Is web3 Socialist or Capitalist?
One of the amazing things about web3 and Crypto is that it is “pre-partisan”. That means that the political powers that be in the United States have not figured out whether they should be for or against it on Party lines. The reason is that both the Left and the Right have factions that like some parts of it and hate other parts of it. As I pointed out in The Audacity of The Network State, I believe that web3 is a Top vs Bottom argument, rather than the normal Left vs Right debate. Thus, Authoritarians on both the Left and Right would be against it (or skeptical/hesitant of it), while Libertarians on both the Left and Right would be in favor of it (or curious/evangelist of it).
We all know the four quadrant political axis is imperfect when dealing with hyper complex individuals who have unique experiences and worldviews, but the one dimensional sliding scale of economic freedom that determines positioning on the Left vs Right axis is still a valid way of analyzing that issue in a vacuum. Does one believe that one should receive all of the profits that they derive from the system, or does one believe that disparity between the haves and the have-nots necessitates a redistribution of wealth? Again, it is not a binary issue. You could be in favor of some redistribution, but how much will depend on your perceived value of fairness, influenced no doubt by your particular circumstances and where we happen to be in this particular junction in our economic evolution (time and place). The further left you move, the more you value the social collective, while the further right you move the more you value the productive individual.
So let us examine where web3 falls on this one dimensional economic spectrum. But first, I must re-quote my favorite Navalism: Naval says that in order to generate wealth, you must have leverage, and there are four modern ways to generate leverage: labor, capital, media, and code.
The first two are the classical ways, and the latter two are the more modern ways. In the “olden days” you could either have someone follow you and perform work on your behalf in the form of labor, or convince someone to give you capital in the form of money or hard assets/machines. Now, due to the proliferation of the internet and computers, you can create additional leverage via media and code. Media, by virtue of content, which can be monetized in a thousand different ways or converted to labor or capital. Code, by virtue of open source material and zero marginal costs to scale software. The most interesting thing to me about the four types of leverage is that when you merge labor, capital, media, and code.. you get web3.
The Socialist Argument
In many ways, this topic comes down to money vs labor. Socialists argue that without the labor, there would be no product, while Capitalists argue that without them taking the risk of deploying their money, there would be no labor (and thus no product). Both sides obviously have truth in them. Modern politics have leaned heavily into what could be referred to as Socialist rhetoric (although I am using these terms directionally here, not definitively). We have seen former Presidential Candidate Pete Buttigieg talk about changing the way we define economic output to include things like stay-at-home moms or caregivers, teachers, and firefighters. These people are either not paid at all, or not paid congruently with their respective value to society. Another Presidential Candidate, Andrew Yang, popularized Universal Basic Income, and pushed the esoteric “value” discussion even further by extending it to artists and creatives. Yang’s point is that culture plays a massively important part in building a vibrant society, and that, like stay-at-home moms, they are often not compensated adequately (or at all).
The art aspect has been the single biggest motivator of the NFT space. Sold on the promise of provenance, the origin of an artwork’s creation, providing royalties to the artist at each selling and reselling of a piece of artwork, a huge buzz was generated around NFTs. This concept, unfortunately, was meme’d into oblivion with the formation of things like Bored Ape Yacht Club, etc, which had a very dilutive effect. There are simply too many NFT communities minting hundreds or thousands of almost in-differentiable NFT-artworks. The space has become a medium of capital formation instead of artist compensation. It all happened so quickly that no one even stopped to realize that there is no mechanism automatically built into an NFT to provide the origin address with royalties from subsequent sales (to be clear, it is a possibility, but happens about 0% of the time). There is nothing at all wrong with interesting ways of capital formation, in fact, it is probably the most important part about web3, but it is interesting that the age old problem of paying artists adequately for their work is not resolved in it’s current iteration the way you think it would be by the hype. It does lower the barrier to crowd funding artists, and allows patrons to share in the success of the project, which is more akin to another modern trend: fractionalized ownership. More on that in the Capitalism section.
So the concept of paying artists adequately for their contribution to society, while not completely solved due to Capitalistic reasons (it is very hard to consciously overpay someone in a free-market society), is definitively baked into the ethos of web3 from the Socialist perspective. In a16z Doesn't Care What You Think, I talked about web3’s inverted community-first monetization practices. This parallels with Naval’s first type of leverage, which is labor. Organizing people is hard, but if there is a common purpose (no matter how silly), it can be monetized by web3. This is the inherent nature of a blockchain. In many ways, a blockchain is just a money printer that is always on. It continuously prints blocks of open storage space that can be filled up by users transacting upon it. In order for a block to be printed, someone needs to perform the labor by burning electricity or solving a math equation. (Remember, this is necessary in order for the network to reach consensus on which block is the decided “next” block in the chain, as well as defending against bad actors from manipulating transactions on any previous block.) The one performing the labor gets paid in the native token of the chain, which is why every blockchain is also a token or currency by definition. In order to transact on the chain, you would need to buy tokens from the printer/laborer, as each transaction requires tokens. If no one is transacting on the chain, then there is no one purchasing tokens from the printer, and thus the value of the tokens being printed would be very low. Simple economics tells us that if supply outpaces demand, prices go down. However, if you have a common purpose that is generating high demand relative to supply (no matter how silly), the mechanics of a blockchain will make it so that the price of the token will increase. I am of course speaking about this in a vacuum which essentially just means pre-speculation, which introduces an incalculable outside force. In cases of things like DAOs and Network Societies, this directs the value of a token to be commensurate with the perceived value of group (based purely on participation, not speculation). Thus, the Socialist ethos of web3 are born. The means of production are owned by the group, with early adopters as formative members evangelist/advocates of the common purpose receiving most of the benefit by virtue of the appreciation of the group’s value. The actual production of course, does not have to be decided immediately, or hypothetically ever actually materialized (although I would assume that would erode the confidence in the group’s achievement of the common purpose and thus the value of the DAO).
To give a real world example. What if stay at home moms formed a DAO? The $SAHM token would issued to those buying into the belief that stay at home moms should have some sort of treasury with which to operate. The network effect of the buy in generates more demand than supply, and the value of this “currency” goes up relative to another. The earlier you supported, the more formative a participant you were, and your paper gains become greater. You could argue that this is similar to a SPAC in which investors put their money into a shell corporation that looks to acquire a company and take it public, but the fundamental difference is the heavy reliance on community, which is heavily reliant on a common purpose. The distinction is subtle but important.
Going back to NFTs and the adequate valuation of a member of society. The hope behind most NFTs is that it sparks some communal interest/hype pre-launch, and that an artist can be rewarded with outsized gains relative to what would have been achieved otherwise (which for some pixel art was probably nil a few years ago). The unique value proposition is that the patrons feel like they are supporting culture (which they are), by proliferating an ecosystem in which the artist receives future royalties (which they are not). The problem is that unlike a DAO, the tokens for an NFT are non-fungible and thus extrinsic from the value of the community. The NFT as a value for entrance into a community (token-gated commerce, etc) is something I am very bullish on, and further accentuates then value of community, but the value of NFT as art does not hold any weight beyond the historic value of art, which is to say it is in the eye of the beholder, and worth whatever the next person pays for it. The value of an NFT does not directly affect the value of the token used to purchase it.
This is not to say that NFTs as art have no value, nor is it to say that there are no projects leveraging the “NFTs as entrance into a DAO” value proposition. The best example of this is the NounsDAO, which auctions off a unique NFT, every single day, forever, of which the proceeds go to the DAO’s treasury, and the possession of grants voting rights/governance over what to do with said treasury. As of today, each Noun goes for about 40 ETH (that’s $54,000 USD every day), and the treasury has amassed 29,000 ETH or $37.7M USD. Now we are getting to one of the real, yet under discussed aspects of web3, which is governance.
What will NounsDAO do with their treasury? As of today the DAO has had 147 proposals, of which the vast majority have been executed. The proposals are mainly different ways to promote the DAO, such as launching a podcast, attending an event, or elevating certain members to higher status levels, all done for the most part pseudonymously. What affect does this pay-to-vote type of governance have on the future of democracy? It seems hyper-Capitalist until you remember that the economic value was derived solely out of the community organization. Once again, the ethos of web3 is placing value in the collective. The bigger question is, once some of these DAO treasuries start amassing real value, what will the governance structure be? Quadratic voting? One vote per NFT? Weighted voting based on TVL? Likely there will be some combination of everything, but I believe that the Socialist ethos behind community organization, and general fear/hangover from modern democracy will lead some DAOs into some wild governance structures that we would never conceive of otherwise.
Everything I’ve said up to this point pertains particularly to the function of the cryptocurrency/tokenomics sector of web3, but what about web3 as a whole? My favorite web3 quote is from Chris Dixon, General Partner at a16z crypto (aka the guy in charge of the $7B investment into web3), where he says “the incentives for networks and corporations are fundamentally misaligned”. What this means is that throughout the entire iteration of web2, users have been blessed with the ability to create a public platform for themselves. People can generate followings, collaborate, and monetize in an infinite number of ways. However, that blessing can be retracted at the whims of a few individuals running the corporation. If Facebook or Twitter or Google decide it to be so, they can essentially wipe your entire net worth away with a keystroke (if your network is your net-worth).
This is a rare occurrence for sure, but also not without precedence. The conflict arises in the tension between culture, public markets, and politics. The large corporations that run the networks are subject to the policies of the government, who are subject to the pressure of the constituents. If Cancel Culture demands a sacrifice, the corporations must capitulate lest they face regulation or taxes. Now, this is more of a Top vs Bottom issue, with Cancel Culture firmly in the Authoritarian Top, but the point is that public sentiment can change and swirl, and you could be on one side of the mob today, and another side tomorrow. Best to not give power to a mob in the first place.
So the incentive of the network is not aligned with the incentive of the corporation. The value of the network is derived from its users, but only a very small portion of that value gets extracted by the users. The vast majority of that value (advertising revenue) is harvested by the corporations which they reinvest to figure out ways to keep you logged in for longer.
There is one simple reason why the corporations get to keep the value of its users. They own the software. Also, as AGM (former PM for the original FB ad platform and currently running a web3 attribution startup) has pointed out many times, you can’t just take the $100B in revenue in divide by the 1B users and land on a value of $100 per user (as I have intimated in the past so consider this an editorial). The value of each user is derived from the cross-stitching of behavioral patterns, or in other words, software. So while of course the network has no value if it has no users, the concept that “the value of my data is worth X” is a bit of a misnomer.
In any event, software is up for grabs. A fun fact: about 99% of the software in use today was developed open source. It is only when something of gigantic value is created that the code becomes inaccessible. web3 by it’s nature is 100% open source, which means that anyone is free to fork, duplicate, or modify existing framework. This creates the concept of “composablity” wherein you can connect software like lego bricks. Another Chris Dixon quote, “composability is to software what compounding interest is to Finance”. That is a strong statement considering Finance is the backbone of the economy.
OK, so anyone can build on top of anything, that is democratization, but not necessarily Socialist. True, but the Socialist aspect comes via ownership. The definition of Decentralization is that there is not some overpowering force that can shut down the whole system, or take extractive fees for no reason. A blockchain or protocol can simply **exist** and make the code such that things like transaction fees go back to the protocol, or get distributed to users. The best example of this is Uniswap, an automated market maker bot, which provides liquidity pool pairings to match buyers and sellers. There is no extractive middle man fee like on a centralized exchange. The protocol thus becomes a public good, and anyone can buy Uniswap tokens, although the token value isn’t really tied to the performance of the protocol.
Many more of these public goods can and will be created in the future. I can predict this because of open source, and Bezos’s Law (your margin is my opportunity). If everything is open source, and there is a popular protocol, but the tokens are distributed in such a way that is slightly beneficial to a small subset of users, the protocol can be copied and refined until it achieves a sort of equilibrium. This is how the free market works, iterating until there is a product that is maximally satisfiable to all. It is a peculiar staple of web3 that the ethos of Decentralization and community building would be propagated by free market economics. So software becomes more distributed, and free, and decentralized, and without a small group of people getting rich off the backs of the many. That’s kind of Socialist..
The Capitalist Argument
Somewhere within the last decade a groundswell of people starting building projects around an obvious concept. Wealthy people make money by owning things, or having their money work for them. Without having money to start with, or at least very little, how could one participate in the same scenarios? This is where fractionalized ownership became more prevalent. Projects like Pacaso, AcreTrader, and Robinhood sprang into the universe to lower the barrier of entry into second home purchases, investment in farmland, and investment in stocks. Hypothetically this allows people with less means (but still some means) to achieve the same gains on their dollar that the wealthy enjoy. The basic concept is Capitalistic in nature. More people participating in Capitalism is a net good for the economy. Crypto takes that 100 decimal places to the right, and with every factor of 10 a new group of participants is unlocked.
Up to this point, Capitalism in the form of having equity in something has been exclusionary. Things like accreditation laws prohibit regular people from investing in private companies. I get that the government is trying to protect people from being duped into bad investments that they can’t afford, but the net effect is that it prevents people from participating in the economy. When people can’t participate, there is a negative psychological ramification that accentuates the “rich get richer” narrative which leads people to favor more Socialist policies. Fractionalized ownership lowers the hurdle, but earning an amazing 10% per year on your $500 for 20 years is not going to generate generational wealth.
Going back to Naval, in order to generate wealth you need leverage, and Capitalism is all about leverage. Through modern day conveniences you can start a YouTube channel, or string together some code and become a millionaire. Knowledge has become Decentralized, which means that anyone with the motivation and an internet connection can change the world. It should be noted here that there are another billion people coming online in the next generation from India and Africa looking to participate in a global economy. This is going to have massive implications when you factor in web3 and the network effects of community. So what does all of these mean about whether web3 is Capitalist or not?
Well, it is pretty obvious that when you have an asset class that materializes $1T out of thin air the Financial sector is going to perk up and take notice. While the underlying purpose of a blockchain is simply to verify transactions securely across a distributed network, the output is that a token is produced, and that token has a stated value relative to other things (like USD). In a world where everything is being financialized, and a new type of currency is invented, of course Capitalism is going to take over. And what does any well informed Capitalist do? They speculate!
I have written in the past about how the traditional public and private markets have started becoming a little Crypto-esque, which is to say that pure speculation was becoming more and more rampant. Just look at valuations of Zoom stock (did anyone really think that the world was going to shut down forever?) or any private company getting valuations of 100x ARR. Everyone is looking for alpha anywhere they can find it. web3 and Crypto provide the highest returning asset class the world has ever seen. That’s not due to the normal economics of supply and demand, it is due entirely to speculation.
Achieving a 1,000,000% return is not unheard of in Crypto. Imagine putting in $1USD and getting $10,000USD in return. Now imagine that everyone and their brother launching a protocol, hyping it up with marketing, and shooting for the moon. Actually you don’t have to imagine those things, that’s exactly what happened. This is why the Crypto market is not taken seriously, because there are so many scams. But the allure of mad gains is too much to ignore. Cryptocurrency was tailor made for Capitalism. The government doesn’t control it, there are infinite ways to arbitrage, stake, invest, trade, loan, or manipulate it. It is a Capitalist carnival, and the rides are gambles.
The dichotomy of web3 is funny, some of the most Socialist ideas get flipped on their head by Capitalism. NFTs being the biggest example. Created out of the desire to help artists monetize, which will promote a redistribution of wealth, it has turned into its own micro-economy, where the goal is more about flipping art for profit, quickly, rather than supporting the creator. Pure Capitalism. As an outsider to the NFT community, it is very easy to say that bleeding hearts are more susceptible to such chicanery, but I believe that it is a conscious decision. Capitalism is built into human nature. In every interaction and exchange that we have, we are constantly evaluating whether we are getting a good deal, and if we want to interact or exchange with that person again. The vibrancy of the NFT market (in my opinion) comes out of the desire of people to participate in a market that is relevant to them. “Participating in a market” are the key words here, for the umpteenth time. NFTs are a random thing created out of thin air, just like Cryptocurrencies, and DAOs. All three are being speculated on in grandiose fashion, with real-world money at stake. The innate human desire to create, participate, and win in those markets is the heart of Capitalism, and inextricably tied to Crypto and thus web3.
Closing Thoughts
The ethos behind the rails of web3 can ascribed to Socialist proclivity to want to redistribute wealth to those of economic need. The concept of a Decentralized network could be interpreted as one of two ways. Either you believe that the protocol is akin to the government and and thus owned by the people, as it was built privately but given to all for free as a public good, or you believe that because the protocol is effectually NOT a government in the traditional sense of the word, that it is in essence a private company of sorts.
This is the conundrum that web3 has placed upon us with the concept of true Decentralization. It is a little bit esoteric, and a little bit semantic, but it comes down to what the people decide. It is technically owned and regulated by the people (Socialist), but the people regulate it in a very laissez faire kind of way (Capitalist). The creation of the rails aims to disrupt some of the biggest industries in the world by removing counter-party risk, reducing fees, and literally redistributing wealth (Socialist), but the same rails open the flood gates to a truly free market economy, with the majority of participants jockeying for ranking in the global standings (Capitalist).
So for web3, you can make the conceptual argument in either direction, which is why the whole thing is still pre-partisan. It is one of the most powerful tools in terms of leveling the playing field in the global economy, but it is also one of the most powerful tools of amassing wealth. Can the two extremities exist without each other? Can love exist without hate? Can life exist without death?
What you do on top of the rails is fervently Capitalist (Crypto, NFTs), but built upon rails that are a bit ambiguous. I imagine people reading this, building protocols, trading NFTs, and governing in DAOs will all have different opinions based on their own personal values and definition of the purpose of Decentralization. And if Balaji’s predictions come true and governments go away and we all end up as participants in a Network State, well then everyone can decide for themselves.
On a somewhat related note, in trying to come up with a title image for the article, I always go to Stable Diffusion first to see what sort of thing they concoct for me, and well, today they came up with this masterpiece:
The future is here.