The Rise of Information Era Capitalism

David Rangel & Vijay Sundaram

Our last post explored the origin of the equity-based, joint-stock corporation, and four critical ways in which Information Era networks and platforms are pushing Industrial Era capitalism to its useful limits:

I. Value creation is at odds with value capture

II. Value capture is highly inefficient

III. Market pressures lead to short-term thinking

IV. Wealth concentration is increasing

In this post, we’ll outline how crypto uniquely addresses these problems.

Crypto: a new path forward

Crypto refers to the use of cryptography to create rival and scarce digital tokens combined with a shared, decentralized ledger (the “blockchain”) and an open protocol that establishes the rules of the system. Bitcoin, originally designed by Satoshi Nakamoto, was the first project to introduce such a system and has sparked an explosion of crypto projects and experiments.

A cryptotoken can be used to facilitate and track the valuable transactions or activities that take place on a network. As the network’s usage and activity increase, demand for the token increases proportionally and it may become more valuable. In addition, the openness of the underlying protocol gives potential ecosystem participants clarity on the terms under which they will engage with the network and its users, and how those could change in the future.

In short, crypto is perfectly designed for networks and networked platforms. It can fundamentally change how they are created, structured, and run. And, crucially, it can solve for the four key limitations identified above.

I. Value creation is amplified

Crypto will result in new and expanded value creation, although the degree depends on the type of project. We expect that crypto will enable the development of completely new types of entities, value propositions, and business models that we can’t foresee today (e.g., decentralized autonomous organizations and automated economies). However, it’s already clear how this could work for today’s networks and networked platforms.

Networks: For standard networks, there are several ways of creating more value. The most straightforward one is by bringing more entities into the network. We believe crypto is relevant here because it can (i) make cross-border transactions easier, (ii) attract participants who may only transact in censorship-sensitive contexts, and (iii) may bring new types of entities (e.g., automated agents) to a network. The full potential of this is still developing, but we expect these will be a source of new value.

Networked Platforms: Where we’re most excited about the promise of crypto-enabled value creation is in networked platforms. A platform that captures value by holding tokens whose value is tied to total ecosystem value (as opposed to shares that depend on capturing value via revenue) will have incentives that will lead to better cooperation with platform participants. Value creation and value capture will no longer be at odds, resulting in better cooperation and a more valuable platform ecosystem.

II. Value capture becomes more efficient

Once a network or platform holds tokens (whose value increase with the activity on the network), they no longer have to capture value by taking in revenue (although they may fund operations from the occasional sale of tokens). Furthermore, the value captured via the token is a “pure” representation of the value created by the ecosystem, as opposed to the “trickle down” value represented by a company’s cash flows, diluted because of pricing mistakes, inefficient operations, or bad decision making.

Of course, a badly or inefficiently run platform creator can endanger the entire ecosystem. However, crypto also adds value in this scenario: the right token structure and governance can give participants the ability to replace the platform creator if and when necessary.

How token economies are set up and managed is an emerging field, one that still needs a lot of innovation and experimentation. Some aspects of how to run such an economy are well known (e.g., the quantity theory of money), but there is a lot of work to be done in understanding how they apply to cryptotoken economies. We’ll write more about this in the future.

III. Management, token holders, and users are all long-term aligned

Suboptimal short-term decisions happen today for two reasons: public company management is not given the necessary incentives to think long-term and a network/platform’s ecosystem is very rarely able to effect change to counteract such incentives.

Management compensation, especially an equity component, is driven by markets that react to short-term value capture metrics like quarterly earnings per share (EPS) or revenue per share. Given the corporate equity-based tension between value capture and value creation, management has strong incentives to trade the long-term growth of their entire ecosystem for short-term bumps in revenue or earnings in an effort to increase equity value. In a world driven by crypto, however, once a token has been launched publicly, management will be incentivized to maximize network value as tracked by the token. In this way, management, token holders, and network users are aligned.

Furthermore, once an ecosystem starts to develop around a venture, openness of the network and protocol will allow ecosystem participants to have full visibility, and potentially direct input, into the direction of the token economy. Overall value creation is no longer beholden to a single company’s management and their incentives, but can be influenced by participants that want, for their own benefit, to increase the ecosystem value.

Revenue per share and earnings per share metrics, which create tension between corporate shareholders and ecosystem value, will no longer be relevant. We foresee the development of alternate metrics that gauge the health of the entire ecosystem, the number of platform participants, and the total value created.

IV. Wealth distribution improves

The changes in financing for crypto projects also mean that tokens (and therefore value capture) will be available to the general public earlier in their lifecycle than we see today. In theory, this will result in a broader distribution of wealth created by successful projects.

The fact that these will be utility tokens available on a blockchain also means that they will be more widely available than current corporate shares. This will also bring the opportunity to benefit from the upside of the network to people that are simply users of the network or that live in other countries.

Crypto presents a multi-generational opportunity to completely rethink how technology-based networks and networked platforms are structured, how they are managed, how they create and capture value, and how this value is distributed among all stakeholders. By refreshing the entities at the core of capitalism, crypto promises to usher in a new economic system native to the Information Era.

Our next post will explore how to think about new, crypto-native ventures.