[18] Web 3 Economics: Value Creation vs Value Capture
Who (should) get what in community-run projects?
Dear Readers,
Hope you had a great weekend!
This week we’re diving further into value creation in Web 3. We wonder how the mechanics of value creation and value capture will continue to play out under a “decentralized” model — and whether it’s as even as we think or want it to be 🤔💰
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A common critique of Web 3 is that inequality and concentration of power is rampant … and looks a lot like the Web 2 world.
Stats highlight this critique acutely: “Of the 19 million bitcoin currently in production, just 0.01% of buyers control around 27% of the cryptocurrency”.
🤦♀️🤯🤷♀️
That means the top 0.01% in this ecosystem own something equal to $150Bn in value (based on Mid-May 2022 BTC prices).
And it’s not only BTC where you see this kind of distribution.
We see uneven distributions everywhere: in economies around the world, in teams, in companies and even in nature.
Many projects in Web 3 struggle with the concept of what is the “right” token distribution.
Simple Question: What segments of a community (users, investors, project team members, etc.) should own what percentage of that project’s token supply?
This simple question is not so simple.
Is even distribution the best? Will everyone do an even amount of work?
From there, how do you reward A-players? What do you really value and prioritize (and therefore, reward with more tokens)?
On the one hand, it’s easy to say Web 3 is inherently supposed to be more equal, but on the other hand, it seems like concentration of power / influence is all around us.
Value Creation vs. Value Capture
When a group of individuals come together to work on something, the question around how each person gets rewarded is a Value Creation versus Value Capture question.
Value Creation is about who is actually doing the work to create value.
Value Capture is about who is benefiting from the results of the work (i.e. capturing the value created).
Let’s take a look at a couple examples:
1️⃣ Group projects in school. You know the drill: sometimes one person carries the team, and the rest are just happy to coast (Free-rider Problem).
The reality is, not everyone carries their weight. They aren’t all optimizing for an A — whatever the reason, we don’t all want to work and we don’t all care equally.
In this example, everyone is usually rewarded with the same grade, so the free-riders get the benefit without doing (much of) the work.
Uneven value creation (one person does the work), even value capture (everyone gets the same grade)… feels a bit unfair? 📓 🎓
2️⃣ A more “real-world” example: in large companies, the CEO is usually amply rewarded. Some would say it’s crazy the CEO or management team makes as much as they do for the work the rest of the organization actually does. This can also feel a bit unfair.
There is even value creation where work is more evenly distributed across the population, but uneven value capture where people at the top can make a 100x+ (in recent years as high as 350x) more than the average employee in some years. 📈🥧
3️⃣ In Web 3, projects are experimenting with a community-driven work model with the goal of (more) even value creation and (more) even value capture. Since decentralization and broad distribution are key principles in Web 3, the ideal scenario is that everyone does the work and value is shared as evenly as possible across those who do. 🕸 3️⃣
Projects worry about token distribution because they want the value capture to be as distributed as possible with the goal of sharing value as evenly as possible with the community. In this state of the world, power, ownership and value capture is less concentrated.
This sounds nice on paper and the vision is appealing: share the work, share the wealth and (implicitly) more equality and less concentration of power / wealth.
But is this realistic?
Can we really expect an even distribution of work? Does everyone want to contribute evenly, participate and do the hard work….
Are we all going to vote on how communities evolve in governance proposals?
Are we all going to help evangelize the community, whether it be creating content or telling other people about it?
Are we all going to contribute our skills to improving different parts of the community (product, tech, marketing, etc)?
For the average community member, the answer is probably not… but you’ll likely get a (small) subset of community members who will jump in head first and become evangelists.
These will be the people who end up doing a fair amount to a majority of the work to make the project successful. In every project, the natural evangelists are the founding team members, but some evangelists will come through the community.
So does this mean the natural outcome of Web 3 is a model with uneven value creation and uneven value capture? … Where few people contribute overwhelmingly, but capture outsized value… which then leads to concentration of wealth and power in these communities.
Is that fair? Is this the natural evolution of human-made systems and structures?
It’s worth asking: is this just human nature?
Splitting the pie 🥧 📈 🍰
Even in nature, we see the species with the most power (humans) usually hones it further over time. Then this compounds on itself as sub-groups form, concentrate power and want to pass on inter-generational wealth / status.
For as long as we have a system (society, government, project governance) that encourages value capture, there will always be value creators taking early risks or adding outsized contribution and being rewarded handsomely for it.
It’s easy to say “more people should have more coins / tokens”, but are those same people going to contribute evenly?
And how do we define contribution within Web 3 anyway… is contributing capital enough, or do we want to incentivize them to also contribute work / time to the project as well?
The participation you want to incentivize ends up being critical in a decentralized system. This is one of the most important design choices!
Because in decentralized systems, community participation becomes even more critical than under traditional business models. In a traditional business, users don’t actively contribute to the product because they don’t get any upside. But the advent of Web 3 means users act as stakeholders and are more involved in the growth of new companies than ever before.
So the opportunity to share economics and upside with the average user is there.
But will the average user take this opportunity and actually do the work?
Can and will are two different things.
OR…
Is it just the early evangelists / believers / risk takers who jump at this opportunity and therefore take an uneven share of the wealth / power in a project?
It’s still early… but if you are starting a Web 3 project, here are some fundamental questions to think about:
How do you / should you reward evangelists, early believers, risk takers (e.g. A-players) who believe in and contribute to your project and community?
Is an uneven distribution of tokens acceptable in the beginning? Should it move to more even distribution? Should this evolution happen naturally or does it need to be incentivized?
What should “average” contribution look like? (e.g. is capital for tokens in your project enough, or do you want community members to do some level of work?)
TBH… there is likely no one-size-fits-all approach to a shared responsibility model.
Each project will have to decide how to split the pie and live with the tradeoffs.
As they say in economics, there is no such thing as a free lunch (or pie).