Interest misalignment is a core component of society’s systematic inequality. Blockchain networks offer a new incentive structure that can better align interests in which “employees” and “shareholders” are one-in-the-same. This better interest alignment could be a solution to today’s inequality.
In our modern capitalist economy, parties can be broadly categorized into three buckets: managers, employees, and shareholders. Each of these groups have fundamentally contradictory interests. Shareholders want to reduce employee and manager income to maximize profit. Lower incomes and fewer benefits can mean more corporate earnings and higher returns for shareholders. According to the Economic Policy Institute, while productivity has increased in the United States by 69.6% from 1979 to 2018, inflation-adjusted compensation has only increased by 11.6%. The “Productivity-Pay Gap” has widened to the benefit of shareholders and detriment of employees. Similarly, lower pay for employees can mean more profit for managers. Over the same time period (1979–2018), CEO-to-worker compensation ratio has grown from 31.6x to 278.1x. Is the value created by the average CEO really worth 278x the average employee?
Source: Economic Policy Institute
While both shareholders and managers (through equity options) have a stake in the company’s future, employees often don’t have any equity or stake in the company’s future. According to the National Center for Employee Ownership and the U.S. Department of Labor, employee stock ownership plans cover approximately 10.3 million active participants (less than 10% of the American labor force).
Issues are further exacerbated by monetary policy that systematically favors the wealthy equity owners. Significant money-printing (aka “monetary stimulus” or “quantitative easing”) disproportionately harms low and medium-income workers. Monetary stimulus generally flows through to equity returns, so employees holding cash suffer and equity-holding managers and shareholders gain. Massive monetary stimulus helps shareholders whose assets inflate along with the increase in money supply whereas the average employee with limited non-cash assets suffers.
Source: Federal Reserve of St. Louis
For example, the money supply (“M2”) grew from 15.47 trillion in February 2020 to 19.67 trillion in February 2021 (~27% YoY increase), which does not include the USD 1.9 trillion coronavirus relief bill passed in March 2021. In this most recent stimulus bill, despite getting a $1,400 stimulus check, did the average employee really fare better? Assuming a constant velocity of money, if you had over $14,000 in cash savings, you will likely see a long-term relative decline in your purchasing power as the $1,400 check will be more than offset by the ~10% increase (1.9 trillion/19.67 trillion) in monetary supply. According to research by Northwestern Mutual’s 2020 Planning & Progress Study, Americans have, on average, $65,900 in personal savings.
In contrast, open permissionless blockchain networks and cryptocurrencies (“crypto”) enable contributors (“employees”) to also be owners (“shareholders”), which dissolves the inherent conflict of interest amongst the modern economy’s constituents: employees, managers, and shareholders. For example, if you contribute to Bitcoin’s protocol or create products on top of it, the value you create adds to the value of the network and demand for Bitcoin.
While Bitcoin may be a good store of value, transactions are expensive, slow, and not user friendly, next-generation Proof-of-Stake Protocols like Celo take these tools further by allowing easy-access to financial tools for anyone with a mobile phone.* These newer protocols also allow for new forms of contributor-owner interactions, including incentivized token distributions just for using the protocol. While this may initially seem strangely altruistic, it’s actually in the protocol’s “selfish” interest, because a tokenholder is more likely to continue being a protocol contributor. Uniswap, for example, allocates 60% of the UNI genesis supply to Uniswap community members (details here). Since Uniswap issued 400 UNI to all users of the protocol in 2020 (now worth ~$12k), UNI’s price has increased by approximately 10x to over $30. This would be like receiving Uber stock deposited directly to your wallet for driving or taking an Uber ride, a paradigm shift in incentive structures. Furthermore, contributions to the network are adopted on merit, not pedigree, so more great ideas can be adopted from diverse sources and more people can share in the upside.
Crypto dissolves the lines and conflicting interests amongst employees, managers, and shareholders. As contributors are also owners, value created for society accretes to both the producer and consumer, rather than to rent-seeking shareholders. Like any powerful technologically-driven paradigm shift, there are significant downsides not explored in this article, but the core ingredients to reshape incentive structures for a more equitable society may lie within crypto.
Disclosure: The author works on and contributes to Celo. This piece should NOT be construed as investment advice and only reflects the author’s opinions.