There’s only two ways I know of to make money — bundling and unbundling
- Jim Barksdale

In the traditional finance stack, investors bet on companies which are a bundle of many properties: market, team, idea, timing, execution, traction, and much much more. Due to the emphasis on the company as the basic unit of account a bevy of consequences ensue: (ethical) investors only select one company in a domain due to potential conflicts of interest, board seats and shares become the governance lever, and IP is the primary defensible unit of value accrual.

This is not the most efficient method of capital allocation, and it will soon be supplanted by a superior model.

What will change is that the constituent elements of a company will become unbundled, and it will be possible for investors (whose distinction might change as their role also unbundles) to upregulate individual ideas, markets, approaches, and desirable outcomes with the expectation of profit. If you’re reading this in 2024 this might be an approximately unintelligible sentence, but with 5 years hindsight it will be not only obvious, but radically understated.

I don’t yet know exactly how this new game will be constituted, but despite the ambiguity I think it’s still worth providing a sketch of how it might work.

(The alternative to providing a sketch of how it might work is to describe the shortcomings of how it currently works, but showing one path through the idea maze is oom easier than trying to illuminate the maze itself.)

More or less, this is one way to roll the story:

Generation: Founder characters will propose an initiative that should be enacted.

Optimistic execution: By default, the protocol will immediately stage funding for it; optimistically preparing to distribute the capital.

Elision: Investor characters will either block or support the allocation of capital.

Support: In the event that they support it, they get a piece of “ownership” in the initiative, this ownership behaves differently than standard shares, but it’s a good starting analogy.

Block: In the event that they block the initiative, the investor gets a piece of ownership in the other initiatives that are funded thanks to the capital freed up by the block.

Leverage: The investor gets the most influence and ownership when they provide a reason for the block and a bounty on evidence that would change their mind (this is enforced by way of the mechanism of epistemic leverage).

Optionality: Later, if an investor changes their mind by paying out the block bounty, they can exercise an option to buy in to the initiative, now at a higher price.

Attribution: When a lucrative outcome is reached, the owners of shares of the initiatives that preceded the outcome receive retroactive funding.

As a story

A founder posts a proposal that says, “Manufacture 10x more efficient batteries.”

The initiative “Manufacture 10x more efficient batteries.” gets scheduled for beginning drip funding, but before it can begin to pay out, an investor blocks its execution, and leverages their influence by making the point that, “The science of achieving 10x battery efficiency over Lithium-ion is unproven.” and they say there are many ways they would convert their stake. Among the various block bounties they offer is, “Synthesis of a room temperature superconductor via an affordable manufacturing process.”

The block bounty they and other investors have created is massive, and kickstarts a gold rush of new proposals that portend to fulfill the block bounty. Most of them are garbage, and quickly get blocked by investors. However, eventually one of them, called “LK-99” starts to generate some controversy.

What made LK-99 stand out is that in observation it passed one of the many standard blocks of a room temperature superconductor: the material appeared to partially levitate. This skyrocketed the attention on the initiative, and huge volumes of support and blocks both rolled in, creating large standing bounties for independent replication of the results as well as heated debate about how to interpret the results.

Eventually, the majority of participants relinquished their support of the initiative, paying out those that contributed replication attempts, and returning to earning the median returns of the protocol.

But then a new proposal catches the network’s attention: “PCPOSOS2”.

Much like LK-99, it initially generates controversy because it’s able to overcome many of the common block bounties for superconductors. As usual, that heat of disagreement generates attention that increases the volume of both supporters and blockers, and the replication bounties begin to grow. However, unlike LK-99, after independent replicator labs hold their replication rights for a short time, they quietly begin to convert their wouldbe bounties into support stances.

Within weeks, the cascade of independent replication becomes a near-consensus view that PCPOSOS2 is the real deal. Seeing the new evidence and the shift in popular opinion among high integrity players, the original investors in “The science of achieving 10x battery efficiency over Lithium-ion is unproven.” begin to convert their doubts into holdings of PCPOSOS2 before prices get too high — this triggers a massive payout for the researchers, independent replicators, and early supporters of PCPOSOS2, including the LK-99 researchers who first directed network attention in the direction of this compound. But for the investors in PCPOSOS2 it’s all worth it, because the retrofunding that will come from the societal benefit of 10x better batteries will more than pay for their funding of that research.

Traditionally, all this work would have been performed in multiple different stages. Perhaps initially the research would have been supported by government grants overseen and allocated by a committee. Then it would eventually graduate to the stage of being considered interesting enough to go through feasibility studies on the back of institutional grants. Then it would receive investor funding so a single company that held the intellectual property could attempt to bring manufacturing and sales to scale. Here we imagine all of these steps happening in parallel by myriad contributors dynamically allocating their energy in a single unified protocol.

Summary

By unbundling the traditional finance stack to operate on the primitive of ideas rather than the primitive of teams (after all, company literally refers to a group of people, as in “we have company”) there’s an entirely new space of possible dynamics, one which can be orders of magnitude more efficient, intelligent, and holistic in its allocation of capital precisely because it permits highly decentralized and parallelized effort without concern for the protection of intellectual property. This can only be possible in the context of a unified game for credibly and competitively evaluating the value of a contribution to the commons, which itself requires a new system of incentives reminiscent of and yet substantially different from traditional markets. If we succeed in designing such a system we will unlock a new era of capital allocation; one that’s capable of identifying desirable collective outcomes, funding basic research to approach them, and equipping the machinery of markets with the incentives to see them realized.

So, what are we trying to describe, really?

A new game of capital allocation?

A scientific research funding mechanism?

A governance mechanism for allocating treasure?

A social network that pays for progress and insights?

A method for retroactive funding of public goods?

A market that pays for private information?

An alternative to intellectual property?

An economic system?

Read more

This is a reprint of a post originally found here: coda.io/@connor/capital