My high-level view of Web3 is that crypto’s main value-add will be similar to the development of the joint-stock company in the 19th and 20th centuries. It’s a revolution in the mechanism by which to facilitate and distribute value across time and space.
For some historical perspective, prior to the joint-stock financial instrument (and limited liability), primarily wealthy families were the only ones able to fund and invest in new technologies; up until the railroad era, in which the capital requirements well exceeded any one or two familial ties.
Moreover, investment opportunities carried with them extensive risks if things went sideways, which they inevitably d0. Meaning, the debt incurred by a speculative investment could result in destitution and imprisonment.
Thus, the ability to pool capital from various and multiple sources, with the innovation of limited liability, led to the ability to finance larger and larger projects. The ability to pool more capital and allow a wider array of people to profit via speculation, is a key component to the positive cycle within capitalism.
This financial innovation was a result of the demand created by the technological revolution in steam engines and railroads. Even further back to the innovation of going from iron to steel.
Similar to the innovation of the joint-stock company, as described in “The Company: A Short History of a Revolutionary Idea”:
The central good of the joint-stock company is that it is the key to productivity growth in the private sector: the best and easiest structure for individuals to pool capital, to refine skills, and to pass them on. We are all richer as a result.
Moreover, as Carlota Perez explains in “Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages”:
By contrast, the development of railways…did need great quantities of investment from the beginning that were rarely available to a single firm. At that time the development of joint-stock companies concentrated capital, spread the risks and made the diffusion of that important innovation possible.
This is all to say, in my view, capitalistic value is amplified not necessarily within the new instrument itself, but the organization and efficiencies it facilitates to the developing business ventures. In the Web3 world, this is all to highlight that maybe the additional value will not be contained within blockchain itself, but via the sharper organization, transmission, and efficiencies of value throughout the capitalist system.
Without proper value accrual structures in place, it seems possible to me that certain tokens of various blockchains may ultimately become involuntary public goods in many cases. If dilution, airdrops & token games are the norm, then I would expect over time for financial gravity to takes its course.
That is the differentiating factor in my investing strategy within Web3, what protocols are structured correctly to accrue value, while also maintaining a view that it’s what occurs through the technology that makes the capitalist system better. That is where I believe the real value is, in those limited protocols that are in alignment with historical principles of value retention, while striving for an initiative product-market fit.
During periods of technological revolutions, historically banks and financial companies reacted quickly to develop innovative instruments to accommodate the new technology, like the development of the stock market.
For instance, branch banking sprouted up as a result of the combination of extensive railroad systems coupled with the new telegram services. Communication between branches became easier, and allowed for the bank to operate across geographies, and where new towns were being built along the developing railway systems.
Yet we’re at a stage in which crypto is seemingly struggling to find a wider product market fit to this end, outside of stablecoins. In my view, crypto’s hyper-financialization is both a feature and a bug and will ultimately determine its primary utility as a financial instrument that augments and accelerates the economy similar to the introduction and proliferation of the joint-stock company… or not.
It’s by this, coupled with my view that crypto will struggle to gain escape velocity from its hyper-financialization that is suffers all too often, I sense the size and scope of total crypto market participants will be more limited than many may proclaim.
In technological cycles that generally persist for 40-50 years, per Perez, we’re rounding second base by more modern standards (if you take the beginning to be 2009 and the introduction of Bitcoin).
Not “early” but not late either.
Maybe it’s more of a “show me” phase, where it’s time to find the product-market fit for most cases. Yet crucially I believe that, as explained by Perez, a regulatory framework is needed to move forward. It’s crucial to be incorporated within the legal framework to unlock its full potential, just like the joint-stock company and LLC did in the past.
The ETF is a serious move toward that end.
I’m likely bristling some of the more hardcore believers in the space, but I sense I reflect the views of more traditional participants in the financial space. I’m wired for optimism, yet I like to think I require some degree of concreteness to the more futuristic views, which is to say, at year 15 I’m going to need a little more proof.
Will