Beyond the Shareholder Model
by pfitzy12 – originally shared on Medium
TLDR:
- Competitive theory (ex. Porter’s Five Forces) gives a great model for strategy in a landscape of independent competing firms, but fails to provide a good model for dependent cooperative firms. Open source networks need a new model.
- The corporation and associated shareholder model is anachronistic to the logic of the internet. Open source contribution should outcompete centralized org structures in software if users, investors and teams are properly aligned.
- Lack of corporate oversight and deterministic / programmable treasuries has
led to DAO team malfeasance and / or misguided treasury strategies that are
value destructive.
- Ie. airdrops, liquidity mining, protocol owned liquidity, point systems etc
- Networks should be cooperatively owned and any stakeholder that adds value to them should be compensated fairly.
- We need to find a stable way to finance, grow and govern networks on the internet
The RevNet yellow paper starts out with the framing statement :
“Successful organizational frameworks have always been well-adapted to the technologies of their respective eras. In our current era of internet-native business and user-generated value, many frameworks have grown anachronistic, failing to optimally align participants.” - RevNet yellow paper
The shareholder-owned corporation is an outdated framework conflicting with the logic of open-source, user-owned software.
One key factor supersedes all secondary explanations : misaligned incentives.
In traditional corporations, diverse stakeholders often clash, and power dynamics typically favor shareholders. In contrast, a user-owned software network erases stakeholder distinctions, fostering a unified focus on long-term stability and growth rather than short-term incentives dictated by a privileged few. In the realm of Web3, sustainable networks thrive on cooperation. It’s essential to strike a balance in incentives for teams, users, partners, and investors; otherwise, participants may seek greener pastures elsewhere. While compatible with a free market, this approach diverges significantly from the traditional firm’s long-term objectives.
The Shareholder Model
The shareholder model prioritizes the interests of investors over other stakeholders - users, employees, partners, and communities.
Concerning users, the central misalignment lies in the drive for maximum profit extraction. Given the zero marginal cost of software distribution, not only is this unnecessary, but it can impede network growth if users migrate to more affordable alternatives or lack sufficient incentives for their value creation and continued network propagation.
Shareholder models also prioritize profits over the interests of employees. The model prioritizes shorter time horizons reinforced with stock options over predictable salaries as well as short term growth hacks and M&A at the cost of longer time horizon R&D and employee training. Corporations prefer shorter time horizons. Employees prefer longer time horizons.
With partners, conventional strategy informs a view of charging buyers the maximum they are willing to pay and paying suppliers the minimum they are willing to accept. A simplistic view of stock price is the delta between this willingness to pay and supplier opportunity cost over time discounted back to the present. If the lines of ownership between firms erode via tokens, the desire to extract the most you can might be short sighted if it undermines long term stability and growth.
Local communities can face adverse effects as well. Driven by the allure of job opportunities and tax revenue, corporations may inadvertently drain resources from local areas and channel them towards distant shareholders. From a network ecology standpoint, this preference for efficiency can compromise resilience and redundancy, as the departure of a corporation can deal a severe unabsorbable blow to the local economy. Furthermore, there may be additional detrimental environmental externalities to consider.
Under the shareholder model, corporations are motivated to assess the expected impact of market forces and strategically position themselves in segments where these forces work in their favor. The ideal scenario involves a growth in return on invested capital when the position is robust, the value chain is well-suited, and execution is optimal. Conversely, if market forces are weak, and the value chain is ill-fitted or inadequately designed for competition in that market, the return on invested capital is expected to erode.
While the corporation has proven to be an optimal governance structure for competitive, independent companies, it falls short for an open-source network reliant on a collaborative ecosystem of individuals and firms. When a governance framework is inadequately aligned with the technology of the era, surface-level symptoms inevitably emerge. The prevalence of issues such as rug pulls, VC dumping, airdrop farming, mass marketing, and the concentration of power in core teams or voting cartels can be attributed to embedded incentives in existing fundraising and go to market strategies and tools combined with a lack of effective corporate controls.
We must shift away from constructing with the mindset of castles, moats, and strategic power. Instead, let’s envision open source through the lens of lego-like modularity, bridges for connectivity, and meta-cooperation facilitated by incentives.
We need to find a stable way to finance, grow and govern networks on the internet.
In Part 3, we introduce you to RevNets.