a16z: Computers and Casinos, the Biphasic Culture of Cross-Chain, and Insights for Regulation

Original Title: Blockchain's two cultures: The computer vs. the casino

Author: Chris Dixon

Published Date: 03.10.24

The Computer vs. the Casino

People's interest in blockchain stems from two distinctly different cultures. The first culture views blockchain as a way to build new networks, which I refer to as the computer culture, because at its core, blockchain drives a new computing movement.

The other culture is primarily interested in speculation and making money. Those inclined this way see blockchain merely as a means to create new trading tokens. I call this culture the casino, as its essence is really just about gambling.

Media coverage has exacerbated the confusion between the two cultures. Stories of making and losing money are always dramatic, easy to understand, and attention-grabbing. In contrast, the stories about technology are subtle, slow to develop, and require historical context to be understood.

The casino culture is problematic. An extreme example is the now-defunct offshore exchange FTX, which had a devastating impact. It took tokens out of context, packaged them in marketing language, and encouraged people to speculate. Responsible exchanges provide useful services like custody, staking, and market liquidity, while reckless exchanges encourage bad behavior and recklessly handle users' assets. In the worst cases, they are outright Ponzi schemes.

The good news is that the fundamental goals of regulators and blockchain builders ultimately align. Securities laws aim to eliminate asymmetric information associated with publicly traded securities, thereby minimizing market participants' trust in management teams. Blockchain builders also seek to eliminate the centralization of economic and governance power, reducing the trust users must place in other network participants.

As of this writing, the U.S. Securities and Exchange Commission (SEC), the primary regulator of the U.S. securities market, last provided substantial guidance on this topic in 2019. Since then, the agency has initiated several enforcement actions regarding the trading of certain tokens, claiming that these token trades are subject to securities laws, yet it has not clarified the standards for making these determinations.

Applying legal precedents from before the internet to modern networks has created significant advantages for bad actors and non-U.S. companies that do not comply with U.S. rules, while leaving gray areas. The current situation is so complex that even regulators cannot agree on where to draw the line. For example, the SEC states that Ethereum's token is a security, while the Commodity Futures Trading Commission (CFTC), the primary U.S. commodities regulator, states it is a commodity.

Ownership and Markets are Inextricably Linked

Some policymakers have proposed rules that would effectively ban tokens, meaning their actual uses would also be prohibited, even blockchain itself. If tokens are purely for speculation, these proposals might be reasonable. However, speculation is merely an ancillary function of tokens' true purpose, which is that tokens are a necessary tool for communities to own networks.

Because tokens can be traded like any ownable item, it is easy to view them merely as financial assets. Well-designed tokens have specific uses, including serving as native tokens that incentivize network development and drive virtual economies. Tokens are not a mere footnote to blockchain networks, nor are they a troublesome aspect that can be stripped away and discarded; they are a necessary and core feature. Without a way for people to own community and network ownership, there can be no discussion of community and network ownership.

Sometimes people ask whether it is possible to make tokens non-tradable through legal or technical means, thereby gaining the benefits of blockchain while eliminating any implications of a casino. However, if you remove the ability to buy or sell something, you effectively remove ownership. Even intangible assets, such as copyrights and intellectual property, can be bought and sold at the discretion of their owners. No trading means no ownership; you cannot have one without the other.

An interesting question is whether there exists a hybrid approach that can tame the casino while still allowing the computer to be built. One proposal is to prohibit the resale of tokens after a new blockchain network is launched, either for a fixed period or until certain milestones are reached. Tokens could still serve as incentives for network development, but token holders might need to wait several years or until the network reaches a certain threshold to lift trading restrictions.

Timeframes can be a very effective way to align people's incentives with broader societal interests. Reflecting on the hype cycles experienced by many previous technologies, the early hype phase is often followed by a crash, then a "productivity stagnation." In contrast, long-term restrictions force token holders to endure the hype and its aftermath, achieving value through promoting productive growth.

The industry needs further regulation, but it should be clear that regulation should focus on achieving policy goals, such as punishing bad actors, protecting consumers, providing stable markets, and encouraging responsible innovation. This is crucial. As I discussed in Read Write Own, blockchain networks are the only known technology capable of rebuilding an open, democratic internet.

Limited Liability Companies: A Regulatory Success Story

History shows that intelligent regulation can accelerate innovation. Until the mid-19th century, the dominant corporate structure was the partnership. In a partnership, all shareholders are partners and bear full responsibility for the actions of the business. If a company incurs financial losses or causes non-financial harm, the liability pierces the corporate veil, falling on each shareholder. Imagine if shareholders of publicly traded companies like IBM and General Electric were personally liable for the mistakes made by the company in addition to their financial investments; few would buy their stocks, making it much harder for companies to raise funds.

Limited liability companies existed as early as the early 19th century but were rare. Establishing a limited liability company required special legislative action. As a result, almost all business enterprises were partnerships among close-knit relationships, such as trusted family members or close friends.

This changed during the railroad boom of the 1830s and the subsequent industrialization period. Railroads and other heavy industries required substantial upfront capital that exceeded the funding capabilities of small teams, and even very wealthy teams found it difficult to provide alone. Thus, new and broader sources of capital were needed to fund the transformation of the world economy.

As you might expect, this upheaval sparked controversy. Legislators faced pressure to establish limited liability as the new corporate standard. Meanwhile, skeptics argued that expanding limited liability would encourage reckless behavior, effectively shifting risk from shareholders to customers and society at large.

Ultimately, differing viewpoints found a balanced way forward, with industry and legislators crafting wise compromises, establishing a legal framework, and making limited liability the new norm. This also gave rise to public capital markets for stocks and bonds, along with all the wealth and wonders these innovations have generated since then. Thus, technological innovation drove regulatory change, a manifestation of pragmatism.

How Does Blockchain Move Forward?

The history of economic participation is one of gradual compatibility, benefiting from the interplay of technological and legal advancements. Partnerships have a small number of owners, typically around ten. The limited liability structure greatly expanded ownership, with today's public companies having millions of shareholders. Blockchain networks, through mechanisms like airdrops, grants, and contributor rewards, further expand this scale. Future networks may have billions of owners.

Just as enterprises in the industrial age had new organizational needs, so do enterprises in the network age today. Imposing old legal structures (like corporations and limited liability companies) on new network structures is a fundamental cause of many issues in enterprise networks, such as the necessity to switch from highly attractive models to extraction models, excluding many contributors from the network. The world needs new, digitally native ways for people to coordinate, collaborate, cooperate, and compete.

Blockchain provides a reasonable organizational structure for networks, while tokens are a natural asset class. Policymakers and industry leaders can work together to find suitable guardrails for blockchain networks, just as their predecessors did for limited liability companies. These rules should allow and encourage decentralization rather than defaulting to centralization like corporate entities. There is much that can be done to control the casino culture while encouraging the growth of the computer culture. Hopefully, smart regulators will foster innovation, allowing founders to do what they do best: build the future.

*This excerpt is from *Read Write Own: Building the Next Era of the Internet* by Chris Dixon, first published on Fortune on March 10, 2024.*