Community Capitalism
The transition from feudal lords to protocol participants
I have spent this entire year working with founders of decentralised financial protocols and I wanted to take a moment to step back and think about why. At a high level, I believe that an entirely open source financial system will be as powerful as Linux was for the world of operating systems.
As I look back on everything that has happened this year, I start to see something new emerging: a way for communities of people to control the most profitable software services on the planet. It has been remarkable to see DeFi explode by handing over control to the users who deposit assets in the system. The results are simply incredible.
If we zoom out much further, I want to look at how the world has improved when capital moves from the hands of the few to the hands of the many. I want to draw a line from feudalism to community capitalism.
Note: These thoughts are extremely loose and have only a smattering of historical depth. I welcome all corrections, clarifications and criticism.
Feudal Lords to Joint Stock Companies
The last 1,000 years can be roughly split into two 500-year chunks: feudalism & capitalism. Feudal lords controlled all of the land, farms, buildings and capital. This was passed down inside families and never distributed to the workers. There was no way for anyone to create new forms of capital because they could not get access to any in the first place. You were born rich or poor—that was it.
Capitalism totally changed that. People built things together and share the risk among investors, founders and employees. Risk, reward and ruin were separated when joint-stock companies became more common. The prerequisite for successful entrepreneurship shifted from inheritance to initiative. People without wealth could access it and start new ventures. This commingling of capital and people helped fuel the extraordinary rise in economic output.
Funding Founders & Employee Equity
Over the last 50 years, two trends have put incredible sums of capital in even more hands: venture capital and employee stock options. Equity compensation kicked off in the 1950s but it really went into overdrive when it was mixed with high-growth technology companies backed with high-risk equity bets.
Silicon Valley perfected the art. Employees at many of the most successful technology companies have become unfathomably wealthy by sticking with the companies through IPOs and onto their growth stage.
While stock options certainly can have their drawbacks, it is really remarkable to see the employees of incredible companies benefit from partial ownership. There have been companies like this for a while—community banks and employee-owned retailers have been around for a long time. However, they are not usually super profitable enterprises so they do not push huge amounts of capital into the hands of more people. What was significant in Silicon Valley was the employees owning a piece of the very best businesses on the planet.
Crowdfunding & Contractor Equity
The SEC did two huge things this year. Firstly, they raised the crowdfunding limit to $5m. Balance did one of the fastest crowdfunding raises to the $1.07m limit in 2017. While it gave my project a great community, it was also incredibly costly in terms of time, administration, accounting and management (around $50k). This is what stops a lot of high quality founders pursuing crowdfunding—the hassle is too much.
I predict we will see a multi-billion dollar company in the 2020s that was seeded with crowdfunding capital. This is a massive shift away from restrictive accredited investor laws.
The second huge thing the SEC announced this year was a proposal to allow gig workers to receive stock compensation.
I predict that we will see competitors to Airbnb, Uber and DoorDash all take advantage of this rule by making their contractors owners of the business from the earliest days. This will give them a huge advantage and enable them to lock in their community of gig workers much more tightly.
We will also see all kinds of new marketplaces pop up that allow their network of gig workers to benefit from the equity growth as well as the transactional revenue.
Token Sales to Crypto-Equity
What was the greatest technology investment of the 2010s that was available to the general public? Answer: The Ether Sale in 2014
Initial investors in that event who held on to $1,000+ Ether made 3,000x their money. There has never been an event like it. Furthermore, well over 100,000+ people bought Ether under $10 and made many times their money. That is absolutely incredible.
Technology investments were previously for the venture capitalists on Sand Hill Road. Now anyone could join in. On the flipside, this led to the insane hype in 2017 which got really out of control. I decided not to sell a token for Balance because it felt dishonest to do so.
What we are starting to see now is totally different. Huge pieces of infrastructure on Ethereum such as Compound Finance and The Graph Protocol are issuing tokens after creating enormous amounts of value for their communities.
This shift is really where community capitalism starts to take off. The investors, founders, employees, workers and users are now going to be owners. These kinds of things were simply not possible before Ethereum. A blockchain is a really great accounting mechanism for the Internet. Ethereum’s ERC-20 token standard has become the default way to express value in new kinds of systems. With this digital backbone, we are now able to include communities of people in the creation and distribution of digital capital.
Every month, a bunch of new ways to earn tokens pops up: mining, staking, liquidating, curating, slashing, contributing, securing, managing. Protocols are rewarding the participants with a share of the capital—communities of people are owning crypto-equity alongside the founders, investors, and team.
This year saw the launch of incredibly successful ownership tokens from Compound, Uniswap, iEarnFinance, Curve, 1Inch and many others.
We are driving the ownership of capital to the edges of the network. Everyone in the world with an internet connection is going to be able to participate. Exciting times lie ahead.
Community Capital in the Twenty-First Century
In his legendary tome, Capital in the Twenty-First Century, Thomas Piketty argues that the gap between those who earn wages and those who own assets is getting ridiculous. While he has received a fair bit of pushback for some of his points, I do think the broad theme is right: wealth inequality is increasing rapidly.
We all feel it. This year, the stock market was pushed to new heights during a pandemic while millions of people lost their jobs. The wealth gap is becoming a wealth gulf.
I do not have all the answers to this problem, but my gut tells me that we need more people to become owners of technology and not just users. Today, we till the digital soils of Facebook, Google and Twitter without any real say in how these algorithms control our minds.
Owning public stock in the digital services is not enough. We need to own the services themselves. Big technology companies have become more powerful than nation states. The community capital of the 21st century must be distributed as far as possible.
I hope we will look back on the digital services of today in the same way we view the feudal lords of yore. These tyrants that controlled the digital land and forced us to till their soil.
There is so much amazing stuff to be built. Community capitalism is coming.
Interested in helping? Reply to this email or DM me on Twitter.
Enjoyed this! Would be great to read an extension of this post that tackles common arguments that people have against going in this direction and why you believe they're wrong.