The Web 3 Way of Wealth Distribution

Every Thursday , the Forta Foundation team gathers on Zoom for a virtual happy hour. I haven't met some of my co-workers in person, so this is the only time I get to know who they are outside of the office. Everyone has a story to tell, you just have to ask.

The rule is "we don't talk about work". More often than not, someone asks an interesting question and it ends up snowballing into discussions about economics, politics, the impact of social media, etc.

In April, Juan posed the question "Will encryption and Web 3 have a positive impact on global wealth distribution and equality?"

In the discussion, I am pessimistic. The evolution of the technology industry over the past 30 years has objectively had the opposite effect. Value creation is concentrated in a small group of companies (many of which operate effective monopolies in their respective verticals), and wealth creation is concentrated in a small group of people (founders, early employees, and investors). Seven of the nine richest people in the world have founded or run tech companies in the US, with a combined fortune of about$1 trillion .

We’ll explore what enables the tech industry to create and capture disproportionate value, but the question I really want to dig into is “will cryptocurrency and Web 3 perpetuate the wealth gap, or will it level the playing field?” We zoom in...

Web 2 Value Capture

As I mentioned above, over the past 30 years, the largest technology companies have been able to create and capture value disproportionate to their size.

Amazon, Microsoft, Google, Apple, and Facebook are effective monopolies in e-commerce, operating systems, search, smartphones, and social media—owning entire industries and capturing most of their value.

Their founders and CEOs — Bezos, Gates, Page, Brin, Ellison, Ballmer, Zuckerberg — also amassed enormous fortunes. Now that Elon owns Twitter, I can group them together:

It boils down to the fact that thanks to computers, software, and the Internet, a small team can create and capture value in unprecedented multiples. Sudden spikes in value creation have also occurred historically...during the Industrial Revolution when machines replaced human labor.

When Amazon went public in 1997, it had 256 employees. Amazon's IPO has a market capitalization of $438 million, equating to a valuation of $1.71 million per employee. Today, valuations per employee at recently public tech companies are even higher...

The seven companies founded or run by the eight richest tech billionaires mentioned above are located on the US West Coast, California and Washington.

Early employees with the greatest equity will also work closer to the main office, leading to a concentration of personal wealth in these areas. Not surprisingly, 3 of the 7 fastest growing real estate markets in the US since 2000 are San Jose, San Francisco and Seattle.

financialization

Even outside of technology, asset ownership has concentrated over the past 30 years. Since 1980, the U.S. economy has undergone rapid financialization, with more and more corporate profits coming from financial activities rather than trade or production. During the same period, US household wealth shifted from real assets (real estate, commodities) to financial assets (stocks, mutual funds). From 1984 to 2011, real estate declined from 40% to 25% of household wealth, while financial assets increased from 25% to 50% of household wealth.

The top 10 percent of U.S. households own 90 percent of their wealth in stocks and mutual funds, but only 30 percent of their wealth in primary home ownership. There are barriers to ownership of physical assets that don't exist with financial assets...you need to be close to the physical asset for practical application. That's why people who live in Detroit own houses in Detroit, and people who live in San Diego own houses in San Diego, not Detroit.

The top 10 percent of U.S. households own 90 percent of stock and mutual fund wealth, but only 30 percent of primary residence ownership wealth. There are barriers to ownership of physical assets, financial assets do not, you need to be near physical assets to get real assets. That's why people who live in Detroit own houses in Detroit and people who live in San Diego own houses in San Diego, not Detroit.

My conclusion is:

(a) technology and the Internet enable us to create more value with fewer people who are disproportionately captured by traditional corporate structures, and

(b) Financial asset ownership is easier to concentrate than physical asset ownership because physical location does not eliminate the utility of financial assets.

Web 3 Wealth Distribution

The distribution of Web 2 crypto wealth is similar to that of the broader tech industry. Crypto started in the Web 2 world, dominated by centralized companies headquartered in common places like San Francisco. Most of the value creation and capture happens on a few large exchanges ( Coinbase , Binance, FTX ). Their small teams create disproportionate value, and their founders and early investors capture most of the wealth creation. The CEOs of all three companies (only one of which is public) appear on the Forbes 100 list.

In terms of asset ownership, though, it is interesting that while roughly 70% of BTC is owned by the top 2% of online entities, retail investors have actually seen a gradual and continuous increase from 2012 to 2022. In 2012, retail investors owning 10 BTC or less accounted for 2% of the total supply. The same segment of retail investors owns roughly 12% of the BTC supply by 2022.

I like this statistic because it goes against the norm. In general, high-risk/high-growth asset classes (i.e. tech startups) are not readily accessible to the average retail investor. Cryptocurrencies are unique in that they are both high-risk/high-growth and easily accessible.

Seeing retail investors own over 10% of assets, you might think it would be refreshing to still find product-market fit and a strong indicator of a potential shift in wealth distribution.

geographic perspective

Geographically, Web 3 is more diverse than Web 2. San Francisco and New York are undoubtedly hubs of activity, but they are not as dominant as Silicon Valley and Seattle were 20 years ago.

The default work schedule today is "remote first". You can be anywhere, which means startup teams are more geographically diverse. For the first time in my life, most of my co-workers are based outside of the US (which also happens to be one of my favorite aspects of working in this industry).

The best people are everywhere.

Two other market forces that affect crypto and Web 3 talent and companies—regulation and taxation.

States with no state income tax, such as Nevada, Texas, and Florida, and countries with favorable capital gains treatment, such as Puerto Rico and Portugal, have seen a significant crypto brain drain.

For companies, regulations and taxes can affect your base of operations. FTX, now one of the world's leading exchanges, recently moved its global headquarters from Hong Kong to the Bahamas, mainly for regulatory and tax reasons. Such a move would have been unrealistic for the previous generation of tech companies, who needed to be where the talent was.

value capture

Web 3 value capture is already more fragmented than Web 2

It starts with ownership, and decentralized networks and applications are owned differently than their Web 2 counterparts. For example, protocols that issue tokens will often allocate 50% or more of the total supply to the community through airdrops, grants, rewards, etc. This means 50% less tokens held by founders, early team members, and investors, and more than 50% held by users and early backers.

Value capture is also naturally more decentralized, with blockchain and Web 3 protocols generating a lot of revenue, but not by one company. Instead, fee revenue is distributed among miners, validators, stakers, and liquidity providers.

Now you can say that these stakeholder groups are simply replacing employees in traditional corporate structures. While there is some logic in this, the absence of an intermediate entity with centralized ownership means that the value captured by decentralization is more decentralized.

Summarize

As I write this question, I have ownership economics ( about Web3 ownership economics ) in my mind. The number of assets being created is growing exponentially, and access to these newly created assets is increasing every day.

How will the ownership economy, especially NFTs, affect wealth distribution? One thing I'm confident about is that it's becoming more geographically diverse, I'm sure it won't become as concentrated.

Article written by Andrew Beal

Article compilation: Block unicorn