The Big Long – Owning Networks vs Owning Companies – 03/22/18
Blockchain-based networks have ushered in a new asset class for investors to consider. Specifically, proof-of-stake (POS) networks are ideal investment vehicles to extract rent from the usage of these networks. When an investor purchases the native currency in a POS network, they have a claim on a percentage of the future transaction fees of the network. I believe several advantages exist to owning networks vs owning companies (stocks) and I will explain this in the following:
Owners have direct, censorship resistant access to their stake
Public/Private keypairs allow stakeholders in a network full, unrestricted access to their assets vs stock ownership where assets themselves are little more than a daisy-chain of contractual obligations, forcing the end-owner to jump through several hierarchical hoops to get to the true ownership of the asset. In other words, you trust your banks and brokerages houses to allow you access to your assets when investing in stocks. This trust is not required when investing in networks with a sound and robust byzantine consensus mechanism. Therefore, network ownership intrinsically exists completely outside of the control of any government or regulatory body, giving users unrestricted access to their assets.
As with companies, the natural tendencies of these systems are towards centralization of control, but the ability to hard fork at will mostly alleviates this problem with networks as users can clone the chain and reconfigure governance in a more decentralized manner if needed. Agnostic stakeholders will wind up with an equal amount of stake on both chains, giving all stakeholders a choice of which chain they wish to continue with. I suspect we may see something like this happen eventually in Lisk, which uses Delegated Proof of Stake (DPOS), a consensus mechanism most closely related to corporate governance.
This hard-forking mechanism gives networks a unique security feature not found in traditional companies. It provides an extra measure of checks and balances against any faction that gains too much control in a blockchain. For instance, an attempted hostile takeover of a network could be mitigated by a hard fork, giving users ultimate control over the direction of the chain and significantly reducing the power of capital-intensive groups. This generally cannot be done with stocks during an attempted hostile takeover.
Blockchain-Based Networks are Designed to Live Forever
Widely used blockchain-based networks will likely live forever, or at least as long as humans are here to maintain them. Because of their globally distributed and decentralized nature, no government will have the power or jurisdiction to completely shut them down, as they have with other monopolies. An example of this would be the dissolution of Standard Oil, a company which had come to dominate the oil industry in the late 1800s and early 1900s. The Supreme Court of the United States found Standard Oil in violation of the Sherman Antitrust Act on May 15, 1911 and ordered the company to be broken up into 34 smaller companies. This type of action by a government will be nearly impossible with blockchain-based networks. These networks can be regulated on the periphery, but an attempt to shut down every participating node will result in an un-winnable game of whack-a-mole by any regulatory body. From an investment standpoint, this will give investors the unique opportunity to potentially own a tenable monopoly IF one chain becomes dominant.
However, no guarantee exists that any one chain will become dominant. The largest obstacle to monopolization is the combination of open source code and the ability to hard fork, giving these types of systems a much more level competitive environment, reducing the potential to monopolize. This diminishes the concept coined by Warren Buffet of a wide and sustainable economic moat, but as I have stated previously, due to the synergistic nature and network effects of these chains, I think we will most likely see one chain become dominant over time. For instance, we only have one internet based on the TCP/IP protocol. We don’t have competing internets. The same will likely hold true for blockchains.
Networks don’t have debt
When analyzing traditional companies, debt and the cost of debt must always be taken into account when attempting to identify fundamental valuation. Companies can take unnecessary risks, garner negative value and eventually go bankrupt, or worse, receive a bailout from taxpayers. Networks cannot go bankrupt. They can only slowly die from lack of use. Networks likely won’t issue bailouts for entities that take unnecessary risks, but it is possible, especially with something like dfinity’s Blockchain Nervous System (BNS). However, these types of bailouts have yet to happen to date with any legitimate blockchain-based system. Any transactions reverted so far in blockchains have been because of coding errors – i.e. the 2010 stack overflow bug in bitcoin and the DOA hack in ethereum. Networks largely mitigate the risks of moral hazard, whereas TBTF (Too Big To Fail) companies are fraught with it.
Finally, companies do have one advantage over networks at this point – companies are mostly run by people and not software that can wreak havoc if not properly coded. Some folks say that anything that can be hacked, will be hacked. However, many critical systems are run by software – airlines, national defense systems, medical systems – this is the reality we live in today, and these systems work sufficiently for society to function. In the long term, through proper peer review and rigourous testing, blockchain-based networks can also work sufficiently for society to function, and potentially function much better than the legacy financial system. If so, then native tokens of these networks could be a very lucrative investment.
Disclaimer: None of this is advice of any kind.