Lecture: Tokenize the enterprise …And melt it into the community. Rinse, Repeat. » Brave New Coin
(bravenewcoin.com)
Tokens are the new “new” thing in the blockchain space. Just when everyone thought that blockchains were hot enough, everyone realized that tokens *are* the business model for Web 3.0.
A decentralized system spreads control among many parties. It may or may not be tokenized. The key benefit of tokens is to align incentives among participants of the ecosystem. It’s a positive-sum game among the tribe of token holders. (And let’s not forget the windfall of a token launch, if you choose that path.)
So far, only startups have launched tokens. But what about enterprises? Could we tokenize Facebook? What about Amazon or IBM? How? What would be the benefit? In short: tokens will eat the enterprise from within, because investors will make money and the community will gain. We’ll have crypto tribes that started as companies. Repeat across many enterprises and it means goodbye to the stock market. Finally, this turns out to be a new response to the Innovator’s Dilemma — how can enterprises compete given their tendency to protect their profits (aka the status quo)?Let’s explore in more detail.
Here’s the recipe, for each enterprise:
Tokenize. Shares become tokens.Decentralize. Spread power among more people; users get tokens for past and future contributions.Melt into the community. Over time, both value and power spreads further.When one or a few enterprises do this, and actually make money for their shareholders in doing so, then other enterprises will follow suit. In the end, it’s all crypto tribes.
Let’s walk through this recipe, using Facebook as a example.
Facebook is at odds with its users. Facebook’s founders and shareholders have made massive amounts of money. Yet its users didn’t, despite contributing the key personal information and content that is the heart of Facebook.
This is a basic tension: Facebook has a bias to openness, versus users’ privacy.With its billions of users and high engagement, Facebook has become enormously powerful. Yet it’s controlled by a small handful of people. This is dangerous for society. Especially when it’s not structured to handle such a responsibility. There have been various proposals to improve the situation.
One idea is to get the courts to consider it a monopoly and break it up. This relies on slow-moving government processes.Other ideas come from the blockchain world. Namely: overtake Facebook from the bottom-up, by building something decentralized, and try to get the users to come. We’ve seen many such efforts at decentralized social media. But success is limited so far.
The greatest challenge is how to populate the network. It’s chicken-and-egg: people only join if their friends are there. It’s hard to crack two billion highly engaged users.There’s a variant: build something decentralized and tokenized. This can only help, because early token holders = your first users, and they’re incentivized to bring in their friends. HODLers gonna promote.
So, tokenization increases virality. But it’s still no guarantee to overtake a network with two billion engaged users.These ideas assume a start at zero, and attacking from below with something faster, sleeker, more viral. And they might work; but I’ve come to realize there’s another way. Tokenize from within.
Here’s how it works.
Then, Facebook converts each of the 3 billion shares to a $FB token (share → $FB) in a contractual arrangement. Or, it simply starts using the blockchain as the registry of who owns what (share = $FB). Delaware is moving towards making the latter possible.Either way, we end up with a blockchain holding all $FB tokens that have replaced the previous FB shares. It’s tokens as securities.
Up until this point, the governance of the tokens is still in the hands of Facebook (the company). And it’s still one share one token. Step 2 is where the real change occurs: spreading power, and tokens for users too.The following need to happen simultaneously.
When this is done, it will be obvious for crypto exchanges like Kraken or Interledger to add $FB tokens. So in steps 1 and 2, FB value has been moved from the traditional exchanges (stock market) to new crypto exchanges. What becomes of Facebook the company?
One option is to dissolve it. This is broadly ok because employees are incentivized to contribute simply because they own $FB; though I acknowledge there are messy details to sort out. Another option is for Facebook the company to simply become a service provider to the public $FB blockchain; it’s incentivized to improve the service because by doing so it earns more $FB tokens on behalf of its employees.
Now note that other individuals and organizations are able to improve the service too.In my example, I gave 50% of $FB to existing shareholders and 50% to users. It could be another ratio. But “half” is a good rule of thumb for a starting point — each side is within an order of magnitude and avoids nit-picky arguments.
This step is something gradual that happens over time. At the beginning of this step, half the $FB tokens are owned by the previous shareholders, and half by the users. As time goes on, it could spread out more as users earn $FB tokens for usage, or more people buy $FB due to the lower friction to buy it.And some will hold on for dear life. HODL those $FB tokens. Facebook maximalism. You heard it here first.
You might ask why would Facebook shareholders ever go for this scheme. The main reason is that it will make them money! That’s the chief driver of a typical shareholder. It’s a huge value add if Facebook the company found a way to not be at odds with its users, the way it is now. And in fact it’s not just a neutral relationship; users are incentivized to add value.
Moreover, it liberates Facebook from quarterly earnings reports that are the bane of planning long-term and doing the right thing. Instead, there is a balance between building the business and building community. This alone could drive the value more than 2x, which then pays for itself. As bonus value, there is improved liquidity due to lower friction to buying $FB than there was in buying FB shares; and finally there are fewer bottlenecks to adding value since anyone can improve the code base.
Here, using Amazon as an example, I describe tokenizing one business unit at a time. It has the same result and same benefits of tokenizing the enterprise all at once, but with lower risk.Let’s take a quick step back, for context. Many folks are excited by how blockchain with IoT (Internet of Things) technology could help transform the supply chain, for everything from cars to drugs to intellectual property.
It could bring transparency to previously opaque sectors, reduce fraud and therefore insurance costs, and unlock new business models.However, this decentralized dream could be stopped dead by the new octopus: Amazon.
The original octopus was Standard Oil, with its tentacles and massive wealth touching every corner of the planet. Amazon is following a remarkably similar pattern. (Need convincing? Read about Rockefeller then Bezos.)This means that the incumbents with their emerging decentralized supply chains are headed into an all-out war with Amazon. It’s not clear who will win.There’s another path.
The octopus itself decentralizes. And it does so by choice.The recipe for this octopus named Amazon could be like Facebook, converting the whole enterprise at once. But there’s a lower risk option for Amazon. Amazon itself already has many independent business units. They each have their own API, and their own profit & loss. In fact, this API-per-business effort is precisely what spawned AWS more than a decade ago.So, here’s a simpler, lower-risk path for Amazon:
Tokenize + decentralize one of the business units.If that works, repeat for other business units.Once this has happened for all the units, Amazon is tokenized and decentralized.Over time, it melts into the community.
More Examples
Let’s look where the biggest payoff will be. One is where enterprises are at odds with their customers or broader communities, and therefore have the most to gain by aligning incentives. Here are some:
Historical Precedents
A tokenized, decentralized enterprise might seem like a stretch at first glance. Perhaps even a huge stretch. But, we have precedents which show us steps towards this:
Stock Markets
After one enterprise tokenizes with success, i.e. makes $ for shareholders, it will spur a second enterprise to do the same. Then a third, a fourth, and so on. Before we know it, most enterprises (especially publicly traded ones) could have tokenized, decentralized, and melted into communities.Maybe some enterprises will hesitate.
Or leaders will have their own selfish reasons to not do it. Well, we might not have to wait for a publicly traded company to tokenize itself. Instead, if a community gathers enough assets, it could simply buy the majority of (voting) shares on the market, to gain control the company. Then that community tokenizes, decentralizes, and melts the enterprise. It can be a domino effect: done in a good order, the wealth creation from tokenizing that company may be enough to buy the next company on the stock market.
And so on and so forth. (Alas, this is also a new angle for corporate raiders..) Either way, the result could be: every single company on the stock market has tokenized, whether it chose to or not. Traditional stock markets as we know them will be empty. The new tokens on crypto exchanges. Corollary: buy more Kraken. Or, run an Interledger node and become your own exchange:)
In the late 1990s, I was wrapping up undergrad studies in Canada. Many of my friends had gone to work for Nortel, then Canada’s biggest tech company. Nortel had moved from providing telephone equipment to network equipment, just as the Web took off. This was the height of the dot com bubble. Nortel’s valuation was in the stratosphere.How do you justify such a valuation?
One of my friends was an advisor to Nortel’s top managers, who were asking this. If you don’t know how, then selling might be a great idea, as AOL-Time Warner and NSI-VeriSign did then.Or, you can try to live up to the valuation. Nortel aimed for this. But they had a constraint: they could only consider opportunities that will bring at least a billion new dollars soon. Stuff that would move the needle.
This precluded them from doing the nonlinear emerging stuff (nowhere near $1B); and from cannibalizing their business (not new $).Right around that time, Skype launched. Nortel’s response? “Tiny market — pfff” and, since it overlapped with existing phone-biz revenue “it won’t add new revenue”. Disgusted, my friend quit Nortel — and joined my startup:). A decade later, Nortel was gone.
And in fact, these constraints of “a billion dollars or it doesn’t matter” and “why would we cannibalize ourselves?” exist for enterprises even when valuation isn’t sky high. Enterprises try to preserve their status quo, to preserve their profits — at the risk of death by disruption. Clayton Christensen’s 1997 book The Innovator’s Dilemma described this problem.
Christensen’s proposal was for the enterprise to spin out a company, and let that spinoff innovate on its own without the enterprise hampering its movement. Then, if the company did well and got to truly needle-moving revenue, then the enterprise could acquire it again.Now, enterprises have even partly institutionalized this approach, by running accelerators or incubator programs.
That way any needle-moving startups that emerge — spinoffs or otherwise — are within reach of the enterprise.There’s another solution, though it’s not for the faint-hearted: the leadership cannibalizes aggressively, current profits be damned. Axel Springer did this: it ate its print business with digital, and in the process became the world leader in online classifieds. Now, despite its 71 years, 60% of its revenue is from digital.
“Tokenize the enterprise” is a new answer to the Innovator’s Dilemma. It allows the enterprise to embrace change, because the enterprise has become the community, and vice versa. The community can decide if it has the courage to embrace change. And, crucially, if some subgroup doesn’t agree, it can splinter off (yes, fork) to do its own thing.
Then, a billion dollars doesn’t matter. Communities can self-organize around the original community or the new one, based on their beliefs. Just like ETC vs ETH. Put another way: for the tokenized enterprise, hard forks are the new spinoff.
The new communities will be much more fluid. Membership in each tribe is really mostly about what tokens you own, and therefore what communities you are incentivized to contribute to.
Coase Theorem means that if transaction costs within an organization are radically lower than between organizations, then organizations grow giant. Hence, large enterprises. But blockchains change this. Blockchains radically reduce...continue reading: https://bravenewcoin.com/news/tokenize-the-enterprise-and-melt-it-into-the-community-rinse-repeat/
A decentralized system spreads control among many parties. It may or may not be tokenized. The key benefit of tokens is to align incentives among participants of the ecosystem. It’s a positive-sum game among the tribe of token holders. (And let’s not forget the windfall of a token launch, if you choose that path.)
So far, only startups have launched tokens. But what about enterprises? Could we tokenize Facebook? What about Amazon or IBM? How? What would be the benefit? In short: tokens will eat the enterprise from within, because investors will make money and the community will gain. We’ll have crypto tribes that started as companies. Repeat across many enterprises and it means goodbye to the stock market. Finally, this turns out to be a new response to the Innovator’s Dilemma — how can enterprises compete given their tendency to protect their profits (aka the status quo)?Let’s explore in more detail.
Approach
Here’s the recipe, for each enterprise:
Tokenize. Shares become tokens.Decentralize. Spread power among more people; users get tokens for past and future contributions.Melt into the community. Over time, both value and power spreads further.When one or a few enterprises do this, and actually make money for their shareholders in doing so, then other enterprises will follow suit. In the end, it’s all crypto tribes.
Example: Facebook
Let’s walk through this recipe, using Facebook as a example.
Step 0. Status quo
Facebook is at odds with its users. Facebook’s founders and shareholders have made massive amounts of money. Yet its users didn’t, despite contributing the key personal information and content that is the heart of Facebook.
This is a basic tension: Facebook has a bias to openness, versus users’ privacy.With its billions of users and high engagement, Facebook has become enormously powerful. Yet it’s controlled by a small handful of people. This is dangerous for society. Especially when it’s not structured to handle such a responsibility. There have been various proposals to improve the situation.
One idea is to get the courts to consider it a monopoly and break it up. This relies on slow-moving government processes.Other ideas come from the blockchain world. Namely: overtake Facebook from the bottom-up, by building something decentralized, and try to get the users to come. We’ve seen many such efforts at decentralized social media. But success is limited so far.
The greatest challenge is how to populate the network. It’s chicken-and-egg: people only join if their friends are there. It’s hard to crack two billion highly engaged users.There’s a variant: build something decentralized and tokenized. This can only help, because early token holders = your first users, and they’re incentivized to bring in their friends. HODLers gonna promote.
So, tokenization increases virality. But it’s still no guarantee to overtake a network with two billion engaged users.These ideas assume a start at zero, and attacking from below with something faster, sleeker, more viral. And they might work; but I’ve come to realize there’s another way. Tokenize from within.
Here’s how it works.
Step 1. Tokenize.
In this step, Facebook shares (ticker:FB) get converted to tokens.There are about 3 billion shares in Facebook. So here, Facebook (the company) issues 3 billion Facebook tokens ($FB) on a blockchain.Then, Facebook converts each of the 3 billion shares to a $FB token (share → $FB) in a contractual arrangement. Or, it simply starts using the blockchain as the registry of who owns what (share = $FB). Delaware is moving towards making the latter possible.Either way, we end up with a blockchain holding all $FB tokens that have replaced the previous FB shares. It’s tokens as securities.
Step 2. Decentralize.
Up until this point, the governance of the tokens is still in the hands of Facebook (the company). And it’s still one share one token. Step 2 is where the real change occurs: spreading power, and tokens for users too.The following need to happen simultaneously.
- Spread governance. Change governance so that the community has more control; then that $FB is not controlled merely by Facebook the company. The key responsibility is setting the rules for protocol updates (API changes) and token governance (monetary policy). There are many possible governance structures, from (1) fully on-chain and automatic (still dangerous, as we’ve seen with TheDAO), to (2) using a traditional non-profit controlled by a set of 20+ caretakers, to (3) starting as a traditional non-profit then becoming automatic over time (my fav, like in IPDB).
- Make the blockchain public-facing. Anyone can read to it or write from it; and no single entity is running all the servers. This means that key protocols for Facebook functionality are open, specifically the ones where tokens are given or spent (see next two bullets). Ideally all of Facebook becomes open source. Wouldn’t that be cool? This is more than just a pipe dream, since open source would actually benefit Facebook the company in this new regime. And in blockchain-land, the value ultimately lies in the (fat) protocols, not in the implementations.
- Tokens for past value-add. Facebook (the company) issues 3 billion more $FB tokens to the existing users of Facebook. It would reward users proportional to their degree of interaction with Facebook over its history. You get $FB for every post made, for every picture shared, for every poke. Or perhaps more in line with the status quo business model: you have a decentralized service that asks you to use your data for marketing purpose in return for other value.
- Tokens for future value-add. Facebook sets up rules such that value-creating actions on Facebook get $FB tokens. For example, each time I post a picture, I get $FB. There is an emerging design practice on how to do this well (e.g. avoid spam), with precedents such as Steemit, Brave’s basic attention token, and userfeeds. Furthermore, people can earn tokens for other value-adds too, such as adding features or improving performance.
When this is done, it will be obvious for crypto exchanges like Kraken or Interledger to add $FB tokens. So in steps 1 and 2, FB value has been moved from the traditional exchanges (stock market) to new crypto exchanges. What becomes of Facebook the company?
One option is to dissolve it. This is broadly ok because employees are incentivized to contribute simply because they own $FB; though I acknowledge there are messy details to sort out. Another option is for Facebook the company to simply become a service provider to the public $FB blockchain; it’s incentivized to improve the service because by doing so it earns more $FB tokens on behalf of its employees.
Now note that other individuals and organizations are able to improve the service too.In my example, I gave 50% of $FB to existing shareholders and 50% to users. It could be another ratio. But “half” is a good rule of thumb for a starting point — each side is within an order of magnitude and avoids nit-picky arguments.
Step 3: Melt $FB Into the Community
This step is something gradual that happens over time. At the beginning of this step, half the $FB tokens are owned by the previous shareholders, and half by the users. As time goes on, it could spread out more as users earn $FB tokens for usage, or more people buy $FB due to the lower friction to buy it.And some will hold on for dear life. HODL those $FB tokens. Facebook maximalism. You heard it here first.
You might ask why would Facebook shareholders ever go for this scheme. The main reason is that it will make them money! That’s the chief driver of a typical shareholder. It’s a huge value add if Facebook the company found a way to not be at odds with its users, the way it is now. And in fact it’s not just a neutral relationship; users are incentivized to add value.
Moreover, it liberates Facebook from quarterly earnings reports that are the bane of planning long-term and doing the right thing. Instead, there is a balance between building the business and building community. This alone could drive the value more than 2x, which then pays for itself. As bonus value, there is improved liquidity due to lower friction to buying $FB than there was in buying FB shares; and finally there are fewer bottlenecks to adding value since anyone can improve the code base.
Example: Amazon. Tokenize the Business Unit
Here, using Amazon as an example, I describe tokenizing one business unit at a time. It has the same result and same benefits of tokenizing the enterprise all at once, but with lower risk.Let’s take a quick step back, for context. Many folks are excited by how blockchain with IoT (Internet of Things) technology could help transform the supply chain, for everything from cars to drugs to intellectual property.
It could bring transparency to previously opaque sectors, reduce fraud and therefore insurance costs, and unlock new business models.However, this decentralized dream could be stopped dead by the new octopus: Amazon.
The original octopus was Standard Oil, with its tentacles and massive wealth touching every corner of the planet. Amazon is following a remarkably similar pattern. (Need convincing? Read about Rockefeller then Bezos.)This means that the incumbents with their emerging decentralized supply chains are headed into an all-out war with Amazon. It’s not clear who will win.There’s another path.
The octopus itself decentralizes. And it does so by choice.The recipe for this octopus named Amazon could be like Facebook, converting the whole enterprise at once. But there’s a lower risk option for Amazon. Amazon itself already has many independent business units. They each have their own API, and their own profit & loss. In fact, this API-per-business effort is precisely what spawned AWS more than a decade ago.So, here’s a simpler, lower-risk path for Amazon:
Tokenize + decentralize one of the business units.If that works, repeat for other business units.Once this has happened for all the units, Amazon is tokenized and decentralized.Over time, it melts into the community.
More Examples
Let’s look where the biggest payoff will be. One is where enterprises are at odds with their customers or broader communities, and therefore have the most to gain by aligning incentives. Here are some:
- Visa. Visa is under the interests of its shareholders and banks. It’s always been at odds with merchants with high fees; this has led to billion-dollar lawsuits. So, Visa could tokenize and include merchants. This is similar for other credit card companies too.
- Uber. Let Uber shareholders, drivers and riders unite in tokens, to share in the value creation. And while we’re at it, let’s tokenize taxi commissions too and let the exchanges sort out where value should flow. But, won’t self-driving cars contradict the drivers’ interests? My answer: let the network hard-fork to both options. The section below on Innovator’s Dilemma elaborates;)
- Twitter, Medium, and really all existing social media. This is just too obvious. If you feel like you’re missing something, read this. Let’s just tokenize and move on already.
- Universal Music Group, Sony Music, Warner Music Group. The big three record labels often find themselves at odds with the musicians they represent, not to mention the rest of the music ecosystem. In tokenizing and decentralizing, we can start to align the interests of everyone.
- Spotify, SoundCloud, Netflix, Getty, Steam, and really all media distribution and aggregation/filtering/recommendation platforms, from music and movies, to photos and video games. Spotify: ICO not IPO? SoundCloud: here’s your biz model. Netflix: get your community even more rabid. Getty: kickstart your community. Steam In Tokens = SteamIT (heh).
- IBM, Microsoft, Intel, banks, etc. Dear enterprises hugging blockchain already: here’s your endgame. When shall we start?
Historical Precedents
A tokenized, decentralized enterprise might seem like a stretch at first glance. Perhaps even a huge stretch. But, we have precedents which show us steps towards this:- Business unit with a tokenized core. For example, almost every airline on the planet has some sort of “air miles” program. Many of these have even spun out into their own businesses, such as Air Canada’s Aeroplan. Blockchain experiments abound for these kinds of applications, from air miles to ticketing.
- Series-A stage startup that tokenized its core. Numerai switched to rewarding its community of data scientists in tokens, turning zero-sum game among scientists to a positive-sum game. Next up — decentralizing the tokens.
- Series-B stage startup that tokenized its core. Messaging app Kik introduced Kin tokens, creating a positive-sum game for its ecosystem.
- Enterprise that tokenized its core. For example, reportedly about a decade ago some of the big credit card vendors tokenized (but didn’t decentralize) their internal flow of value. This led to big savings on currency exchange, lowered friction within the network, and more.
Stock Markets
After one enterprise tokenizes with success, i.e. makes $ for shareholders, it will spur a second enterprise to do the same. Then a third, a fourth, and so on. Before we know it, most enterprises (especially publicly traded ones) could have tokenized, decentralized, and melted into communities.Maybe some enterprises will hesitate. Or leaders will have their own selfish reasons to not do it. Well, we might not have to wait for a publicly traded company to tokenize itself. Instead, if a community gathers enough assets, it could simply buy the majority of (voting) shares on the market, to gain control the company. Then that community tokenizes, decentralizes, and melts the enterprise. It can be a domino effect: done in a good order, the wealth creation from tokenizing that company may be enough to buy the next company on the stock market.
And so on and so forth. (Alas, this is also a new angle for corporate raiders..) Either way, the result could be: every single company on the stock market has tokenized, whether it chose to or not. Traditional stock markets as we know them will be empty. The new tokens on crypto exchanges. Corollary: buy more Kraken. Or, run an Interledger node and become your own exchange:)
The Innovator’s Dilemma
Background
In the late 1990s, I was wrapping up undergrad studies in Canada. Many of my friends had gone to work for Nortel, then Canada’s biggest tech company. Nortel had moved from providing telephone equipment to network equipment, just as the Web took off. This was the height of the dot com bubble. Nortel’s valuation was in the stratosphere.How do you justify such a valuation?
One of my friends was an advisor to Nortel’s top managers, who were asking this. If you don’t know how, then selling might be a great idea, as AOL-Time Warner and NSI-VeriSign did then.Or, you can try to live up to the valuation. Nortel aimed for this. But they had a constraint: they could only consider opportunities that will bring at least a billion new dollars soon. Stuff that would move the needle.
This precluded them from doing the nonlinear emerging stuff (nowhere near $1B); and from cannibalizing their business (not new $).Right around that time, Skype launched. Nortel’s response? “Tiny market — pfff” and, since it overlapped with existing phone-biz revenue “it won’t add new revenue”. Disgusted, my friend quit Nortel — and joined my startup:). A decade later, Nortel was gone.
And in fact, these constraints of “a billion dollars or it doesn’t matter” and “why would we cannibalize ourselves?” exist for enterprises even when valuation isn’t sky high. Enterprises try to preserve their status quo, to preserve their profits — at the risk of death by disruption. Clayton Christensen’s 1997 book The Innovator’s Dilemma described this problem.
Solutions So Far
Christensen’s proposal was for the enterprise to spin out a company, and let that spinoff innovate on its own without the enterprise hampering its movement. Then, if the company did well and got to truly needle-moving revenue, then the enterprise could acquire it again.Now, enterprises have even partly institutionalized this approach, by running accelerators or incubator programs.
That way any needle-moving startups that emerge — spinoffs or otherwise — are within reach of the enterprise.There’s another solution, though it’s not for the faint-hearted: the leadership cannibalizes aggressively, current profits be damned. Axel Springer did this: it ate its print business with digital, and in the process became the world leader in online classifieds. Now, despite its 71 years, 60% of its revenue is from digital.
A New Solution
“Tokenize the enterprise” is a new answer to the Innovator’s Dilemma. It allows the enterprise to embrace change, because the enterprise has become the community, and vice versa. The community can decide if it has the courage to embrace change. And, crucially, if some subgroup doesn’t agree, it can splinter off (yes, fork) to do its own thing.
Then, a billion dollars doesn’t matter. Communities can self-organize around the original community or the new one, based on their beliefs. Just like ETC vs ETH. Put another way: for the tokenized enterprise, hard forks are the new spinoff.
Coase Theorem
The new communities will be much more fluid. Membership in each tribe is really mostly about what tokens you own, and therefore what communities you are incentivized to contribute to.
Coase Theorem means that if transaction costs within an organization are radically lower than between organizations, then organizations grow giant. Hence, large enterprises. But blockchains change this. Blockchains radically reduce...continue reading: https://bravenewcoin.com/news/tokenize-the-enterprise-and-melt-it-into-the-community-rinse-repeat/