Since the beginning of the Initial Coin Offering (ICO) trend, blockchain-based decentralized financing models have been praised by many mainstream commentators for their clear advantages over traditional fundraising models. For entrepreneurs and project visionaries, the allure was the ability to quickly raise money globally, while everyday people became able to invest in lucrative early-stage projects that the traditional system would not allow them access to and were able to sell their investment much sooner than if they had to wait five or more years for their shares to be traded publicly.
But while there are clear advantages to the model, we must be careful not to overhype the impact potential new systems will have on our economy.
There is a popular idea, bordering on religious in some, that cryptocurrencies are going to usher in a magical new golden age of capital markets, democratizing wealth and reducing wealth inequality. In this view, a myriad of decentralized blockchain businesses that anybody can invest in from the early stage will one day prevent and provide competition for some of the world’s most extreme monopolies and large multinationals like Google and Amazon and are thus seen as a wealth spreading vehicle that can bring about a fairer and more equitable society. Their belief is that decentralized company ownership and operational structures will lead to a more decentralized economy with greater competition, and where more investors see a return on their early contributions.
Certainly, this is a fascinating vision - comprehensive, dramatic and intoxicating - but as Karl Popper observed of Marx’s material dialectics, it’s still just a vision, a matter of faith, a belief that is unlikely to align with real-world practice.
Let’s tackle the main problems with this view:
First of all, the basic premise is wrong. While it is true that traditional models don’t allow the same degree of participation that blockchain models do, the limiting factors are the political and regulatory restrictions — enforced by the same groups that almost invariably promote concepts like ‘diversity’, ‘fairness’, ‘equality’ and ‘inclusion’ — rather than an issue of technological feasibility. ICOs managed to circumvent these rules for a time but going forward any blockchain-based investment model will require the blessing of the political class and regulators to propagate without consequences for those involved. At the end of the day, the government enforces whatever it wants, though politicians and regulators should be encouraged to look towards blockchain-based investment models to meet their vaunted political objectives for their ability to decentralize and democratize markets in a faster, more cost effective and secure manner.
Second, while the investment processes are different between blockchain businesses and companies like Amazon, even the world’s largest and most ‘centralized’ companies are, in reality, part-owned by hundreds, or even thousands of shareholders like any publicly floated company. Everyday people may be denied access from investing in large companies at the early stage because they aren’t deemed sufficiently educated based on their income level — which few would argue is fair — but these companies still have a relatively decentralized ownership already, albeit comparatively less than it could have been if the public had been allowed to invest from the beginning.
Third, decentralized companies are not likely to reduce the shift towards centralization of consumer industries that produced megalithic near-monopolies like Google and Amazon anytime soon. The argument is made that without large-scale decentralization we will remain trapped in a centuries-old spiral of wealth disparity between the rich and the poor, and that the internet has accelerated this process as these large businesses were able to make use of a global reach. The solution, it is argued, are open source blockchain projects that allow any group to create decentralized protocols and businesses with the incentive of owning digital property (usually utility or security tokens), and that much of the world’s ‘centralization’ can move into the decentralized world where there may be many more viable consumer options.
But in business, as in most walks of life, individuals tend to default to the path of least resistance — they almost always take the most convenient option where there is no compelling ethical or rational reason not to. Consumers will use protocols and purchase from the businesses that provide them the best value and most convenient service regardless of the commercial structures in place. They will not just give their patronage to a competitor because ‘it’s fair and we want a decentralized industry’. A blockchain-based Google will emerge if its services are better than the competition. Decentralized business and financing models will not break up nor prevent industry monopolies as some proponents claim, and this fact means that even if large scale blockchain businesses emerge, they will have barely any impact when it comes to democratizing wealth but for the few extra people who may have been allowed to invest in its earlier stages.
Another problem is that the bulk of the funding going into a blockchain startup in any funding round will still mostly come from wealthy investors who can afford to contribute more. Even if the business implemented a maximum investment threshold to keep ownership distribution as wide as possible in each financing round, the startup would hamstring itself to ever grow to the level to compete with multinational corporations. Thus, the idea that decentralized models will usher in a more equitable distribution of wealth while also combating industry centralization begins to self-detonate.
Decentralized protocols don’t necessarily decentralize economies that operate atop of them. The internet is decentralized and yet we still ended up with Google, so how would the redundancy of decentralizing an already decentralized application give any different a result? It is true that open source protocols are a potent tool in curbing the worst excesses of a runaway digital economy, but open source is as old as the internet itself and all the greatest innovations have been brought to market by people with a sufficient level of self-interest to do so. Only time will tell what level of ownership that is.
At the end of the day, with a nod from regulators, blockchain-based businesses could dramatically democratize the investing opportunities for individual companies. That said, they remain unlikely to impact wealth concentration on a macroeconomic level anytime soon.