In Praise of Ponzis
A new economic model is emerging. Here's why it makes sense.
An audio version of this article is available below as well as on Spotify, Apple Podcasts, and beyond.
Three weeks ago, a few people decided to buy a rare copy of the U.S. Constitution at a public auction. They tweeted to see if anyone wanted to commit some funds to make it happen. Within a few days, about 18,000 people contributed more than $45 million. At the auction, another buyer decided to pay more, leaving many people disappointed.
But it didn't end there. The organizers set up a Distributed Autonomous Organization or DAO to handle the fundraising process. This sounds exotic, but it basically means this: They used a little piece of software to keep track of how much money each person promised to contribute. In exchange, every contributor was issued a bunch of tokens (in the same way an investor in a company received a bunch of shares). The token symbol (or ticker) was $PEOPLE.
After the auction, it was clear that the group failed. The DAO fulfilled its purpose, albeit unsuccessfully, and it was time to return everyone's money and call it a day. Then something strange happened. The price of $PEOPLE tokens shot up dramatically. It was worth nearly 100 times more than what original contributors paid at its peak.
This means people were willing to pay a 10,000% premium in order to buy shares in a project that no longer has a purpose. And it wasn'y just a handful of people — a whole liquid market emerged. Yesterday, nearly two weeks after the failed auction, the daily trading volume in $PEOPLE tokens was over $70,000,000. Why would anyone pay to buy a token that no longer has a purpose?
The Will of the People
There are many explanations why $PEOPLE still has a liquid market, but they all boil down to this: It's a good story. People love a good story. And people believe that the value of this story will only increase over time.
The crypto community sees the attempt to use a smart contract to buy a copy of the constitution as a historical event. The tokens are basically souvenirs, but they're also a bet on the growing significance of this event — a bet that the souvenirs will go up in value over time.
But it's not just a bet. It's also a marketing effort. By buying the tokens and ensuring there's a liquid market, investors help perpetuate and extend the story. This increases the likelihood that the tokens will indeed go up in value.
This logic seems circular: Let's buy something in order to ensure other people buy it as well. And the same logic can be seen in other blockchain-based projects. Games are paying people to play. Streaming services are giving people rewards for listening. Apps and protocols are giving people rewards for using their services.
These behaviors seem like examples of markets losing touch with economic reality. But sometimes, irrational behavior makes sense. In fact, we live in an era where the craziest actions are often the most reasonable ones.
One reason is that consumers and investors do not operate in a vacuum. They have to choose between a limited number of options, which are often all bad. But there's a deeper reason that reflects a fundamental change in how new businesses are built. To understand this shift, let's illustrate it with a familiar example.
Style and Substance
Everyone's heard of Gangnam Style. But before everyone heard about it, no one's heard about it. The song was uploaded to YouTube. Some people enjoyed it, shared it, liked it, and watched it. In response, YouTube's feed and algorithm showed it to more people. These people also enjoyed it, shared it, liked it, and watched it. The cycle continued and Gangnam Style reached a billion views.
YouTube made a few million from the ads it showed during the first billion times Gangnam Style was watched. Psy, the artist, and his producers probably made around a million.
The viewers who watched the video earned nothing, even though many of them contributed and were critical to the video's ultimate success. What if there was a way to incentivize people upfront to contribute to such a success? What if there was a way to let everyone who contributed earn a piece of the rewards?
Such a way exists. But before we get to it, it's important to understand why now is the time to put it to good use.
So Much Winning
Popular products existed long before the internet. And happy customers played their part in making their favorite products more successful by telling their friends about it or flaunting them as they walked down the street.
But there are a few key differences between the old, industrial world and our own. The old world was characterized by scarcity — there were fewer goods, fewer places where one could live/work/shop, fewer channels on the TV, and fewer things to read. Consumer tastes mattered, but sales and economic activity were constrained to — and constrained by — what could be produced.
The way goods were promoted was also constrained. A handful of powerful gatekeepers (newspapers, TV channels, music labels, book publishers) could crown whomever they wish and prop up new stars.
Today, there is an abundance of many things, if not everything. And most traditional gatekeepers have lost their old powers (even those that are doing well financially like, say, The New York Times, have a far smaller share of global mindshare than they used to).
Today, the main gatekeepers are the crowd and the algorithms that gauge and guide the crowd's attention. These algorithms create a world in which the biggest winners are bigger than ever. Success breeds success, creating path dependencies that make it hard for runners-up to catch up. In a growing number of industries, rewards are power-law distributed. This means the crowd is more important than ever and that launching a successful product is both harder and more lucrative than ever.
"Harder" might not be the right word. Let me rephrase: Launching a successful product is riskier than ever and more dependent on random forces than ever. In the past, a producer could rely on their own manufacturing capacity and on relationships with powerful gatekeepers to guarantee a product's success. It did not always work, but it often worked.
Today, producers can launch products more easily. But so can their competitors. And ultimate success depends on the behavior of large groups of people. These people cannot be coaxed or threatened. But they can be bribed.
The Message is the Message
What if there was a way to pay millions of people to watch a specific video at a specific moment in order to ensure that video goes viral and makes enough money to cover the cost of paying all these people — and then some?
In the old world, this would be too complicated. Just getting everyone's bank details would take forever. But in our world, it is possible. It takes about five minutes to set up a smart contract that sends tokens to an unlimited number of people. The contract can be programmed to pay these people automatically once they complete a certain action online — and to pay them again when their actions bear fruit and drive up the value of a song/product/stock/anything.
This is, essentially, a pyramid scheme. A Ponzi. But it makes sense. It will be the dominant marketing method of the next decade and beyond.
"Nonsense," you might say. "At the end of the day, you need to sell something; narratives are not enough." But aren't they? Another difference between the old world and ours is that we no longer sell things. In the past, the content was used to sell stuff: Executives from manufacturing companies got their TV channel buddies to produce Soap Operas in order to sell more soap. But today, content is not used to sell anything beyond itself. Everything is content, including your actions and behaviors. Why give them away for free?
Join a pyramid. It's not a bubble unless it bursts.