I was listening to a Tim Ferriss podcast recently, featuring a man by the name of Balaji Srinivasan. Balaji is currently the CTO of Coinbase, a company making waves in the financial world after its IPO. To cut a long story short, Balaji mentioned a project he was working on, 1729. This is a space where crypto rewards are given for various tasks, from answering a technical problem to reviewing an article. I know this is a personal finance blog, but I read the latest task on Founding vs Investing and thought I’d give my two cents. It may not be a review in the traditional sense, so I may not be eligible for the rewards, but I wanted to explore it as a thought experiment.
The article linked above has a basic premise. There are two ways an institution come into being, they are founded or inherited. Based on our current environment, it can be easy to class founding as good and inheritance as bad, however, I don’t believe this is necessarily the case. While founder-led institutions are often more agile, adaptive and responsive than their inherited counterparts, the inherited institutions have lasted the test of time. I’m not going to spend time arguing over which is better, founded or inherited institutions, there are people much more qualified than I to do that. I want to focus on the future. Balaji argues that founding an institution has never been easier, and I wholeheartedly agree. Technology has mobilised ideas in a way that was never possible before. What may have taken 50 years in the early 1900s can be accomplished in a fraction of the time, and that excites me.
Time and Institutions
One point I wanted to mention that isn’t necessarily relevant anywhere else is that time has a big impact on the founding vs inheriting argument. Founder led institutions have a very limited lifespan, inherited institutions do not. This is nothing to do with the quality of the institution or the way it is run, it’s down to the lifespan of the founder. Once a founder decides to retire (or dies), the institution is either wound up or passed on to a successor. At this point, it is no longer a founder-led institution, it has transitioned into an inherited one. This is one reason why I am reluctant to argue the case for either, founder-led can turn into inherited very quickly. Just look at Apple, it is undoubtedly an institution and a darling of Silicon Valley but is no longer founder-led.
East Coast vs West Coast – The Historical Divide
In the USA there is an easily identifiable division geographically between institutions. The East Coast is predominately populated with inherited institutions, Ivy League schools, Banks, Media etc. The West Coast (and Silicon Valley in particular) is predominately where you find the founder-led institutions, Apple, Facebook, Google etc. From a historical perspective, this makes perfect sense. The East Coast of the US was populated by European settlers long before the West Coast, the more time humanity is in a specific location the more likely it is that an institution will form at that location. (Let’s not forget that inherited institutions were once founded institutions). With the increased focus on technological advancement, Silicon Valley became the default location for many start-ups that would later become the institutions we know today. So what does this tell us about how institutions were formed in the past?
- People were required to found the institution.
- The location was important in the formation of an institution (Silicon Valley for tech, the populous East coast for media).
- Run in a top-down manner.
Could all this be changing?
The Impact of Technology
We all know that technology has sped up the process of founding anything; a community, a website or a company. What I believe we are seeing now, is a shift from the historical norms of founding an institution to a new normal. One where institutions can be founded faster, and which may not be as easily definable as founder-led or inherited. The impacts of technology on the historical formation of institutions are:
- For the foreseeable future, people will still be required to found an institution. I don’t believe we are technologically advanced enough to have an AI do it. I think of the three points, this is the only one that will remain as-is for a while to come.
- Thanks to technology, it is now possible to form an organisation/institution from your bedroom. You no longer need a flagship office, mahogany furniture and a board of directors with a median age of 70. Don’t get me wrong, you may still choose to have a central office or location, but it is not the necessity it once was. Decentralisation is the name of the game.
- Both founder-led institutions and inherited institutions are run in a top-down manner. A CEO and their C-Suite team usually call the shots which are hierarchically communicated through the institution. Technology (and blockchain technology in particular) has given us the ability to collaborate in a much flatter way. We no longer need direction from above, we can decide between ourselves how the institution can be run.
Enter the DAO
A Decentralised Autonomous Organisation or DAO for short is a prime example of how technology is changing the face of institutions. Granted, many DAOs are in their infancy and have not yet reached an institutional status, but it is only a matter of time. A DAO replaces the typical rule set of an organisation with one that is code-based and dependant on consensus. Participants in the DAO each have a say in how the organisation is run. Using MakerDAO as an example, holders of the MRK token can vote on changing the policy of the organisation, thereby changing how it is run. Rather than having a board of directors that decide on what way to lead the organisation, in the DAO model every eligible participant can have their vote.
The DAO model effectively negates points two and three above. By its nature, it is decentralised (no need for a specific location) and is a flat organisation (not controlled by a single entity). That isn’t to say the DAO model is perfect. I am not here to argue the merits of a DAO, merely to point out that it has the potential to be a completely new type of institution, one made possible by the blockchain.
The Future of Institutions
We know how institutions have operated in the past, but how will they operate in the future?
You may be sick of hearing it, but technology is the great disruptor. The speed at which advancements are being made is outpacing the ability of many institutions to adapt. In a general sense, the larger you are the harder it is to pivot. An ant can turn faster than an elephant. As the speed of innovation and advancement increases, I believe it is increasingly likely that the lifespan of institutions will decrease. Take the S&P 500 as an example. Many would argue that the S&P 500 represents the institutions of today, at least from a commercial point of view. It is where Apple can sit comfortably beside JP Morgan, Tesla can sit beside Proctor and Gamble.
According to McKinsey, in 1935 the life expectancy of a company in the S&P 500 was 90 years. By 2010 it had dropped to 14 years. While this only concerns companies, I believe the challenges companies face are the same as institutions that are not quoted on the public markets. While JP Morgan may be struggling to compete with cryptocurrency and the blockchain, mainstream media is struggling to keep pace with Twitter. I do not doubt that in the future governments will struggle to keep up with decentralised communities defined by ideas, not a geographical location.
That isn’t to say every institution will fall and be replaced by a code-driven protocol. Many institutions have survived because they have adapted and overcome, I believe they may need to increase the pace of adaptation in the future.
Institutions shape our World, and as regular people, we have never been in a better position to shape our institutions. The chances of you being made the head of a legacy institution are infinitesimal. The chances of you founding an institution of your own have never been higher.
The Stoic Trader