Throughout economic history, money largely concerned itself with the development of a medium of exchange. Dating back thousands of years, the barter system enabled markets. It allowed people to trade one thing for another and laid out the foundation for a collective of individuals offering goods and services. Barter, however, had its flaws — the cost of transaction was high, it relied on physical delivery of bartered goods, the granularity couldn’t easily be controlled, and generally the lack of standards limited the markets that could be created, preventing the whole system from scaling.
These flaws became more of a challenge as societies started to become non-local. Trading evolved into goods and services being exchanged across villages, the rise of kingdoms demanded coordination across regions, governments and empires began trading across nations, and suddenly, the history of money became a lot more interesting. To standardize a widely accepted means of payment, governments and rulers initially settled on using precious metals like gold and silver. These bearer tokens worked well to an extent but became susceptible to common issues like being mixed and matched with existing barter systems, not always being accepted cross regions, and the usual attempts for lowering the coin’s weight and mixing with impurities by the issuing treasurers. All the way back in 1260, when Marco Polo arrived in China, he noticed Kublai Khan, a grandson of Genghis Khan, created non-metal representing value by using the bark of a mulberry tree and polishing it to resemble sheets of paper in different sizes. These papers had an official seal by Khan to entrust authenticity, and anyone refusing to accept the paper bills or any older forms of payments (barter, gold, silver) would be executed. This was a pivotal moment in the history of money and institutions. It transformed the way we thought about a medium of exchange, as these paper bills converged to represent a claim on the underlying resource and introduced convenience and scale. It also established a new role for governing bodies to be the ultimate guarantors of collateral, and helped aligned incentives and trust in an institution. It fortified that money is not the value for which goods are exchanged but the value by which they are exchanged.
Fast forward a few centuries with France and England at war, the administration of King William came up with, at the time, a novel idea to finance the war. They decided to borrow a large sum of money and use taxes to pay it back to the lenders with interest. The group of lenders that initially lent 1.2M pounds to the English government in 1694 incorporated themselves into a new entity, named The Bank of England. The Bank of England allowed the public to deposit their gold and share the interest and issued Bank Notes as a receipt. The deposits were then further lent to the king and the public had a guaranteed claim on their deposit through their notes. Until this period, borrowing and lending were primarily done on a small scale and were exclusively short-term loans. This change meant the participants mostly consisted of high net worth individuals interacting directly with private bankers. The general setup of this structure made deposit banking possible, introduced credit and debit, and allowed for fractional reserve banking. Traders became merchants, merchants started companies, and companies became enterprises; industrialization and capitalism brought about scale. Commerce expanded as a whole and as business owners embarked to borrow money and finance their expeditions, new structures for trading companies emerged. These structures had special charters, limited liability, and offered different ways to capture value. The shareholders started to buy, sell, and trade their stock with other shareholders, and as the volume of these trades grew, stock exchanges were established to manage the trades. Sophistication followed, and we saw the emergence of new vehicles like investment funds, pension and insurance funds, mortgage houses, and even venture capital.
At the turn of the 20th century, stock, bonds, and equity markets were well established, and globalization propagated most of these services to the rest of the world. Computers and the internet made it possible for organizations from multiple countries and jurisdictions to work together, but most financial institutions and products we are familiar with have only existed before the end of the 20th century. Over the last 80 years, regulation and technology transformed how these businesses operate, and corporate governance became more central to how these institutions thrive. Technology has played a crucial role in how modern institutions conduct business, and although the actors (executives, employees, shareholders, boards, regulators) within these institutions have largely remained the same, their ability to perform their respective duties has been enhanced through the easy access to information necessary to make decisions. What started as a bank in the 1600s has now gotten 100-1000x easier to replicate with the modern infrastructure, but we believe this can be improved by another order of magnitude. What we see now is a new wave of companies redefining an institution to be software first. The revolution that arrived via the modern tech stack conveniently located itself a layer above the existing legacy infrastructure. This benefited everyone as it became easy to automate existing processes and share information across organizations, but the net result was an efficiency gain, not a transformation.
The wave we’re entering now tackles the bottommost layer that defines an institution. Whether it be a bank, company, financial product, co-op, or a mutual contract, we now have the software primitives required to literally code and represent the rules that define an organization. This is enabled by smart contracts on the blockchain. Everything from coding the logic of a simple escrow contract to facilitating an entirely functional bank with lending, borrowing, savings, etc., can now be represented with only a few hundred lines of code. The notion of having code embody a definition of an organization sounds ridiculous at first, but at its core, it is a representation of rules that a group of people mutually agree on with the added ability to modify them should social consensus change. This includes writing conditions that manage everything from voter rights, to ownership structure, to dividend disbursements, to auditing; all these layers that have existed on top of existing organizations can now be merged directly into the lowermost layer that defines that very same organization.
Imagine pressing a button that deploys your company on a network and within 60 seconds, the contract is accepted with your custom rules and bylaws, and with it, comes automatic auditing, accounting, share representation, voter rights, jurisdictional provisions, compliance, and board setup — all this instantly available for the price of a cup of coffee. The nature of a crypto network protocol managing the rules and the interface of an organization makes it possible to align incentives for all its shareholders, especially at scale. The implications of this new form of organization are immense: not only because it is fast and cheap, but the nature of these contracts being deployed on the same network allow communication with each other by default, which further lets you combine and rely on other services with no additional effort. As an example: one of our investments — MakerDAO, the largest stablecoin on Ethereum, is currently a $550M+ smart contract based organization which lets the MKR token holders change the parameters of the protocol, cast their vote on things like the investment interest APR, and propose radical changes to how the system should work. Another one of our recent investments Opyn is a smart contract organization that lets you create an insurance company around other smart contract based organizations and makes it possible for any individual or institution to become an underwriter with proper economic incentives. The nature of these protocols being open also adds on to the network effects of ecosystems forming around them; and in the case of MakerDAO, close to $500M of additional value has been generated by other smart contract organizations integrating with the Maker platform. Thousands of people are actively using these protocols and hundreds participating in their governance. To us, these are companies at scale setup to perform in a world where millions can voice their opinions.
What makes all of this interesting is that things are incredibly early and standards are still being defined. There isn’t a consistent agreed upon way to manage governance participation and best practices are still in discovery mode, and setup of these organizations is being heavily experimented. This is why we get excited about investing in companies like Bison Trails that manage the administrative layer of protocols that let users interact based on custom rules. Although the business logic for these open organizations is at the smart contract level, there are opportunities to better interface with the code and make it easier for information to be consumed and made available for informed decision making. We’re at the development stage of this ecosystem, where within minutes one can clone an existing smart contract, tweak the parameters and offer their own flavor of what that service should be – and these efforts can still be compliant and work within the existing network. That’s extremely powerful. The proliferation of talent, cross-pollination of ideas, the ability to iterate in seconds is where we see the world moving. We evaluate about a dozen of these organizations as investment opportunities a month, and with all of this already happening in real time, A.Capital is actively participating in this smart contract ecosystem which is redefining the nature of our crypto strategy.
