Why the Future is Infinite Markets 📈
Economic history of the Industrial Revolution. The importance of markets for innovation. The blockchain opportunity.
“We will have patents”
In the 18th Century, France, the UK and the United States were locked in a battle of invention. During the Enlightenment, the three countries had each contributed key ideas. But, when it came from turning insight into industry, the US started to cast a giant shadow.
Why did this happen?
Was America just lucky to have Edison and Westinghouse?
Maybe, but that story, that I learned in College, is about IP markets. As growth moved from farm to factory, economies needed to commercialize innovation. The systems that created the best markets for innovation flourished. The ones that did not, failed.
The US/UK and France had very different approaches to intellectual property right.
In France, inventors presented ideas to The Society for the Encouragement of National Industry. If the Society was impressed, inventors received a reward. The blueprint for their idea then entered into the public record for anyone to use.
In the United States, an inventor received nothing but a certificate for their idea. But that patent certificate granted them exclusive rights to commercialize their invention.
In the French system, your idea was worth what the learned experts declared it to be worth. In the American system, your ideas were only worth something if people paid for them.
The results speak for themselves.
In an 1876 visit to America's Centennial Exposition, a traveler could spot endless American inventions. The Telegraph, the telephone, the sewing machine and the refrigerator. Diplomats took notes on American progress. As a Japanese diplomat said, " “‘What is it that makes the United States such a great nation?’ . . . we investigated and we found it was patents, and we will have patents.”
The genius of the American patent system was that it created a market where none had existed before. Products and services were always sold. But ideas were too abstract. By creating a deed for intellectual property rights – America created incentives for innovation. By only granting an opportunity to profit, America ensured that profits were proportional to value created.
It's become popular to shit on markets. Capitalism is passé the youths tell us. But markets are the single best tool humanity has for stimulating genius. They are to intellectual progress what evolution is to biological progress. Like nature, markets are ugly. Markets are cruel. But ultimately, through the crucible of the market, we can harness base instincts to create "endless forms most wonderful."
The problem with markets is not that they exist, but that we often only point them at stupid things. As Taylor Swift sings, "When you play stupid games, you win stupid prizes."
But markets can be used for better games. We can build markets that incentivize removing carbon from the atmosphere. We can build markets to reward people for ending poverty or disease. We can build markets that reward artists who expand our capacity for feeling and meaning.
The promise of crypto, and the reason it should capture the inner-nerd of every macroeconomist, is that we really can create markets for the good. We can create markets that can direct human instinct, ingenuity and intellect at our greatest problems.
All we need to create a new market is the following:
Demonstrating clear demand for a good or service.
Create a way for people to validate that they have provided that good or service.
Create a mechanism for demanders and suppliers to trust each other and exchange their value.
The last fifty years has been miraculous for markets. We have networks that spread information worldwide in milliseconds. We have built marketplaces for every good under the sun. We have created new instruments of financialization.
We are ready for the next challenge. We are ready to build new markets. We are ready to steer our baser instincts toward greater purpose.
We are ready for the Era of Infinite Markets.
The burden for identifying user demand has historically fallen on the innovator. We revere the lone Promethean genius who extracts fire from Heaven.
Ford, who knew that man wanted a car and not a faster horse.
Jobs, who said people didn’t know what they wanted until you gave it to them.
Musk who saw the future and said “Why not now?”
And, to be sure, alchemy is alive and well in the field of product design.
But what if there are other ways to extract the Promethean fire than a lone-genius?
Because sometimes people do know what they want. They’re even willing to pay for it. They only don’t know that there are others who want the same things.
And inventors don’t know these fragmented groups of would-be customers exist, either.
I saw a talk a few years ago from the founder of IndieGoGo. He talked about how crowdfunding was a mechanism for de-risking innovation. Inventors could validate their ideas before manufacturing a single unit. It allowed successful innovators to prove market demand before seeking investment. It was a step away from the capital intensive alchemy of Ford, Jobs and Musk.
The problem with crowdfunding, though, is also well-known.
An entrepreneur puts up a flashy page, raises capital, then cannot realize the vision. The customer is then screwed.
These crowdfunders are still betting on the magic lone inventor.
Only now they pay upfront.
But crypto advances the cause in a different way.
It provides for consumer-stimulated inventions. At the core of Web3 are two things: community and credible-capital-commitments. These provide the foundations of a new market-type.
These days you need community-market fit rather than product-market fit. The new vogue is to find customers that you can build for and with. Once you find them, you can use pooled demand to bootstrap new goods and services.
It's a brilliant idea, actually. The community sets rewards or bounties for their needs. Inventors can trust they will pay because the money is in a smart-contract. Guaranteed demand drives new products.
FWB DAO developed its own token-gated events software. The DAO was the first customer, but certainly not the last.
gmgn Supply Co. treats members as their first customers to co-develop coffee, chocolate and other goods.
VibeBIO finds communities seeking treatments and brings them into clinical trial for new drugs.
Gitcoin DAO even uses it to bootstrap demand for public goods in software and basic research.
Wherever there is a demand and capital, there is now a market. That's a big deal.
And it gets bigger. Because this innovation can fund more than discrete goods. It can fund outcomes. Imagine a market that pays for reductions in greenhouse gases. Imagine a market that pays for reductions in poverty rates.
It might sound impossible, but digital markets are already measuring and validating outcomes.
The Validation Problem
It’s a truth universally acknowledged that not everything that matters can be measured. But measurement matters. Because without it, you can’t achieve the demonstrable outcomes needed for scaled markets.
And absent scaled markets, valuable – immeasurable things – will remain under-provided and under-developed.
But if we can create a perfectly competitive commodity market, we ensure a few awesome things:
Prices converge to the cost of production of a widget;
Everyone who wants the widget (and can afford its marginal cost) can have it;
Anyone who has a new way to create the the widget (cheaper, faster, etc) can join the market and profit.
The key to establishing a universal global market is standardized units of production. If a good is standardized, everyone can produce it. This allows anyone to develop new ways to produce it faster or cheaper.
But how do you get standardized goods in an open-market?
Traditionally you need a regulator. Moody's for financial products. SGS for exported goods. USDA for agriculture.
Without a regulator, how can I be sure that your electricity is as good as my electricity? How can I be sure that your pound of apples will be as good as my pound of apples?
So in established markets, we get regulators. But what happens for new markets?
This is a chicken-egg problem. If people aren't selling lots of goods, why do we need a regulator? But without a regulator, how can we create a commodity market to sell lots of goods?
But the blockchain has changed how we rate standardize commodities. We no longer need a government-appointed standards enforcer. We have community-validation through consensus mechanisms.
Bitcoin’s core innovation was a decentralized system for validating transactions. Proof-of-work creates trust that a computer is reporting honest data.
If we can trust that data is correctly reported, we can create markets for anything that data can capture. Helium offers a commoditized market for wireless service through their proof-of-coverage protocol. DIMO offers a commoditized market for mobility data through their proof-of-movement protocol. Akansh commoditizes compute. Hivemapper commoditizes location and mapping data.
This has profound implications.
We can build trustable commodity markets for anything that data can reflect. It will allow the sale of electricity back to electric grids. It will allow markets for decentralized computing. In the future, it will likely power the development of carbon-capture markets.
Markets move quicker than single firms or governments. They create exponential progress. And that matters. We can’t afford, for example, to decarbonize at the speed of a firm. But at the speed of a viral network… well.. That’s a thought.
If we have demand, and we have verifiable goods to sell, all we need is a little trust between buyer and seller.
Creating Trust Environments
If there’s one rule that links politics and economics, it’s this: without trust, there can be no trade.
America and China have turned low political trust into an escalating trade war.
Amazon dominates other eCommerce sellers because they have buyers' trust.
Why will we get into an Uber but not a stranger’s car? Trust.
So if we want new markets, we need to establish trust. And this is where the blockchain really shines. It offers two core innovations that we will call:
2. Composable Deals
It’s often said that “smart contracts” – or blockchain programs – are “code that can make commitments.” We can't take them down. We can't change them at will.
A smart contract will operate as-is barring any major, earth-shaking consensus that stops it. It is reliable, permanent infrastructure. Software developers do not need to worry about changing fees or revoked functionality.
For anyone that has tried to build on Apple’s iOS platform or Facebook, that’s a meaningful change.
Core web infrastructure will no longer be the property of temperamental companies. They will be trustable public goods.
This has two profound effects.
First, it encourages greater investment from developers using the platform. Companies as large as Facebook and Uber have had to worry about being booted from Android and iOS. Amazon, Netflix and Epic Games have to try to dodge platform take-rates. Smaller developers worry if the platforms will copy them or remove access to key APIs. Any rational developer hedges their investment on a platform. This is worse for users and for innovation.
Second, blockchains ensure that users own their data. This prevents platforms from building data moats. Amazon sellers could take their reviews/reputation with them. Uber drivers could switch platforms but keep their earned trust. A TikTok creator could take their audience to a new platform. This enables builders to more confidently invest in their business.
Credible commitments to good behavior and low switching costs are a new social contract. Just as property rights are key to economic development, smart contracts are key to developers. They are shifting the tech world from Google’s trust-us-era (“Don’t be evil”) to a more credible blockchain-era (“Can’t be evil.”)
Consider the infrastructure that exists today to purchase a home. To signal a commitment to purchase, individuals place funds into escrow.
Escrow is a fancy term that just means “give our shit to a third-party who can ensure that the terms of a contract are executed fairly.” This mechanism is essential for allowing large-scale investments to take place. Without it, the risk of individuals pulling out of big deals would be prohibitive. But it’s costly – often totaling 1-2% of a transaction in fees.
And it has a limited domain. Escrow is used in countries with strong legal systems. It can be used for transactions that are well-defined – like real estate.
But imagine if escrow was essentially free. Imagine if it were usable to create trust for any kind of multi-step transaction. It would enable composable deals. "I build X so that you can build Y so that we can both build Z." Today those deals require massive legal infrastructure. Tomorrow, they will require a few lines of code.
Let’s use a classic economics example.
Imagine that I want to open a sock factory, and you want to open a shoe factory. We both need the other builder to commit to building for our business to make sense. Shoes without socks are uncomfortable. Socks without shoes are worthless.
Now, if I’m rich, I might just open my sock factory and trust that “if I build it, someone will come and open a shoe factory.” But that’s risky. Instead, we could enter into a mutual agreement. Both of us could commit 5% of our expected factory costs to a smart-contract.
If we both open our factories on an agreed upon timeline, the money would return to each of us. If, instead, I walk away, you would get my 5%. This is a few lines of code.
It would provide a signal to you that I am serious about my investment, and vice-versa. It would allow us to make investments that otherwise would seem too risky to make. It allows rapid coordination on otherwise expensive collective action problems.
That creates the context of trust. And trust is the necessary precursor of new markets.
There is a lot of excitement today around core technologies. There's also a lot of skepticism around social and coordination technologies. AI can generate Van Gogh on-demand. So why should we care about computer code that lets assholes speculate on ape drawings?
I get that.
But the reality is that lasting innovation requires the development of new markets. New markets depend on our ability to demonstrate demand, verify supply and create trust to transact.
We rightly lionize the heroes that powered the golden age of 19th century innovation – Edison, Graham Bell, Morse, Westinghouse.
But we often ignore the context that made their world-shaking innovations possible. That’s a shame. Because if we want another golden age, we don’t just need another set of geniuses. We need new markets.
Fifty years from now, when researchers try to understand where all our new inventions came from, I think they’re going to have a simple answer.
To paraphrase the Japanese Emissary, “We investigated and found that it was blockchain markets. So we will have blockchains.”