The Rise of Crypto Powered Institutions
In this short essay I explore how the current institutional legitimacy crisis may drive adoption for crypto projects. I explain what legitimacy is and why it matters for institutions more than products. I detail why I think that crypto technologies have the right answers and might sneak into unserved markets.
TL ; DR
Legitimacy is accrued by consistently meeting expectations. It is fundamental for any product or organization to be adopted
Modern institutions are undergoing a severe legitimacy crisis
This creates opportunities for crypto technologies which seem to bear many increasingly demanded qualities in today's society
Analyzing how current institutions fail is an interesting way to spot opportunities and shape up strategies for crypto projects
Like for many young folks of my generation, working for traditional institutions was a no go. They seemed suboptimal, only surviving thanks to the status quo and high inertia inherent to a large society. Instead my eyes were fixed on the Valley and its many promises to change the world.
After some field experience though, I found out that traditional tech was bit dated for my taste as well. The creative pioneers of the 90s were still around, but hardly accessible and diluted in much conservatism. The [VC x Start-up] dyad was already widely explored and adopted, and as an industry, tech was more about operational efficiency than adventure. The restless millennial that I am found it a bit boring so I moved on.
My gut feeling led me to the fresh and chaotic land of crypto. Here at least, every single day is about exploration at industry scale. My natural interest for people instead of systems made me choose governance as the place to contribute. Ethereum's model of governance felt hard to replicate. And in order to make the crypto model of organizing as widespread as the startup one, we would first need to create new governance tools and practices that people could adopt down the road.
Fast forward to now, and after a year experimenting with on-chain governance, I have grown a keen interest for the concept of legitimacy. The project I was working with used to allocate its funds through a voting process enforced on the Ethereum blockchain¹. At some point it appeared that it wasn't working as well as expected. Its ability to meet our needs got challenged and it got shut down. It had lost too much legitimacy as an efficient resource allocation mechanism.
Both in the real world and crypto projects, people's acceptance of authority seem to depend on the legitimacy of the source of authority. Beyond crypto it is clear that our modern institutions are undergoing a severe legitimacy crisis. From the financial industry, to governments to the media. They are all loosing their natural authority, crisis after crisis.
Shutting down an experimental governance process is not really a big deal. But what will happen to democracies if some of their most fundamental institutions gradually collapse?
This made me want to dig more. First what is legitimacy ? Why do I feel that adoption of blockchain tech is highly driven by a psychological need for new legitimate institutions ?
Traditional institutions fail to meet expectations
Althought this definition² from the Urban Dictionary is not perfectly accurate, it is not too far from reality either. Something legit is something which does what we want it to do. And well.
Legitimacy can be more formally defined as “a generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and deﬁnitions.” - Suchman³
The consensual agreement that something meets expected standards makes it legitimate among a group of people. For example, when a capitalist asks the question "is our economic system legitimate?" he is asking if the system is generating the growth and returns he expects. A socialist may hold different expectations and thus a different sense of a legitimate economy.
Acquiring legitimacy by meeting expectations is necessary to be accepted as a source of authority. The problem is, if all institutions loose legitimacy at the same time, there is no one left to listen to — if we're talking about the media — or unite behind — if we're talking political institutions—.
In today's society, the legitimacy crisis is systemic. And for good reasons.
We are discovering the hard way that institutions are not fit to meet contemporary expectations. The financial crisis of 2008 pointed at a lack of transparency and accountability. The environmental and social crisis show a lack of sustainability and inclusiveness in coporations. The COVID crisis highlights the lack of traceability and verifiability of information produced by the media. The many crisis to come will keep uncovering new failures.
As the faith in all those institutions goes down, inertia and disorder go up. Division ensues. Thus the recession is not only economical but also psychological and social.
Institutions cannot create a safe space anymore. People fall back into smaller communities which are more resilient as they have their own internal structures and poles of authority. This abandonment only accelerates the psychological escape from current institutions. A psychological tragedy of the commons⁴.
The authority left vacant by failing institutions is waiting for new owners. To me there are two paths ahead. One is the capture of all authority by authoritarians. The second, which I feel less likely to happen but more worthy to fight for, is to re-equip institutions and make them fit to meet the values our time.
Crypto institutions filling the vacuum
Institution: (noun) A large-scale social arrangement that is stable and predictable, created and maintained to serve the needs of society.
— The Builder's Cone (highly recommend reading) —
Crytpo seems on time to fill the supply for legitimate institutions. Building on the recent debates in the tech community, Venkatesh Rao the co-author of "software eating the world"⁵ as well as others⁶ reiterate that we should focus on rebuilding infrastructure for society -- the first time in front of hedge fund managers in 2017⁷--.
Paraphrasing Rao, himself inspiring from Carlota Perez's seminal work on technological revolutions, we have now arrived in the macro rebuilds phase of the building cycle which started in the 1990s. Here is the cycle as described by Rao.
In the first stage you build tools (ex: computer),
In the second stage, you build alternatives to existing things (ex: email),
In the third stage, you disrupt existing things (ex: twitter vs. traditional media),
The last stage is consists in rebuilding macro infrastructure from foundations (ex: Bitcoin/Ethereum?).
"You should be thinking at that scale of ambition. Like Marshall plan scale, or foundational rebuilding phase, based on the logic of software eating the world." - Venkatesh Rao
Starting with their narratives, Bitcoin and Ethereum are all about boostraping new software based institutions:
Bitcoin⁸: bank the unbanked, E-cash, payment infrastructure, digital gold, reserve currency, etc.
Ethereum⁹: decentralized internet, decentralized organizations, crypto-crowdfunding, open finance, etc.
Traditional technology companies think "individual" centric when blockchain projects have an inclination for thinking "group" and "society" centric.
"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" - Bitcoin genesis block¹⁰
From white-paper¹¹ to $180Bn market cap in a matter of years, Bitcoin is claiming the title of global internet currency. Even though the Bitcoin network isn't really convenient nor cheap, It is consistently successful at providing unstoppable ownership over value to its users. At the same time it has consistently generated financial returns. Over time It has become legitimate to crowds who place these values higher than things like convenience. A mix of libertarians and cypherpunks alongside early adopters like dark web users.
Bitcoin is one example, catering for some values to some social groups. But Ethereum has attracted a new wave of entrepreneurs to crypto In Q1 18¹² when it suddenly eclipsed venture capital funding in the space. When ICO stopped and developers had joined entrepreneurs Ethereum had to cater for both demographics. Obtaining legitimacy from entrepreneurs and developers meant enhancing scaling platform stability. Even if Ethereum does not match the Apple store on these yet, it is way more promising on the level of interoperability among apps unlike the oldschool siloed apple.
Many properties that we can find in crypto solutions by design are cruely missing from current institution's arsenal
Depending on their target social group, crypto projects may pick and prioritize among blockchain's instrisic properties like : transparency, accountabily, security, control, traceability, interoperability, ownership and so on. All of which seem to be lacking in current institutions arsenal.
With no real market traction, crypto projects have been naturally addressing markets left increasingly vacant from legitimacy: money (Bitcoin), finance (DeFi), corporations (governance), media (curation, prediction). I think that these markets are a natural fit for blockchain technologies. And I think that analyzing which expectations fail to be catered by institutions in various social groups is an interesting way to sneak into markets and shape up a strategy for crypto projects.
Next time I'll use this legitimacy driven framework to think about the adoption of web3 based solutions. Later down the road I will share insights and updates on how crypto projects currently solve problems related to the media and information.
Thanks for reading! Ideas, conversations, collaborations --> DM open on Twitter @albiverse
Suchman (1995, p. 574)