Institutional Isomorphism is an interesting theory adapted from the ‘Iron Cage’ theory outlined by Max Weber. Weber essentially said that bureaucracy and the rational spirit is such a strong method to control humans that once it kicks into full force it will become like an Iron cage that humans will be imprisoned by forever until the last ton of fossilized coal is burnt.

As you can tell, his statements were broadly true. However, DiMaggio & Powell (some famous sociologists) worked on a piece that would agree with the iron cage theory but rework the reasoning and causes for this taking place. This piece, titled ‘Revisiting the Iron Cage’, is one more suited to modern times. The key theory to come out of this piece is institutional isomorphism.

So WTF is Institutional Isomorphism

Put simply, the theory states that as an industry grows through the various cycles of adoption, the institutions/organizations that come out of this growth tend to be very similar in nature if not identical. Weber’s initial theory suggested that this happens due to the concept of a competitive marketplace where everyone strives only for efficiency. But what DiMaggio & Powell found is that as an industry grows and a few winners within the industry emerge, they don’t necessarily become more efficient nor does the competitiveness remain. Instead they start to homogenize due to imitation and the highly structured nature of large industries.  

Every actor in an institutional setting wants to achieve efficiency. The aim is to be better than the competition. In order to achieve this efficiency, the assumed and popular rational choice is to be highly structured. While most people assume that this structuration leads to efficiency, it often has the opposite effect. Organizations start to look very similar to each other through the process of competing, and as a result none of them tend to become more efficient.

A good example of such an institution is a hospital. Obviously I wasn’t around for when the institution of hospitals started, but I assume it would have been a fairly dynamic environment. Now, as hospitals become a cornerstone piece of our lives, the different organizations within this field tend to look very similar. There is a set course of study from university to post-graduate studies, after which you get an entry-level job, and then you gradually move up the ranks. Eventually you can open your own clinic and also work for other hospitals. Even how different hospitals conduct their operations are very similar. In this case, prestige and professionalization is what makes hospitals homogenous (similar).

However, institutional isomorphism doesn’t only happen within an industry but also across industries that are fairly similar to one another. In this case, the newer industry of the two will eventually become very similar to the older industry.

Coming to crypto

The industry as a whole is still fairly nascent, but in the short time I have spent here I believe there are signs of institutional isomorphism occurring. There is isomorphism at the lower levels of our industry and also at higher levels when you examine the isomorphism of crypto with other industries.

At the lower levels you can see signs of isomorphism when it comes to forking popular protocols or the way majority of DeFi protocols follow a very similar DAO model. At a higher level you can see signs of isomorphism when it comes to the age old debate of DeFi vs TradFi. The mission used to always be DeFi will eat TradFi and TradFi is NGMI. However, over the last few months you can see signs of many integrations between crypto and TradFi as well as crypto firms operating in similar ways to TradFi firms.

I’ll dive into some of the main causes of this isomorphism below.

Starting with talent inflows

On the VC side of things you are starting to see some of the largest crypto VC firms higher TradFi talent. This is not a bad thing in itself because I’m sure there is some genuinely good talent, the issue comes from professionalization. They have all been taught similar things in Uni, they have been taught similar things by their mentors at their jobs, and they have operated in similar ways at their jobs in the various different traditional funds. Crypto is another financial market and when talent migrates from the traditional players, they will be eager to impress. A major part of this will be them porting over their ideas & processes from TradFi. It’s very difficult for humans to completely change the way they conceptualize certain things if they have been working on it a certain way for multiple years, it’s tough to break habits. Hence, as talent migrates we’ll start to see some forms of isomorphism in terms of operations and potentially thought-process.

The same goes for the developer side. I don’t know much about the specifications of coding myself, but from what I’ve seen, the freedom and monetary incentives have encouraged a lot of Web 2 devs to come over to web 3. Yet again, they are used to working with languages in certain ways and they design mechanisms in specific ways. It becomes difficult to break that barrier in the brain. People can slightly push the border but at the end of the day they are more or less confined to the ways they know and are used to. This could lead to applications looking very similar in design to web 2 applications.

Even on the trading side you are seeing this isomorphism. FTX invested in Robinhood and is now also offering stocks on their platforms, Paradigm and others invested in Citadel, and Jump crypto runs their BTC/SPX correlation algo bot. The traditional markets and crypto market have always been correlated and judging by the moves some of the big players in this industry are making, they will likely continue to be correlated for some time. The good thing about this is that the markets will become more efficient but the bad thing is that we’ll start to become very similar to the financial system that many of us tried to escape. Also we’ll lose our casino, that’s an L.

I personally am not a fan of this form of isomorphism, I’d prefer more out of the box solutions rather than the same underlying traditional mechanisms but with some slight variations built on-chain. This is why I’m a big fan of experimentation but the speculation on experimentation is what leaves many people hurt in crypto.

Originality & incentives

While I like speculating on coins as much as the next person, it is the hyper-speculative nature of crypto that causes isomorphism within the industry because it leads to laziness. People lose their originality and willingness to solve complex problems because the incentives are skewed.

You get one successful project with really good ponzinomics and it is instantly forked 75 different times on 10 different chains. Devs make money, early investors make money, and maybe some sharp retail participants make money but nothing of substance is achieved. I agree that some competition is good but the incentives for people to commit to a long-term solution is not there because it is purely an experiment. It may work out and you hit the jackpot or it may go to 0 which is often the most likely outcome. Naturally, most people choose the easy money route.

Even if you zoom out to the broader DAO model, there is a lot of isomorphism within crypto. There is a project that fulfils a certain purpose, said project will launch a governance token, a DAO will be formed around said governance token and people will vote on proposals. I have not seen much experimentation outside of this model. It seems like the general community has accepted it. It passes the bill for “decentralization”, plus there is a token so you & me can gamble and VCs can make money.

This homogenization primarily stems from rationalization. People follow the winners. The ve token model worked for Curve so now everyone wants to implement it, the DAO model mentioned above worked for some DeFi protocols so now everybody will use it. Even if there are more optimal ways to do things in the context of different protocols, most tend to emulate the winning model.

However, it’s not only following winners, it’s the inter-changing of professionals amongst protocols. You have the same set of 10 VCs advising every protocol and you have a relatively small talent pool switching in-between protocols contributing similar ideas to each project. The result is isomorphic tendencies without necessarily improving efficiency. If the focus is purely on efficiency then there would be more experimentation and less settling. But experimentation is much more risky and uncertain when compared to settling which is why most people opt for imitation.

Mass Adoption

We all love talking about mass adoption. We haven’t reached mass adoption as yet but we have reached significantly more adoption over the last 2 years than the industry has seen before.

DiMaggio & Powell found that there comes a point on the adoption curve after which more adoption only grants legitimacy rather than improving efficiency or the technology. We are not at that stage as yet but we have reached a point of adoption where governments and traditional institutions are starting to take crypto seriously. With this level of adoption we are already starting to see varying levels of institutional isomorphism. As adoption continue to grow and we achieve that ever elusive mass adoption then there comes a point where more acceptance simply grants more legitimacy and nothing else.

Another product of mass adoption will be structuration. By structuration I mean the bigger companies will become more rigid in operations because of a rigid organizational structure. We have seen this in many previous industries and it’s likely that this time isn’t different with crypto.

We are already starting to see signs of structuration within crypto and once the current formulas are tweaked over the years, the larger DAOs will find their structure and be “stuck” with it. This structuration certainly has its perks, but it will start to become very difficult for those bigger DAOs to then adapt to any sudden changes that take place. The de facto option will be to emulate the response of their competitors i.e. the other big DAOs. This form of isomorphism is referred to as mimetic isomorphism. When large and rigid organizations essentially imitate each other because it’s the safer option.

Regulation

So far, I’ve discussed how structuration and professionalization will lead to more isomorphic tendencies. Another major contributor is the state. This a form of coercive isomorphism.

To anyone who isn’t coping, regulation seems inevitable. We have had many opportunities to prove that we can self-regulate as an industry but instead in the stupidity of the mob we decided to put all of our faith in Do Kwonzi and Ponzielle Sesta and now we’re here. Not to mention, the figure heads of crypto (SBF, Novo and the like), who are in the public eye, have already started lengthy discussions with regulators and have funded political campaigns. So regulation is certainly on the way.

The isomorphic product of regulation arises because as an industry begins to dominate more aspects of social life, they start to get larger. As a result of becoming so prominent, the structure of these organizations tend to gravitate towards the rules and regulations that have been implemented by the state. It’s a natural process of conforming to laws and powers that are bigger than yourself. The only saving grace for crypto is that it will be very tough to regulate on-chain stuff in the near future and because of how international the work environment is, there will need to be some broadly accepted international norms. Consensus on these things will take time.

Concluding thoughts

This piece was just me rambling and dumping my thoughts about where I potentially see crypto in the future based on things that are happening right now. I do believe there are enough people in this space who are brave enough to go against the grain and ensure that the industry doesn’t become stale, but you never know how things go.

I’ll end it with this, I believe Isomorphism is good in terms of convenience. It is easier to make sense of the landscape, it’s easier for talent to migrate from one area to another, it improves transactional convenience amongst companies, it is easier to attract career-minded staff, and it helps with being acknowledged as a legitimate industry. None of this however, ensures that organizations are more efficient and operating at their optimal level. Hence, I’ve taken a relatively negative view of the isomorphism of crypto in this article.

It is tough to avoid, but we need to stick to our experimental roots in order to continue to break barriers.

Thank you for reading.

If you enjoyed then please consider donating to my ETH address 0x43A5D9C141125Cd67B9268ef28C7c6a9dC15F3c9.

Subscribe to the substack

follow me on twitter

Institutional Isomorphism is an interesting theory adapted from the ‘Iron Cage’ theory outlined by Max Weber. Weber essentially said that bureaucracy and the rational spirit is such a strong method to control humans that once it kicks into full force it will become like an Iron cage that humans will be imprisoned by forever until the last ton of fossilized coal is burnt.

As you can tell, his statements were broadly true. However, DiMaggio & Powell (some famous sociologists) worked on a piece that would agree with the iron cage theory but rework the reasoning and causes for this taking place. This piece, titled ‘Revisiting the Iron Cage’, is one more suited to modern times. The key theory to come out of this piece is institutional isomorphism.

So WTF is Institutional Isomorphism

Put simply, the theory states that as an industry grows through the various cycles of adoption, the institutions/organizations that come out of this growth tend to be very similar in nature if not identical. Weber’s initial theory suggested that this happens due to the concept of a competitive marketplace where everyone strives only for efficiency. But what DiMaggio & Powell found is that as an industry grows and a few winners within the industry emerge, they don’t necessarily become more efficient nor does the competitiveness remain. Instead they start to homogenize due to imitation and the highly structured nature of large industries.  

Every actor in an institutional setting wants to achieve efficiency. The aim is to be better than the competition. In order to achieve this efficiency, the assumed and popular rational choice is to be highly structured. While most people assume that this structuration leads to efficiency, it often has the opposite effect. Organizations start to look very similar to each other through the process of competing, and as a result none of them tend to become more efficient.

A good example of such an institution is a hospital. Obviously I wasn’t around for when the institution of hospitals started, but I assume it would have been a fairly dynamic environment. Now, as hospitals become a cornerstone piece of our lives, the different organizations within this field tend to look very similar. There is a set course of study from university to post-graduate studies, after which you get an entry-level job, and then you gradually move up the ranks. Eventually you can open your own clinic and also work for other hospitals. Even how different hospitals conduct their operations are very similar. In this case, prestige and professionalization is what makes hospitals homogenous (similar).

However, institutional isomorphism doesn’t only happen within an industry but also across industries that are fairly similar to one another. In this case, the newer industry of the two will eventually become very similar to the older industry.

Coming to crypto

The industry as a whole is still fairly nascent, but in the short time I have spent here I believe there are signs of institutional isomorphism occurring. There is isomorphism at the lower levels of our industry and also at higher levels when you examine the isomorphism of crypto with other industries.

At the lower levels you can see signs of isomorphism when it comes to forking popular protocols or the way majority of DeFi protocols follow a very similar DAO model. At a higher level you can see signs of isomorphism when it comes to the age old debate of DeFi vs TradFi. The mission used to always be DeFi will eat TradFi and TradFi is NGMI. However, over the last few months you can see signs of many integrations between crypto and TradFi as well as crypto firms operating in similar ways to TradFi firms.

I’ll dive into some of the main causes of this isomorphism below.

Starting with talent inflows

On the VC side of things you are starting to see some of the largest crypto VC firms higher TradFi talent. This is not a bad thing in itself because I’m sure there is some genuinely good talent, the issue comes from professionalization. They have all been taught similar things in Uni, they have been taught similar things by their mentors at their jobs, and they have operated in similar ways at their jobs in the various different traditional funds. Crypto is another financial market and when talent migrates from the traditional players, they will be eager to impress. A major part of this will be them porting over their ideas & processes from TradFi. It’s very difficult for humans to completely change the way they conceptualize certain things if they have been working on it a certain way for multiple years, it’s tough to break habits. Hence, as talent migrates we’ll start to see some forms of isomorphism in terms of operations and potentially thought-process.

The same goes for the developer side. I don’t know much about the specifications of coding myself, but from what I’ve seen, the freedom and monetary incentives have encouraged a lot of Web 2 devs to come over to web 3. Yet again, they are used to working with languages in certain ways and they design mechanisms in specific ways. It becomes difficult to break that barrier in the brain. People can slightly push the border but at the end of the day they are more or less confined to the ways they know and are used to. This could lead to applications looking very similar in design to web 2 applications.

Even on the trading side you are seeing this isomorphism. FTX invested in Robinhood and is now also offering stocks on their platforms, Paradigm and others invested in Citadel, and Jump crypto runs their BTC/SPX correlation algo bot. The traditional markets and crypto market have always been correlated and judging by the moves some of the big players in this industry are making, they will likely continue to be correlated for some time. The good thing about this is that the markets will become more efficient but the bad thing is that we’ll start to become very similar to the financial system that many of us tried to escape. Also we’ll lose our casino, that’s an L.

I personally am not a fan of this form of isomorphism, I’d prefer more out of the box solutions rather than the same underlying traditional mechanisms but with some slight variations built on-chain. This is why I’m a big fan of experimentation but the speculation on experimentation is what leaves many people hurt in crypto.

Originality & incentives

While I like speculating on coins as much as the next person, it is the hyper-speculative nature of crypto that causes isomorphism within the industry because it leads to laziness. People lose their originality and willingness to solve complex problems because the incentives are skewed.

You get one successful project with really good ponzinomics and it is instantly forked 75 different times on 10 different chains. Devs make money, early investors make money, and maybe some sharp retail participants make money but nothing of substance is achieved. I agree that some competition is good but the incentives for people to commit to a long-term solution is not there because it is purely an experiment. It may work out and you hit the jackpot or it may go to 0 which is often the most likely outcome. Naturally, most people choose the easy money route.

Even if you zoom out to the broader DAO model, there is a lot of isomorphism within crypto. There is a project that fulfils a certain purpose, said project will launch a governance token, a DAO will be formed around said governance token and people will vote on proposals. I have not seen much experimentation outside of this model. It seems like the general community has accepted it. It passes the bill for “decentralization”, plus there is a token so you & me can gamble and VCs can make money.

This homogenization primarily stems from rationalization. People follow the winners. The ve token model worked for Curve so now everyone wants to implement it, the DAO model mentioned above worked for some DeFi protocols so now everybody will use it. Even if there are more optimal ways to do things in the context of different protocols, most tend to emulate the winning model.

However, it’s not only following winners, it’s the inter-changing of professionals amongst protocols. You have the same set of 10 VCs advising every protocol and you have a relatively small talent pool switching in-between protocols contributing similar ideas to each project. The result is isomorphic tendencies without necessarily improving efficiency. If the focus is purely on efficiency then there would be more experimentation and less settling. But experimentation is much more risky and uncertain when compared to settling which is why most people opt for imitation.

Mass Adoption

We all love talking about mass adoption. We haven’t reached mass adoption as yet but we have reached significantly more adoption over the last 2 years than the industry has seen before.

DiMaggio & Powell found that there comes a point on the adoption curve after which more adoption only grants legitimacy rather than improving efficiency or the technology. We are not at that stage as yet but we have reached a point of adoption where governments and traditional institutions are starting to take crypto seriously. With this level of adoption we are already starting to see varying levels of institutional isomorphism. As adoption continue to grow and we achieve that ever elusive mass adoption then there comes a point where more acceptance simply grants more legitimacy and nothing else.

Another product of mass adoption will be structuration. By structuration I mean the bigger companies will become more rigid in operations because of a rigid organizational structure. We have seen this in many previous industries and it’s likely that this time isn’t different with crypto.

We are already starting to see signs of structuration within crypto and once the current formulas are tweaked over the years, the larger DAOs will find their structure and be “stuck” with it. This structuration certainly has its perks, but it will start to become very difficult for those bigger DAOs to then adapt to any sudden changes that take place. The de facto option will be to emulate the response of their competitors i.e. the other big DAOs. This form of isomorphism is referred to as mimetic isomorphism. When large and rigid organizations essentially imitate each other because it’s the safer option.

Regulation

So far, I’ve discussed how structuration and professionalization will lead to more isomorphic tendencies. Another major contributor is the state. This a form of coercive isomorphism.

To anyone who isn’t coping, regulation seems inevitable. We have had many opportunities to prove that we can self-regulate as an industry but instead in the stupidity of the mob we decided to put all of our faith in Do Kwonzi and Ponzielle Sesta and now we’re here. Not to mention, the figure heads of crypto (SBF, Novo and the like), who are in the public eye, have already started lengthy discussions with regulators and have funded political campaigns. So regulation is certainly on the way.

The isomorphic product of regulation arises because as an industry begins to dominate more aspects of social life, they start to get larger. As a result of becoming so prominent, the structure of these organizations tend to gravitate towards the rules and regulations that have been implemented by the state. It’s a natural process of conforming to laws and powers that are bigger than yourself. The only saving grace for crypto is that it will be very tough to regulate on-chain stuff in the near future and because of how international the work environment is, there will need to be some broadly accepted international norms. Consensus on these things will take time.

Concluding thoughts

This piece was just me rambling and dumping my thoughts about where I potentially see crypto in the future based on things that are happening right now. I do believe there are enough people in this space who are brave enough to go against the grain and ensure that the industry doesn’t become stale, but you never know how things go.

I’ll end it with this, I believe Isomorphism is good in terms of convenience. It is easier to make sense of the landscape, it’s easier for talent to migrate from one area to another, it improves transactional convenience amongst companies, it is easier to attract career-minded staff, and it helps with being acknowledged as a legitimate industry. None of this however, ensures that organizations are more efficient and operating at their optimal level. Hence, I’ve taken a relatively negative view of the isomorphism of crypto in this article.

It is tough to avoid, but we need to stick to our experimental roots in order to continue to break barriers.

Thank you for reading.

If you enjoyed then please consider donating to my ETH address 0x43A5D9C141125Cd67B9268ef28C7c6a9dC15F3c9.

Subscribe to the substack

follow me on twitter