“If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘what would I do if I were a horse?’”
— Ronald Coase
Debating Web3 Markets
In 1960, the economist Ronald Coase was invited to debate his theory of markets and property rights with some of his most prominent critics: the fabled economists of the University of Chicago.
A pre-debate straw poll found 20 of the assembled luminaries, including the great Milton Friedman, opposed Coase’s ideas, versus just one in agreement.
At the end of the evening, the vote was 21 for Coase and 0 against.
According to one participant, Coase’s debate opponents “stumbled out into the evening air in a state of shock, mumbling to each other that they had witnessed intellectual history."
He had convinced that preeminent group that the key to understanding economics was understanding markets and property rights.
60 years later, Coase’s work may be due a re-reading — because what is crypto if not a rethinking of both markets and property rights?
Coas(e)ting Into Web3
Coase is best known for a fundamental insight about why firms exist.
If markets were costless and frictionless, he theorized, there would be no reason for people to organize into companies.
Instead, entrepreneurs would make only “arm’s-length transactions.”
For example, if there were a perfectly liquid market for newsletter writers, Blockworks could hire a new one every day.
Instead of making a long-term investment in a hit-or-miss writer who’s not nearly as funny as he thinks he is, a liquid market for newsletter writers would allow Blockworks to hire a macro expert one day, a crypto-native the next and so-on.
Contracting with employees would be just as easy as buying SHIB tokens today and switching them into DOGE tokens tomorrow.
That is, of course, not how it works: Finding a different writer every day, agreeing terms with them, signing one-day contracts and making daily payments would be a wildly inefficient way to run a company.
Which is to say, transacting in the “market” for newsletter writers (and most other labor) is expensive and time-consuming.
It’s for that reason that entrepreneurs create hierarchical organizations: Markets are expensive to use, so it’s cheaper to bring many of those transactions in-house.
Could Web3 Change That?
Web3 maximalists expect DAOs to replace LLCs, which has always seemed a little pie-in-the-sky to me.
But looking at it through the lens of Coase’s writings has me thinking maybe they are onto something: Because crypto radically lowers transaction costs.
And high transaction costs is what firms solve for.
As expensive legal agreements are replaced with cheap smart contracts, organizations will be increasingly able to decentralize.
Markets for Everything
So reading Coase has made me more open to the case for DAOs, but it still seemed highly theoretical to me until I heard Do Kwon speaking on his latest passion project: creating fungible labor markets.
Being a DeFi gigabrain, Kwon naturally envisions labor trading on a decentralized exchange, via automated market maker, just like tokens do.
In theory, that could provide entrepreneurs a more efficient way to source labor.
Except that Do Kwon is not interested in theory: He’s got a startup in the works to make it a reality.
Web2 has already taken steps in that direction — Uber has created a market of on-demand drivers, for example.
And Amazon has created a market for on-demand web services.
Do Kwon hopes to take it a step further and create a frictionless, tradable market for labor.
That could make Coase’s vision a reality and allow DAOs to replace LLCs.
In some cases, at least.
If we manage to replace LLCs with DAOs, we may replace owners as well.
Or at least investment returns to owners.
According to Coase, it’s the transaction costs inherent to business that cause value to flow to owners — because owners provide the capital required to fund the high transaction costs.
But if there are no transaction costs to fund, there is no need for capital.
And if there is no need for capital, there’s no reason why capital (i.e, investors) should earn a return.
So to the degree that crypto lowers transaction costs, it should also lower investment returns.
We think of DeFi as disintermediating the middle men of TradFi — but it may be disintermediating investors, too.
Fungible labor markets would be great for labor, great for entrepreneurs wanting to build things, and great for the users that use the things that get built.
But not so great for investors.
And I think we are seeing some of that effect already.
Crypto has lowered transaction costs for protocols and DAOs, as evidenced by highly decentralized organizations like Uniswap and Yearn.
Uniswap and Yearn have provided huge value for users, but, thus far, not much return for investors — the UNI and YFI token holders.
Do Kwon’s fungible labor markets could allow more DAOs to do the same.
Those markets will likely be limited to more quant-y endeavors, like coding.
(Luckily, higher-value endeavors, such as newsletter writing, will be harder to commodify.)
But successful, genuinely decentralized DAOs are already realizing much of Ronald Coase’s vision. And creating a lot of value for users in the process.
How much value they will capture for investors is open to debate.