New technology might be exciting but real industrial revolutions happen when technological breakthroughs meet economics. It’s therefore vital to pay attention to the social / business feature of blockchain networks.
Classic economics tells us there are four Factors of Production:
All these factors capture certain value and the proportion of the value captured depends on the sector, region, regulation etc. There are patterns, of course, and until the relatively recent money printing bonanza and collapse in interest rates, a substantial portion of value has been captured by Capital.
Crypto networks are introducing some changes to the factors. Let’s assume servers, data centres, mining equipment etc. are the new Land so the composition stays the same. What’s changing though, is the distribution of value capture across these four factors. Most factors have previously been compartmentalised by region, sector and restricted access to capital. Internet has opened those gateways and crypto broke them down altogether - not only information can now flow seamlessly across the world, but so can money. The combination of:
open sourced networks + no regulation + programmable money
has democratised access to capital and now small individual investors have the same investable universe as sophisticated investors (they might be less successful IRR-wise due to lack of professionalism, but it’s clear that this lowers the Cost of Capital dramatically either way); individuals can contribute their labour from anywhere in the world, form open ‘communities’ and explore new governance models. Most importantly, they can build economic incentives into their product - this is the secret sauce of crypto that led to its exponential adoption.
Imagine a video game that pays you as you play it.
Imagine a web browser that pays you every time you see an ad.
Imagine a bank that allocates you shares every time you deposit or borrow.
Imagine a network that increases in value every time you use it.
All of this already exists. And this is what happens to user adoption when such incentives are introduced:
These business models create a completely new type of customer loyalty, user incentives and are therefore enable exponential growth. This specific type of financial innovation was conceptually part or crypto from the beginning but only truly blossomed this year. Here’s what it did to just one sector within crypto - so-called Decentralised Finance:
Time to start paying attention?
P.S. To clarify none of the above has anything to do with ICOs - a notoriously dubious way of raising capital due to lack of regulation, which had no real innovation within it and has pretty much disappeared.