Previously, I wrote about the Blockchain Web, a concept for applying blockchain to improve current internet services. This sequel models an alternate vision of monetization and financial success for businesses in the Blockchain Web, leveraging the new technology. Notably, this does not include DeFi solutions, but rather follows a different line of economic incentives. I’ll discuss the current economic environment and the alternate vision from web3. With these in mind, we can look at how a new form of equity—combining aspects of current company equity and the emerging tokenomics—can shift incentives to more stable, useful and better distributed outcomes.
The internet business model is as capitalist as it gets, with a severe prejudice for growth over anything else, be it in user numbers, usage statistics, or profits. This is demonstrated in companies like Facebook or Apple being measured by their growth in usage and ad revenues. In The Nature and Logic of Capitalism, Robert L. Heilbroner points out how central to capitalism is “the use of wealth in various concrete forms, not as an end in itself, but as a means for gathering more wealth.” As the internet companies follow this constant drive for more and to be bigger, they dominate: Big Tech has become the oligarchical ruling class of the internet ecosystem. Heilbroner describes how this affects dynamics of the members within this ecosystem:
The analysis of capital as an expansive process is an important step in escaping from the fetishism of capital as objects, such as machines, or as a sum of money. It leads us to see capital as a web of social activities that permit the continuous metamorphosis of M-C-M' to take place. At the center of this process is a social relationship between the owners of money and goods, the momentary embodiments of capital, and the users of these embodiments, who need them to carry on the activity of production on which their own livelihoods depend. The legal crux of this relationship lies in the right of exclusion: a central, although often ignored, meaning of “property” is that its owners can legally refuse to allow their possessions to be used by others. The critical aspect of money or capital goods as private property does not lie in the right of owners to use them in any way they wish, for such a dangerous social right has never existed, but to withhold them from use if their owners see fit. It is this right that enables the capitalist to dominate the sphere of trade and production in which his authority extends, as other legal rights enable military officers or priests or political figures to dominate the spheres in which their authority extends.
: M-C-M’ is a notational term defined by Marx in Das Kapital*, referring to the application of money towards obtaining more money: Money to Commodities to Money*
In short, Big Tech owns the capital of the internet, and therefore has dominant powers over use: look to the opaque algorithms that dictate what is shown in user feeds, the inconsistent process of moderation of content, the rug pulls of monetization for content creators. To use Marx’s nomenclature, we can consider this G-C-G’: growth (in usage and/or profits) to control (in the form of network effects and user lock-in) to more growth. Blockchain technology, particularly cryptocurrencies and decentralized finance, claim to offer an alternative that empowers individuals and takes away that control.
The promises of web3 are often pointed directly at this imbalance of power from centralized internet companies. Chris Burniske notes in Protocols As Minimally Extractive Coordinators that web3 aim to provide infrastructure that “should be minimally extractive, whereas businesses are incentivized to be maximally extractive (that’s profit, and a business is valued as a multiple of its profit).” Setting aside for now the misaligned comparison of internet businesses with web3 protocols (more on that in a later essay), Burniske makes the point often heralded by web3 supporters: Big Tech is mainly concerned with profiting off users, while blockchain enables distributed rewards in various forms to all participants. Burniske ends his essay by noting the dynamic shifts this could provide to the internet, in the opposing direction of Heilbroner’s capitalism:
Any unnecessary extraction from the process of exchange is a tax that will ultimately be weeded out by copy-paste competition in the world of open-source protocols. While this presents a brave new world for businesses, minimizing extraction should accrue to the benefit of all of us as consumers.
So, we now have a model that redistributes capital—and by extension control—away from centralized entities (Big Tech), towards networks of individuals, currently taking shape as DAOs. But here we hit a logical inconsistency: how can we build and maintain an economy that is, for lack of a better term, anti-capitalist, within the bounds of capitalism? Put another way, if web3 promises to break the cycle of G-C-G’, businesses and participants in web3 must have incentives towards something else. They can’t continue to aim for growth and control (in this case via incentives, rather than ownership) in the same way and promise new outcomes and dynamics. A possible alternative is the Blockchain Web’s strategy of profit, which has at its center stability and utility.
With stability and utility, rather than growth and control, we have a vision for financial outcomes that shifts priorities from more money to stable money; from extracting financial value from users to providing utility value to users. This balances the two ends of the spectrum that are Big Tech and Web3, much like was discussed in the first part of Blockchain Web. For businesses, profit growth isn’t the North Star like for tech corporations, rather stable profits. And users needn’t expect profits for their participation like in tokenomics-based protocols, rather they get an experience and utility that improves their lives.
The stock market and various forms of equity investment have offered for centuries a way for capitalists to gain more capital and the powerful to get more power. This is a major contributor to financial inequality. Based off the ideals of web3 that are in opposition to corporate tech, it feels like a perfect target to redistribute wealth and empower individuals. Royalty-integrated equity (RIE) is a form of equity that the blockchain enables which addresses both shifting business incentives away from pure profits and growth, and also can create a more accessible form of capital ownership.
Simply put, RIE is a fungible token that integrates royalty payments on transfer. In other words, RIE creates shares of stock in companies that can pay small royalty fees back to their respective companies when they are traded. How does this work? Currently, there is a standard for NFTs to be built with royalties: a function in their smart contracts that pay back small percentages to the original creators. This could be implemented in cryptocurrency tokens, taking the royalty from the payment for transferring the tokens. So when a token is traded on an exchange, a small fee is paid back to the token issuer (and likely the exchange). With RIE, buying shares in a company would mean not just investing in that company’s stock, but sending money directly to them in the process.
Imagine a typical IPO or token launch. The shares/tokens are open for trading, and various market mechanisms determine their prices, which directly impacts the valuation of the company itself. Investors now demand returns, which always means growth: for the share/token price to increase, the value of the business operations must have demonstrably increased. A RIE launch would be similar, with a massive addition: immediately the issuing business now gets revenue off any trade of their tokens, regardless of price!
This forms the basis of capital stability, lifting the load of the overbearing need for capital growth. If a business is able to raise money by entering the public markets with RIE, they reach a point of stability: income from their equity being traded offers a steady revenue stream. That revenue can be used to reinvest in the business in ways that are often overlooked; ways that do not figure into the bottom line but rather provide value for customers. It can be used to fund public goods, make the product cheaper or even free, or a number of other uses that provide value to customers or the ecosystem, regardless of effects on profit or growth.
RIE also affects utility, specifically in the realm of token distributions. Businesses no longer need to focus solely on maximizing the price of tokens being traded when revenue can be gained from tokens simply being traded. This means tokens can be designed with utility as the priority, rather than profits, circling nicely back into the vision of the Blockchain Web as an ecosystem of tokens for utility, rather than as currency. Tokens share this with stock in companies: when they can forego (or at least focus less on) ensuring the price goes up, they can be built to offer direct value to users.
At first blush, this may seem like a way to simply get even more money into the hands of the wealthiest who own businesses and tokens. While this will no doubt be used to that end, it offers an example of how to help those who currently aren’t participating in equity markets join the fray. By combining RIE with DAOs, we can imagine a collection of people joining together in DAOs that then list themselves publicly as RIE shares. This could be unions, or neighborhood representatives, or small businesses or any such collective that wants to receive funding. We can call these Grouped Investment Bundles (GIBs), and they can offer valuable redistribution of returns and rewards from equity.
To see how this would work, imagine we own a restaurant in New York City. Margins are low and demand is constant (not to mention cutthroat). We know a number of other restaurant owners in the city, and the story is the same for most of them, too. We want to have some breathing room on our revenues so we can pay our employees better, invest in newer equipment, and more. Here’s where the GIB comes into play. A bunch of us restaurant owners can gather together and form a DAO: call it NYC Restaurants (NYCR). We can make public our revenues, create a singular valuation for our combined business, and split the DAO based on our respective revenue shares. We publicly list our DAO’s token, NYCR, as a RIE token, and allow the wider investment community to trade shares of our collective business. The RIE sends us back royalties from the trading volume, and we split that amongst ourselves based on the share ownership in the DAO. This in addition to having a publicly tradable equity of which we have significant stakes. Now, without having contributed financial capital, collectively we’ve given ourselves more revenues and an avenue for more investment.
RIE and GIBs are more than just new tools to make money in the existing economic structures. My vision is that they enable a reevaluation of what we value in a business. The capitalist drive for productivity and growth to fuel profits is embedded in us culturally, and consumes our lives. Going back to Heilbroner:
This brings an implosive aspect to the expansion of capital, as daily life is scanned for possibilities that can be brought within the circuit of accumulation. The transformation of activities that bring pleasure- or use-values into activities that also yield a profit to their organizers thus becomes an important “interior” realm into which capital expands…
Much of what is called “growth” in capitalist societies consists in this commodification of life, rather than in the augmentation of unchanged, or even improved, outputs.
To put it into perspective, Heilbroner published these words in 1985. This is not a new problem, and it hasn’t much improved: web3’s promise for redistributing wealth and control sounds a lot like the early internet’s promise at the turn of the 20th century. But the tools and methods of making money will never supersede the ultimate goals, and thus the goals themselves must be adjusted. With RIE, we have a new technological tool that can change economic goals from that “commodification of life” to the “augmentation” of it. By adjusting the outcomes we can adjust the incentives, and in doing so usher in a better form of capitalism.