Capital is, in essence, the power to organize the economic resources of a social system, and its worth as a function of how much of those resources can be directed to the holder’s benefit. This understanding reveals the inherent value of cryptonetwork governance as capital, and helps us understand tokens with governance rights as new kinds of capital assets.
All forms of capital offer some kind of control over the distribution of economic resources across a group of people — in effect, governance over that pool of resources. Productive and human capital, for example, influence which goods and services are offered in the economy (and thus how income is ultimately distributed), financial capital determines the distribution of purchasing power, and equity capital presides over how a company’s resources are used. Intangible forms of capital also exhibit this quality: political capital, for example, governs the rules of markets, and social capital drives human attention (and thus behavior).
This insight, that capital is governance (and vice versa) leads to the source of its intrinsic value. Whoever has control over a pool of important resources also has the potential to direct some of those resources to their own benefit. So the value of a system’s capital is proportional to the value of the resources it governs.
This relationship is very clear in the case of corporate equity, where the value of a share of stock (which is essentially a voting instrument) is rooted in its right to a piece of the company’s book and profits — its “assets under power,” so to speak. The relationship is less clear in the intangible realm, where capital does not take the form of tradable assets that can be priced by the market, but remains present nonetheless. For example, we might look at the global cost of corruption (about $3.6 trillion/year, or 5% of the economy) to assess part the value of political capital, even though “political capital” is not constructed to produce direct economic gains for its holders. Similarly, we might observe the ability of social media influencers to profit from their fame, even though having lots of followers does not by itself guarantee a right to financial benefit.
This relates to crypto-networks insofar as they are a new form of social organization. It is useful to think about these ideas through the cryptoeconomic circle, pictured below:
The Cryptoeconomic Circle
The two pillars of trust of a crypto-network are its cryptoeconomic and governance models. The cryptoeconomic model defines ‘the rules’ of the system (what is the unit of work, how do users pay, how miners are compensated, the token supply model, etc.), while the governance model defines who has the power to change those rules, and under which conditions.
If capital is the power to organize economic resources, then the power to change the rules of a crypto-network forms its capital. And when that power takes the form of a token, it can be traded, priced and modeled by market. In this context, a network’s ‘assets under power’ include (1) the token itself, which is controlled by the cryptoeconomic policy, (2) productive resources, as controlled by the definition of ‘work’ (e.g. the consensus protocol), and (3) flows of value, as controlled by regulating payment mechanics and other incentives for miners, users and investors. And as the value of these resources grows, so does the value of the capital which governs them.
Certain proof-of-stake systems are good examples of this idea. Here, miners are required to lock a certain amount of tokens in order to be allowed the right to work for the network. The value which flows from users to the supply side is then distributed to miners proportionally to their stake. This way, tokens that can be staked are a form of capital in that they represent the power to organize some of the economic resources of the network, such as production capacity and distribution of income. And ultimately this is a form of governance, in the sense that staking is a mechanism for deciding how income should be allocated across miners. And so, as the value of that income grows with user demand, so does the value of stakable tokens.
For example, in Decred, 30% of the block reward is reserved for users who participate in its proof-of-stake consensus layer, and that reward pool is divvied up in proportion to how much DCR each participant has staked. Here, DCR is a form of capital as it has power over how some of the block reward is distributed. But because Decred also allows the PoS layer to vote on the use of its community pool (which is funded with 10% of each block), as well as on protocol upgrades, the value of DCR as a capital asset extends beyond what is connected to block-reward revenues. Such power is harder to quantify, and therefore difficult to price, but remains an important value driver that we might consider a kind of “governance premium”.
Joel Monegro first presented the thesis that governance is capital (and thus the driver of long-term token value) at the Token Engineering meetup in New York in early 2018, where he showed the following slide which describes the features of what can be described as power tokens (i.e. governance tokens that can serve as both currency and capital):
Slide from TokenEngineering talk On The Price and Value of Governance
The basic principle behind power tokens is that they fuse the features of “utility tokens” and “governance tokens”, which really means the combination of currency and capital — with the capital function being the driver of long-term value. Ultimately, the key insight is that what we’re dealing with in the creation of these new assets is the creation of new forms of capital, network capital, that is natively digital, and cheap to distribute — and that’s important for the mainstream mass adoption of crypto and web3 over the next 10 years.