Stakeholder owned software networks
Shareholder value vs. stakeholder value, sustainable markets, software networks, the end of monopolies, machine economy, free markets.
Traditionally markets have been coordinated by corporations and governments. This post explores the economic drivers and life cycles of software enabled monopolies organised in the form of a corporations. Thereafter it gives an outlook on how open source software networks coordinate markets by optimising for stakeholder value instead of shareholder value and why this might be a historic development.
Source: https://unsplash.com/photos/xMStl9_dpE4
Web monopolies coordinate markets through corporations
Marketplaces are humanity's oldest form of coordinating resources effetively - goods, services and money. They exist for thousands of years and have mostly been geographically limited until the internet revolution took place. Basically all major internet monopolies are created around multi stakeholder marketplaces for different goods and services. Their role is to coordinate resources within these marketplaces by
pooling and matching supply and demand
defining industry standards for the exchange of information, goods, & services
providing proprietary technological infrastructure for such exchange
distributing information across all stakeholders
Google and facebook are coordinating publishers, advertisers and users. Amazon coordinates suppliers and consumers of consumer goods. AirBnB and Booking coordinate travellers and supply in the form of flights, inventory, services and more. The list goes on.
All of them are following similar life cycles:
The cycle starts with the implementation phase where one side of the market place is bootstrapped by the company, mostly the supply side. With each additional user on the supply and the demand side the utility of the network increases exponentially for all other network participants.
Once a critical mass is reached a fly wheel effect kicks in drawing more suppliers and demand into the ecosystem during the growth phase. Network effects are evolving into lock in effects once switching costs for market participants > economic benefit from staying in the network. This creates very strong entry barriers for competitors.
Once the company is holding a significant market share and lock in effects matured the company starts to become more rent seeking and exploitative during the consolidation phase. Potential competitors are acquired or smashed while multiple sides of the ecosystem are getting economically cannibalised by the monopoly - e.g. Amazon or google preferring their proprietary products over the ones of third parties. The rules of a monopoly controlled market are set and enforced by the monopoly corporation.
During the final phase of disruption the monopoly either becomes more intertwined with the government (Wechat in China) or otherwise regulated (GAFA in the US). As large incumbents become less innovative due to lacking competitive pressure the incentives for entrepreneurs to replace the monopoly and change the rules of the market increase. After a few decades new technologies are available to commoditise the monopolised services as we observed throughout the cycles of hardware - software - web and now data monopolies.
Historically, monopolies have come to an end mainly because of two underlying reasons:
Shareholder value optimisation: Driven by short term interests of shareholders all monopolies start to extract monopoly rents from one or multiple sides of the market they are coordinating. E.g. amazon prefers proprietary products in their search, google kicks out competitors from its ranking algorithms, uber starts offering ride hailing services with proprietary EV. These dynamics create the incentives for entrepreneurs to build new services at a fraction of the cost, with radically improved '10x better' features mostly leveraging new technologies. Historically these incentives mostly brought monopolies down after a some decades, at least in free and open markets.
Corporate structure, regulation: Once monopolies reach an undeniable economic and social significance within a country or geography governments start to get interested in leveraging monopoly power to their own benefits. They start to integrate technology companies into their institutions to increase their leverage and power. Information control, surveillance and censorship are the natural consequence.
Crypto networks coordinate markets through open source software protocols
The next wave of market dominating software networks will be immune to both of these weaknesses by leveraging their unique properties:
Stakeholder vs. shareholder value
Open source software protocols are coordinating resources in a market place by taking into account the interests of their stakeholders including suppliers, 3rd party service providers, developers as well as the demand side.
This is done through crypto economic mechanisms (a sub category of mechanism design) which allow for the programmatic distribution of value among all stakeholders. Whoever is contributing a valuable service to the network is getting compensated by the protocol programmatically in the form of cryptographic assets representing a unique unit of ownership in the network. These programmatic assets can have various properties resembling various financial assets, money or digital commodities. They are liquid and can be traded on secondary markets. Early examples of potentially sustainable crypto economic design implementations are Bitcoin (money), Ethereum (computation markets), Erasure (information and data markets), Livepeer (video transcoding markets), Filecoin (data storage markets), Maker (lending markets), Uniswap or Balancer (liquidity markets).
Ownership of a network's crypto asset empowers its holder to have a say in the network through governance rights. Depending on the concrete implementation these governance rights can be spanning from core parameters like the pricing of goods / services, the network's distribution mechanisms, underwriting risk to new features and product decisions. We're still early with regard to programmatic governance mechanisms but the design space is huge. Crypto networks will bring the principles of liquid democracy, conviction voting or quadratic voting to life, potentially making markets and society more efficient, transparent and fair. These experiments will massively accelerate humanity's transition from the industrial towards the information age. Aragon and Decred are innovating at the forefront of governance experiments.
Current internet monopolies have been bootstrapped by leveraging utility network effects - with each supplier or user the services of the network became exponentially more useful for existing and future users. The focus on stakeholder value creation will drive even steeper growth in a given economy by adding value network effects to the equation. Early adopters and service providers are benefiting economically from bootstrapping the network into existence. We don't know yet if these mechanisms will suffice to cross the chasm from early adopters to mainstream but I'm optimistic that we will at some point.
By optimising for stakeholder value instead of shareholder value crypto networks are less likely to extract monopoly rents from the markets what makes them more sustainable and economically durable.
Open source & open data vs. proprietary & information asymmetry
As soon as a crypto network would extract monopoly rents from its stakeholders the incentives would be in place to offer competitive services at a cheaper price point. The open source nature of crypto networks allows for the forking (copy pasting) of the code base representing very low entry barriers for competitive services - as seen with Bitcoin Cash e.g. However, forking a protocol is more complex in practice as whole multi stakeholder ecosystems need to be migrated.
All transactional data within an open source crypto protocol can be read by anyone at any time bringing down information asymmetry - another corner stone of monopolised markets.
Distributed software protocols vs. corporations
Corporations are closely tied to physical jurisdictions where governments can leverage their monopoly on violence against them. Crypto networks are nothing but open source code, owned and maintained by a globally distributed network of stakeholders. They cannot be subject to any law as they cannot be represented by any group of people. Only the end points like hardware providers, miners or users themselves can be regulated .The philosophy behind crypto networks is to let the market decide which services are useful and which aren't - not governments.
Open questions
The networks described above are in existence today and are coordinating resources worth hundreds of billions of dollars but they are young and mostly unproven. Their growth and significance will cause new questions I'm seeking answers for:
In the long run - will work or capital contributions to a network create high concentration in ownership stakes of crypto networks?
If so - will these high concentrations undermine the fluid governance mechanisms and stakeholder value optimisation and fall back into the dynamics of conventional monopolies?
Which are the attack vectors governments will develop to protect their monopoly on coordinating resources and economic activity?
Will crypto networks be geographically regulated like the open web is today (western version, asian version)?
How can we guarantee that as many humans as possible can freely opt into and out of these software networks no matter their physical location and local regulation?
Assuming that governance will evolve it might be abstracted and algorithmically defined (AI?). Thereby, is humanity voluntarily enslaving itself to the machines?
How much relative value (to created value) can be captured by crypto networks operating at a market equilibrium taking stakeholder value principles into account?
Conclusion
The next wave of software networks will be economically resilient and sustainable by optimising for the benefits of various stakeholders in a given ecosystem as opposed to shareholders only. Their attributes of strong network effects, governance and open data will prevent them from the phases of consolidation and disruption. They are highly adaptive and probably here to stay.
[Disclaimer: The author is holding some of the digital assets mentioned above with his Venture Fund Inflection or privately.]
What is your take on these developments? Where am I wrong and why? Please comment.
Great article, Alex. I am also excited to see the maturation of the SAFG framework for early investment in these stakeholder businesses and communities - incentivizes virtuous behavior from the start?