In this essay, Chris Burniske of Placeholder Capital talks about what kind of world crypto entrepreneurs are creating and want to be creating with the systems they build. He talks about different kinds of values, the dangers of only pursuing market values, and why crypto has a unique opportunity now to recalibrate those market values and incorporate more of the societal virtues we hold dear. Then he dives into which values he hopes to imbue into crypto networks and how that informs his thinking as a VC in the space.
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I was born the son of two educators. My dad was not a fan of what he saw finance doing to the world, so I was raised with an intellectual bent against the folks on Wall St. At the same time, both my parents were frugal, my father having grown up in a household of six relying on a single salary, and my mother the daughter of a grocery store executive. Due to their frugality, I was implicitly taught the importance of being careful with your resources and working to grow them over time, a frame of mind that is well suited to capitalism.
In college I studied to be a marine scientist — my friends were environmentalists and surfers, and the Global Financial Crisis of 2008 and 2009 strengthened my disposition to believe all of finance was bad, serving no purpose for society other than to enrich its insular actors at the expense of everyone else.
But my opinion of finance, and what finance could be used for, changed when I met Cathie Wood, who would go on to found ARK Investment Management. I met Cathie my senior year of college, introduced through a personal friend that asked if I could show her son the school I was attending.
All I really knew about Cathie was she was supposed to be some financial hot shot.
Being who I was at the time, I rolled up barefoot on a skateboard, and through the weekend tried to provoke Cathie with reflections on things that were broken in the world, in particular financial and environmental issues. But Cathie wasn’t riled, she fed off the conversations, and at the end of the weekend left me with the line, “Chris, if you so dislike finance why don’t you do something to change it?”
Cathie would go on to offer me a job, which I originally turned down due to my detest of NYC and finance, but would return to work for her in 2014 after a clip of her discussing Amazon drone delivery caught my attention.
I was shocked that Amazon using drones was a medium-term reality, and it caused me to realize ARK was in the business of predicting and supporting the future — in Cathie’s words, allocating capital to its best and highest use. Those of you who know Cathie know that she is one of the most gracious and ethical individuals you will encounter in the professional sphere — through the goodness of her action in the world, Cathie taught me that finance is not good or bad — finance is a tool that can be used by its wielder for good, or for bad.
Blank Slate of State
Much to the chagrin of some of my closest friends, I’ve worked in finance ever since the summer of 2014. First on the public markets side leading ARK’s crypto efforts, and then as a venture capitalist at Placeholder.
In this time, I’ve come to realize markets are a powerful technology that is meant to serve society’s virtues, but markets are dangerous as a virtue system in-and-of themselves. If we continue to allow markets to dictate our virtues, we will perpetuate a society that the majority now whisper is selfish, divisive, imbalanced — threatening, even.
With the technology that underlies crypto and blockchains at large, we can record and organize contributions of labor and capital much more granularly than we could prior. Such a technology enables us to program behaviors that manifest the virtues we want to see in the world, and then allow market values to guide society towards those virtues.
The opportunity to craft the future we want to see is always ours, but blockchains allow us to do it with a rapidity and scale not previously experienced by Homo sapiens. We are already witnessing a situation of relative chaos and discontent in the physical world, a perfect opportunity to provide solutions to those discontents — these things do not happen by coincidence, they culminate together.
And as Fred Wilson says, “Don’t let a good crisis go to waste.”
A fear of mine is we are letting the crisis before us go to waste. We are replicating the same market-based virtue systems — the same power structures and inequalities — that we see in our physical world, in the crypto world.
The transition into the information age, and crypto, is all the more critical because we’re starting from a relatively BLANK SLATE OF STATE…. it’s not very often that an entirely new realm of being comes into existence — and the digital world, something that has been around for less than 2 basis points of Homo Sapiens history, is exactly that: an entirely new state of being.
The trouble is, society is predisposed to repeat its past, or at least rhyme, often perpetuating the same virtues it grew up observing. If we aren’t intentional as crypto is being born, then replicating the meatspace mess in the digital space is the default outcome.
If, instead, we can accept that all capital and coordination is formed from expectation, which I will discuss today, then we can work to change our expectations of the inputs and outputs of human contributions to society, giving everyone a baseline of decency from which to pursue their virtues.
Market values displacing our virtues
I want to briefly take a step back to discuss how virtues have changed over the last few centuries.
Ever since the industrial revolution transformed the world, pre-existing societal virtues like temperance, fortitude, and justice have largely been displaced by virtues that optimize for market values. Because this happened over centuries no one experienced the shift in a single lifetime, but we all feel its effect. A concise description of the transition appears in the book, “Why Liberalism Failed” by Patrick Deneen.
When I refer to a liberal, or liberalism here, I don’t refer to the current political distinction between liberal and conservative. Instead, liberalism dates back to John Locke, whose works in the 17th Century were the basis of a political philosophy that focused on individual liberties and property rights, all set in the context of free markets. If you zoom out from the polarized meaning that the term “liberal” can have today, you will see that liberalist ideals are at the foundation of America and the modern west.
Liberalism unlocked the rational individual in free markets, the ideological key that released society from feudalism. A good thing.Prior to liberalism there were rulers that claimed divine power, and then beneath them were the masses. The idea of progress was scant, and instead what was celebrated were aforementioned virtues like temperance, fortitude, and justice. The pinnacle of what a low-born man could achieve was to be a religious man, or at certain periods, a philosopher. And yes, he had to be a man.
During that time, the money-changers and material pursuits were cast aside as false idols, sinful even. Jesus is quoted as having said, “it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.”
Fast forward to now and we have inverted from temperance and pursuit of justice, to consuming as much as possible and at any cost.
Society’s most powerful preachers, preach from the pulpit of profit.
The church has dwindled in power, and while meditation and mindfulness are surging in popularity, they still have the liberal musk of individual glory on them. And so if we zoom out, we can see that the prime virtues of what the common human aspired for has completely 180’d since feudalism. As I said before, that’s not necessarily a bad thing, but I raise it to provide us context for how these things can, and will, change with time.
Markets have been a powerful technology that have had emergent effects on culture; they’ve hijacked our virtues. And as a result, we live in a hyper-capitalist era where psychological well-being is in decline, despite market-technology having given us more material wares than we possibly could have dreamed.
Max Weber, one of the founding fathers of modern sociology, warned us about this tendency in what he called the rationalization of society. He lived through society’s transition into the industrial era, and as economic machines took over he saw society give up many of its traditions, emotions, and prior values — many of which can be irrational — and replaced them with a fixation on calculation, control, and efficiency.
In our new society, “Profits are the primary focus rather than issues of humanity.”, and rationality and reason are used as the intellectual defense for inhumane actions. While such ideals have given rise to the global economies we have today, they have also dehumanized us. We all talk about this — about how we’re more technologically connected than ever before, but feel emotionally disconnected. Everyone’s so busy running around, chasing their individual pursuits in competitive market contexts, that we’ve forgotten the traditions and emotions that unite us.
Philosophers at the early-to-mid stages of industrialization anticipated the “icy waves of egotistical calculation” that would sweep through society. It has just taken centuries to play out.
The sirens of market values
I’ve touched upon reflections on how market values have affected society on a macro-scale, but now I want to dive into it on a micro-scale, as those responsible for designing crypto-economic systems have to work from the micro-scale up.
The one takeaway I want to stress here is rewarding people with external rewards alone is unlikely to be society’s salvation.
To the contrary, there’s literature that stretches back half a century that shows “external rewards” often have a negative impact on “internal motivation.”
An early work came from Edward Deci in 1971. Deci’s results indicated that:
“(a) when money was used as an external reward, intrinsic motivation tended to decrease; whereas (b) when verbal reinforcement and positive feedback were used, intrinsic motivation tended to increase.”
Over the next three decades, numerous other experiments assessing the effect of external rewards on intrinsic motivation were performed. In 1999, a meta-analytic review concluded that:
“Careful consideration of reward effects reported in 128 experiments leads to the conclusion that tangible rewards tend to have a substantially negative effect on intrinsic motivation…Even when tangible rewards are offered as indicators of good performance, they typically decrease intrinsic motivation for interesting activities.”
While there is research that has shown these effects are weaker in the context of low-interest tasks, these experiments should still make us wary of relying on external rewards to provide meaning in peoples’ lives.
Many of the most fulfilling components of life — things like love, relationships, and belonging — come from places of internal motivation. Meanwhile all market values are external rewards.
This is particularly important for crypto to contemplate, as we are the arena of programmable incentives, where it sometimes seems like all ills can be solved by providing a financial incentive — or dis-incentive — for doing things.
Society’s tendency to be mimetic and repeat the past
As we design the future, it’s inevitable we transplant many of our existing behaviors and norms from the physical world into the digital world. We are too much creatures of habit. But by being aware of the fact we are creatures of habit, my hope is we can work to create structures that reform habits that we don’t like as a society at large.
We see the “creatures of habit” tendency on a micro scale, when we become renditions of our parents, and we see it on a macro scale in the way generations repeat or rhyme with each other.
Rene Girard, a French historian and philosopher, formalized this tendency in his theory of mimetic desire. He famously said:
“Man is the creature who does not know what to desire, and he turns to others in order to make up his mind. We desire what others desire because we imitate their desires.”
Girard argues further that mimicking the desires we grow up with and see around us is what ends up leading to conflict over scarce resources — one could argue this hack on the human psyche is how markets have worked to coordinate human behavior on a massive scale.
The theory goes further, but for our purposes it is relevant because it should at the very least warn us of what we already know: we’re predisposed to repeat our past patterns, our past behaviors.
There are a few ways we can break from this predisposition:
One, there is always the chance of chaos — war, financial crisis and ruin, a pandemic, something that shocks society into quickly reordering itself. WWI and WWII were examples of this.
Or, there is the intentional, mostly peaceful, re-ordering of things through persistent actions along united principles. Martin Luther King and the Civil Rights movements of the 50s and 60s come to mind here, though there was more violence then than there is likely to be now.
Between the two, my vote would be for us to make a peaceful transition into a new realm of coordinating human desires and behavior.
The fortunate subjectivity of our virtues
Earlier, I gave the example of how society’s virtues did an about-face in the transition from feudalism to the industrial age. But it can be easy to get lost in current norms, and see them as objective rules that couldn’t possibly change.
To show how all values are subjective and therefore subject to change, I’ll highlight the subjectivity of financial values, a social construct that is supposedly derived from reason and math.
Take a financial analyst’s most prized model to value a company – at face value it’s impressive – appears objective — full of daunting numbers and rigorous logic for interconnected calculations. But go deeper, and speak with an honest analyst, and you’ll find agreement that there are dozens of subjective assumptions scattered throughout the model. Assumptions buried so deep we forgot they were assumptions to begin with.
Things like growth rates, future margins, competitive dynamics, society’s continued desire, and management’s ability to execute on it all.
The differences in these assumptions make all the difference – for example, you can have two companies, each making $1M a year in the present year in annual revenues, and one can be worth $20 million and another can be worth $2 million. The reasons underlying the difference in valuations will be claimed to be rational, but those in the know will admit that beneath that rationality there’s a lot of subjectivity.
Analysts are just the tip of the iceberg, the analyzers of what others are doing. Moving to primary capital formation, the place where new value, new capital is created – things become even more subjective. This is the land of venture capitalists and entrepreneurs.
Venture capitalists work with entrepreneurs to find a fair value of an early stage company or network, with the VC then buying a % of that entity. But the truth is, especially at the earliest stages, the value of that entity is often created solely from minds.
For example, seed companies in crypto have been ranging from $5-10M post-money valuation. No revenues, and little labor beyond the formation and communication of ideas is required for such a valuation – certainly, there is a lot of work that has gone into forming the entrepreneurs that are credible enough to get investors to part with their money. But so long as that test is passed, and investors put $2M dollars into a company valued at $10M post, then that group of VCs and entrepreneurs created $8M dollars of “market value” out of thin air.
This is not to single out VCs (of which I am one) or analysts (which is where I got my start), but in any financial sector, the people who really understand the inner workings will admit how subjective so much of the world’s value is.
Sometimes this subjectiveness is openly acknowledged in mainstream media, like when the idea of “animal spirits” is raised. Animal spirits, a real term used on “Wall Street,” alludes to our primitive pasts, and is used to explain the unexplainable, when markets are behaving erratically, catching the talking heads off guard. It can’t be admitted too often though, or no one will take the talking heads seriously.
While we have developed tools and equations to try to temper our animal spirits, the animal spirits will persist as long as the pricing of assets is being done by glorified monkeys, and is based on the future expectations of those glorified monkeys.
Try as we may to be rational individuals, at the core we are still animals.
As I said earlier, the reason I’ve decided to focus on the subjectivity of financial values is it’s one of society’s value systems that’s supposed to be of most mathematical rigor.
If we can accept that one of the value systems that is supposed to be least subjective is fundamentally subjective, then we can investigate the rest of society’s value systems from there, asking ourselves about their origin, and working to re-design them according to what society needs now.
And starting with financial capital, we may need to change our expectations. For example, the expected “return on invested capital” flows all the way through the rates companies charge consumers, what they pay their laborers, and how they take care of the environment.
Uber needs to support its market valuation by hitting certain revenue numbers, and then over time, extracting profits from those revenues. These expectations dictate what Uber charges its riders, and what it pays its drivers. Uber could be punished by the markets for paying its drivers more, because it will return less to its shareholders.
And if the bottom line for a corporation is how it serves its shareholders, then Uber is going to be guided to optimize for its shareholders, often at the expense of everyone else.
For those of you interested in chewing on this idea further, I recommend reading Jesse Walden’s piece on cooperatives vs corporations, which is titled, “Past, Present, Future: From Co-ops to Cryptonetworks” as well as a piece I wrote called, “Protocols as Minimally Extractive Coordinators.” In that piece, I argue, “As coordinators of exchange, protocols should be minimally extractive, whereas businesses are incentivized to be maximally extractive.”
As we come closer to the end, here, we need to ask again:
How do we want to reprogram ourselves as a global collective?
Some of you may have noticed that thus far in this essay I’ve been hesitant to assert specific virtues, as it is not up to me to decide alone.
The virtues that markets end up scaling and amplifying in the world will be born by the predispositions and intents of the founding contributors — in crypto, given what an early stage we’re still at, this includes everyone listening to this podcast.
If I had to pick three virtues for society to aim for, they would be:
Fairness, Effectiveness and Generative-ness
Starting with fairness, we need to make the default rules of society fair, which I would argue is not currently the case.
It’s important that everyone has fair access to opportunities to build capital. Right now, the minority has access, with the default for most of society being to exist in labor and hardly accrue any capital at all. If we can bake the earning of capital directly into peoples’ labor, then we will have taken a giant step forward in creating a fairer default.
Both Brad Burnham and Joel Monegro, my two partners at Placeholder, have drilled this point home for me.
Starting with Brad, who co-founded USV with Fred Wilson in the early 2000s, where they were early backers of Twitter, Tumblr, Twilio, Etsy, and more, Brad once said to me, “The returns to capital are far greater than the returns to labor.”
He said it so matter of factly, and with the authority of someone who has participated in the birth and rise of so much capital that the truth landed on me like a pile of bricks. If you weren’t in capital, you weren’t even exposed to the playing field where resources and intergenerational wealth is grown.
Joel widened the concept of capital in my mind, when he wrote:“Capital is, in essence, the power to organize the economic resources of a social system, and its worth a function of how much of those resources can be directed to the holder’s benefit.”
Joel, alongside the French philosopher Pierre Bourdieu, points out there are many different kinds of capital, most obviously productive and financial capital, followed by things that are less explicitly quantified but remain as forms of capital, such as social, intellectual and political capital.
Bourdieu argued that “Capital is accumulated labor.” Making sure people are accumulating capital through their labor, and having the forms of capital they accrue be adequately recognized by others, is key to empowering the population of beings we have on this planet.
Some will fairly point out that trying to put quantified capital in everyones’ hands seems to conflict with the research I shared around external rewards vs internal motivation. I do have fears about what happens to a society that is pervasively quantified – it’s one of the places where I think this experiment we call crypto could go most horribly wrong.
But if we are to have quantities at all — and I don’t see us going back from quantities or Capitalism — then I think the key to loosening the grip of quantities on our minds is making sure everyone has enough to begin with. If we can be freed from the fears of “having enough,” hopefully we can return to the virtues that unite and fulfill us.
Another thing we need to be fairer about are the real costs that go into production.
For example, the modern economy massively under-accounts for environmental costs. Here, if we can tweak the inputs to accounting, we will yield different optimal outputs. If environmental costs are better accounted for, then we will avoid things that in the long run are more costly than they are worth in the present moment. This will allow us to achieve fairer outcomes for everyone, over time, and I do believe a technology for programmable accounting is in part the solution.
Turning next to effectiveness, this is a virtue that’s already well baked into our rational society. I’ve included it because it is important that we choose the most effective means to achieving the virtues we hold, which for me, makes it a virtue in and of itself. This is where competition will still play a major role in the world of protocols.
Protocols allow us to more granularly coordinate around social ideals, while still using the tool of free markets and competition to drive those outcomes. This could make crypto a global competition to effectively design systems that both produce the services we need, and further our other virtues.
Lastly, I want to turn to generative-ness. While competition is important to select the winners, it’s critical that winning systems generate more value, more opportunity, than they take away. We live in an infinite universe, and zero-sum thinking wastes the gift of infinity.
How do we encode these virtues in blockchains? The authors of The Sovereign Individual wrote, “Any forecast that accurately anticipates the impact of incentives on behavior is likely to be broadly correct.” If we use our common sense, and think through the virtues of fair, effective, and generative, the necessary incentives will emerge as we build out blockchains over time. To do so, we must be aware of our predispositions, be frank about what’s working and what isn’t, and then iterate over time with our virtues in mind.
But these have been my virtues, not necessarily everyone’s. What’s key is that we start having open and nuanced conversations about virtues, as opposed to the flame-wars and insults we see thrown around on crypto-twitter.
For me, I approach this from the perspective that crypto has already played out. The specifics will be path dependent, but if I place myself ten years in the future, then it’s already a fact that crypto and the distributed consensus systems that underlie it have become ubiquitous. The question I always return to, is what virtues will be underpinning these systems?
Blank Slate of State
To wrap up, I want to return to the idea that in the digital world, we have a “blank slate of state” from which to design.
A Persian philosopher by the name of Avicenna once aptly wrote: “…human intellect at birth resembles a tabula rasa, a pure potentiality that is actualized through education and comes to know.” Just as people are blank slates when they are born, so too are new spaces and realms, such as the digital world. And what a grand opportunity we have with blockchains in the context of this blank slate. A new way to organize humans, to orchestrate the movement of value according to our virtues, has arisen alongside the advent of this new world – a potential fresh start.
As we navigate this fresh start, one thing we need to protect against within ourselves is what Lord Acton described as, “Power tends to corrupt, and absolute power corrupts absolutely.”
I have watched this play out as temptation in myself, and also in the behavior of my peers, as we have all entered positions of wealth or power as crypto has risen. For example, from my eyes the median generation of a crypto contributor appears to be a millennial, and we know that millennials are pissed at Baby Boomers because the Boomers accrued a lot of wealth at the expense of future generations.
It strikes me as horribly hypocritical, then, that many a millennial in crypto is grabbing as much of crypto’s present as they can, with little regard for the future – and doing so while talking out one side of their mouth about the need to “democratize” access to wealth.
Investors and founders are particularly important here as they claim too much of a network’s capital for themselves, they are taking the lessons of an unfair past and projecting them into the future. As a firm, Placeholder is sensitive to this issue, and works with founders and community members to find the right balance of ownership. Given networks’ global scale and the fact that the native cryptoasset needs to circulate for the network to function — which is not the case for equities — we believe that early investor ownership of networks should be a fraction of what’s standard in venture financings of companies. While not everyone does this, my solace comes from the fact that over the long run, unfair, ineffective, zero-sum projects will eventually wither in talent, especially if we return to our virtues as guiding principles.
I want to emphasize that I’m not suggesting we get rid of free markets, competition, and property rights. What I am suggesting, is that we return to seeing these things as tools, not pursuits in and of themselves.
Mario Laul, Placeholder’s governance researcher, is the first one who alerted me to the fact that blockchains can be thought of as typical bureaucracies. Blockchains encode the basic rules – in other words, the protocol – involved in the exchange and administration of information, automating bureaucracy. And we still have the opportunity to bake more abstract virtues into these rules of exchange.
But it requires asking questions like, what is the balance of power between investors, founders, and everyone else? What rights do consumers have? Who, by default, participates in the value creation when a network becomes successful? What are necessary disclosures?
Whatever we decide as answers, blockchains will automatically enforce. There’s no wiggle room for interpretation once a blockchain has set its intention. As Jake Brukhman once said in a personal conversation, “We don’t control blockchains, blockchains control us.” And so it’s important before we unleash them that we’ve thought through their encoded virtues carefully – or at least know how to change a blockchain’s encoded virtues if we get them wrong.
I hope we can protect ourselves from our worst instincts, to create a foundation for our best instincts.
Our opportunity, and the need for virtue in its design, brings me to a James Madison quote:
“In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.”
If we are intentional with our designs, and the builders, consumers, producers, and investors all act with fair, effective, and generative virtues, then I have faith we will do good for the generations to come.
If not, this opportunity may be lost, and so the pendulum of society will choose its next swing.