🤝🏽 The Network Trade: Wealth creation and crony economics
🤝🏽 The Network Trade: Wealth creation and crony economics
This is essay 1 of 4 essays for The Network State Creators Cohort #3
Source: Stable diffusion
“It’s not about what you know, but who you know”.
I have heard this saying a lot in many different contexts. Both in Asia and Europe. It highlights the importance of social connections, which form a network. Networks play a crucial role in trade and are often more important than knowledge.
For example, having a fancy degree on an isolated island may be of little use compared to being street-smart in a crowded market, or knowing the right person in the neighborhood.
In this article, I aim to explore the impact of networks on trade and provide a perspective on how trade might evolve in the future world of Web3 and the Network State. Covering two phenomena of a networked-based trade: wealth creation and crony economics.
💸 Network = Wealth
In tech, the concept of Network effect or Metcalfe’s law is frequently used, especially in developing great products or companies. This concept describes how each new user of a product or service makes it more valuable for all other users. We see this phenomenon in social media and platform businesses such as Airbnb and Amazon.
Where the more people are using the product or service, the more value it provides to the network, hence the more user it attracts in the future. Andrew Chen of A16z explains this concept thoroughly in his book “The Cold Start Problem: Using Network Effects to Scale Your Product”.
However, the economic benefit of networks is not a new invention of the tech world. We have seen the power of networks to create wealth throughout human history.
In the book the square and the tower, Niall Ferguson explains that those with a wide and powerful network, whether through family connections, alma maters, or self-created networks, have a higher chance of creating wealth.
For instance, business families such as the Medici of Florence or the Rothschild of Europe amassed enormous wealth by utilizing their networks effectively.
“A merchant is a node in burgeoning commercial network of credit and debt, a universal men able to befriend different type of men and social classes”
- Niall Ferguson
In a Web3 world, being part of a network such as a DAO (Decentralized autonomous organization) is just as relevant for generating wealth as in the Venetian times. However, the network has moved from a geographical or cultural boundary to an aligned digital community.
One doesn’t need to be in Silicon Valley to raise funds from great investors or have a finance degree from an IVY league school to take part in DeFi (Decentralized Finance).
Similar to how people hire from the same alma mater or conduct business with only close connections, this also happens with the communities within Web3. People use different memes to distinguish themselves from the others, such as a profile picture (laser eyes in Bitcoin, colorful ORB in ReFi DAO, Bored Ape NFT) or network domain (.eth for Ethereum).
Although one could argue that this new network is just the same as the old. It’s contrary to the legacy system. The new trade network values proof of work more than top-down credentials. The on-chain proof of what you have done, your contribution, and the community that you are aligned with, are becoming more important than just who you know.
🏛️ Crony economics
The word crony capitalism is not foreign to most of us. It’s a term often used to describe the corruption of power for personal financial gain or collusion between politicians and business people. One who’s closest to the power will be the first mouth to be fed. This is comparable to the Cantillon effect of central banking, where the trickling-down effect of money will first go through the one closer to power.
However, what about the indirect benefits of a network? I call this crony economics, a debit and credit system based on karma. Most of us might have experienced this throughout our life.
Free drinks in the bar because you know the owner, being on the guest list, getting a free pass by the police because your dad is a well-known man, and the list goes on. Regardless of the political system, people tend to provide support or preferential treatment to those they know or those who belong to the same community.
Nassim Taleb eloquently summarized this in his book Skin in the Game:
“With family and friends, I’m a socialist
At the local level, a Democrat,
At the state level, a Republican,
And at the Fed level, a libertarian”
What about in Web3? some might say that it does happen. For example, the OG, or a small circle of people who joined the community early, benefitted by being connected to the right people at the right time.
Is this good or bad? it depends. On the negative side, we have seen the ICO bubble of 2017, where coins are thrown away recklessly, especially to the core team. On the positive side, the Uniswap airdrop has benefited many people just by being an early user of the protocol.
Given the opportunity to shape the structure of a new startup society, it's crucial to draw from historical lessons and implement innovative governance tools such as utilizing DAO tokens. Here are two practical examples:
1. Token holder quorum:
A minimum number of token holders must vote in order for a proposal to pass. This ensures that all stakeholders have a say in the decision-making process. Fairly similar to the democratic process since Aristotle's time, but everything is done transparently on-chain.
2. Multi-sig:
All financial transactions need to be approved by multiple signatories from the DAO, so funds cannot be misused or distributed without agreement from multiple parties.
These are just some examples of how to use decentralization to eliminate or at least minimize the effect of crony capitalism in a Web3 world.
Cronyism, whether in the economic or political system, is a double-edged sword. It has both good and bad consequences, and it is entirely up to us to ensure that it does not become a vehicle for corruption.
Conclusion
Network is a natural phenomenon of humans, from the stone caves to the metaverse. Birds of a feather flock together. As we are entering a new phase of history in a digital and decentralized world, networks are becoming even more relevant.
However, the shape and size of these networks are changing. For better or worse.
We are still in the early phase of the journey. Let's not repeat the same mistakes our cronyism ancestors of the past and work together to build a more sustainable and impactful network.
Thanks for reading this article and enjoy the weather ☀️
This is essay 1 of 4 essays for The Network State Creators Cohort 3. Check out other essays from our community here.