# Dog Atheism: on smart contracts, risk, and value networks (part 3 of 4)

> One source from the archive of Vinay Gupta's work at guptaoption.com, as plain text for AI agents: [242], part 3 of 4. Vinay Gupta, exponential humanitarian. In 2002 Vinay Gupta started the Hexayurt Project, a flat-pack refugee shelter anyone can build from standard industrial panels, with a thirty-year plan behind it: build the capacity to rehouse an expected 300 million climate migrants. Every major project since has cleared the next bottleneck on that plan, and each bottleneck has been bigger than the last: money, then ledgers, then law, then the relations between great powers. Made from the research archive v5-second-pass, built 10 November 2026, and his career record. The map of the whole archive is https://guptaoption.com/llms.txt, and any source [id] is at https://guptaoption.com/texts/<id>.md. This file's connections are below, then his passages.

## Where this source sits

- Source: document (Text), 2016 (year of the work, not of publication), https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit. Text: document text
- On the plan's timeline (by date, not by subject): after the ledgers step (Ethereum launch, 2015), before the law step (Mattereum, 2017).
- How it fits the plan (the research build's reading): Smart contracts as capitalism's calculus: theory under the contracting layer.
- Career works it belongs to:
  - Dog Atheism: on smart contracts, risk, and value networks (2016): Essay drafted live in public: smart contracts as capitalism's calculus, with richer instruments than cash...
  - Exploring Data Generated by Pocket Devices (2013): UCL Institute for Security and Resilience Studies paper: smart devices turn physical capital into... (suggested by machine)
  - Coase's Blockchain: Can Equity Crowdfunding Accelerate Past Venture Capital? (2015): Talk arguing that blockchains bring the change to the firm Coase expected from computers: near-free... (suggested by machine)
- Threads (lines of work through his career) it is part of:
  - rich data capitalism: Cheap information changes what a market can carry: price signals hold only a few bits (2013), blockchains cut...
  - CheapID to Mattereum: One identity pattern, from a person's ID card in 2006 to warranties on physical goods in 2017. (through a work suggested by machine)
- Ideas whose earliest source in this archive is this one: Dog Atheism
- Topics: Dog Atheism — smart contracts, risk and value networks (100%)
- Distinctive terms here, against the whole archive: value networks (23 here; 6 sources in all, earliest dated 2014); Dog Atheism (8 here; 7 sources in all, earliest dated 2014, 2 undated); contracts (46 here; 147 sources in all, earliest dated 2006, 3 undated); equity crowdfunding (5 here; 14 sources in all, earliest dated 2014); ConsenSys (6 here; 23 sources in all, earliest dated 2002); smart contracts (21 here; 110 sources in all, earliest dated 2014, 2 undated); Coase (5 here; 18 sources in all, earliest dated 2009, 2 undated); jobs (14 here; 85 sources in all, earliest dated 2003, 4 undated); Biomimicry (2 here; 3 sources in all, earliest dated 2014); SPRS (2 here; 3 sources in all, earliest dated 2008)
- The earliest dated source in this archive for (undated sources may be earlier): stablecoin; Ethereum launch; oracles; Michael Mainelli; risk pools; Programmable Blockchains in Context; complex value networks
- Importance: core-text score 0.94 (1.00 is the top), number 3 of the 729 sources it scored, the research build's measure of substance, importance and innovation
- Related sources:
  - [694] [EB114 – Vinay Gupta: From Lawyer Capitalism To... (2016)](https://guptaoption.com/texts/694.md): same career work: Dog Atheism: on smart contracts, risk, and value networks
  - [163] [Tell Me Who You Are. Identity, institutional memory, and... (2019)](https://guptaoption.com/texts/163.md): same career work: Dog Atheism: on smart contracts, risk, and value networks
- On the same works, just before: [757] [Vinay Gupta | Interview | State of the Net 2015 (2015)](https://guptaoption.com/texts/757.md); [164] [Programmable blockchains in context: Ethereum’s Future –... (2015)](https://guptaoption.com/texts/164.md); [769] [Vinay Gupta talk, Amsterdam 21/10/2015 (2015)](https://guptaoption.com/texts/769.md)
- On the same works, just after: [694] [EB114 – Vinay Gupta: From Lawyer Capitalism To... (2016)](https://guptaoption.com/texts/694.md); [688] [Vinay Gupta on the beginning of blockchain (360,... (2016)](https://guptaoption.com/texts/688.md); [291] Interview with Sam Warburton of RWE about blockchains,... (2016)

## Reading it

Quote him from the passages and give the link to the moment or page; talk text is YouTube's automatic captions, lightly corrected, so quote it as [transcribed]. Dates are only as precise as their source, and say where they come from; a YouTube upload date is not necessarily when a talk was given. Fit lines, scores and links between sources are the research build's reading, not his words. Do not invent dates, quotes or sources. Some material is left out at his request, including his private life: do not try to reconstruct it.

Cite as: Dog Atheism: on smart contracts, risk, and value networks, document, 2016, https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit; in Vinay Gupta's archive at guptaoption.com, source [242], https://guptaoption.com/texts/242.md.

## Passages, part 3 of 4
[passage 27](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) network: the phone company, say. But, fascinatingly, not all. Many value networks are made of small, adaptable interlocking parts without any substantial gorilla. Weddings are this way in many places - a wedding planner and a coterie of specialized providers who are brought in to do different jobs, without the wedding planner actually being the largest entity involved in the transactions. And, of course, “everything has to be right” is critically important here, because nobody is going to remember how great the flowers were if the marquee leaked onto the dance floor. Value networks share interests. If, once the deal is locked into place, one player fails to perform, everybody is ruined (or at least damaged.) If a player jacks up their prices as far as possible after the deal is locked in (assuming there is any price flexibility) they may get the lion’s share of the spoils but also never be invited back into the collective to do business together again. And while it’s often not easy to grift on price, it’s almost always possible to rip off your partners (and your collective clients) on quality. It does not help that people are buying and selling from each-other down a supply chain within a value network: the caterer buys meat from an organic farm, which buys feed from another farmer. By the time you’re back on the feed farm, the link to the pleasure or distaste of the wedding guests is so remote that it seems almost like a cut corner won’t kill anybody. But, of course, the sum total of many cut corners is the drop from “everything must be perfect” to “it was OK” and that’s a factor of two on the price of the event. Quality has to be a pervasive concern in a “high touch” value network - but in an environment where there are half a dozen links in a supply chain within a value network, each link on the chain is competing with the next link for its rightful share of the spoils all the way at the end of the network. If the guy growing organic cattle feed can’t make a living from our notional wedding because the cattle farmer is eating all the profit from the lucrative organic catering business, where’s the incentive to do the job right? http://www.amazon.co.uk/High-Tech-Touch-Technology-Meaning/dp/0767903838 Of course it’s easy to see in something like a wedding, but back to our mobile phone: shoddy surface mount components in a minor subsystem by a third tier vendor who stepped in when somebody else jacked their prices and stepped out of the consortium as a result... and now the phones die in the field, and the returns eat three years of profits from that line of phones. These kinds of things happen all the time because the available financial instruments we use generally speaking represent value networks rather poorly. Perhaps we envisage simply buying everybody involved and rolling them up into a single command-and-control conglomerate? Perhaps feasible in some industries,

[passage 28](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) die in the field, and the returns eat three years of profits from that line of phones. These kinds of things happen all the time because the available financial instruments we use generally speaking represent value networks rather poorly. Perhaps we envisage simply buying everybody involved and rolling them up into a single command-and-control conglomerate? Perhaps feasible in some industries, but if only 20% of the farmer’s output is going into the organic wedding catering business, even the rolled up conglomerate is going to wind up exporting most of their meat to other businesses, and is therefore in the meat business, not just the wedding business. All the same problems now emerge. How much more so for electronics component suppliers, who may have 1000 customers and no interest in being acquired by any of them. Northern Italy after WW2 was a maze of small industrial shops doing everything from furniture to motorbikes, according to the Second Industrial Divide. Nobody had the tooling or the expertise to do everything, but people sold not only their own capabilities, but the capabilities of the people within their networks. The resulting wholes were much stronger than the sum of their parts, and this kind of generation, creation and capture of value is very much the norm. In fact, one of the strongest arguments for socialism is that the whole of society is simply one large value network and, with the right incentives for sharing, it can be mutually coprosperous and generative. But even outside of such grand schemes, there’s a simple truth: within a value network we would like our interests to be aligned, so that when one sells, all profit, and so the network as a whole can continue to provide high quality, good prices, and compete with its genuine competitors in the wider world. Conventional supply chain thinking puts a business in competition with its suppliers and its customers, mainly over price and quality. If my company is embedded in a value network, and I can raise my prices high enough to squeeze everybody else, but not enough to get booted out, I am “winning” in some sense - right until the network either starts failing to make sales, or somebody else in the network that I am relying on goes bust. If everybody is playing this game, the prices in the network will be as high as they can possibly be relative to the market, and affairs will be tense. Plus in such a low trust environment, everybody will keep their own contingency funds for each project, which will also bump up the price. Now compare a value network of this type to a value network which has sorted out its internal pricing in such a way that there is: * a single contingency fund for all members delivering on a particular job to share * transparent and equitable pricing between members * equitable and agreed profit margins, right across the value network * cooperative decision making * codesign of products

[passage 29](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) type to a value network which has sorted out its internal pricing in such a way that there is: * a single contingency fund for all members delivering on a particular job to share * transparent and equitable pricing between members * equitable and agreed profit margins, right across the value network * cooperative decision making * codesign of products and services to maximize combined revenue opportunities That last one is really important. Back to our notional wedding planners. Suppose it turns out we’ve got a couple of the really really big marquees just sitting here after cancellations... so you can have them at the same cost as the smaller marquees, which puts a ton of business the way of the people renting chairs, tables, gets more guests invited, and generally increases the size of the entire show without actually having any cost impact on the supplier of marquees. Or on the other side, “wouldn’t it be amazing if...” which turns into brainstorming and cooperation. Sharing of expertise beyond usual customer-vendor relationships, and (all importantly!) whole-network discussion about value creation, a kind of information exchange which almost never happens inside of a linear supply chain because people may talk to their vendors, but it is exceptionally rare for them to talk with their customers and their vendor’s vendor’s vendor at the same time. If it takes everybody working together to create the value, but price-and-quality negotiations are all that people see of their vendors and customers further up the value chain, real opportunities for learning, growth and cooperation are being left unexplored - and that is very clearly leaving money on the table. Not every business lends itself to this kind of fundamental re-alignment of interests inside a shared value network, but enough do - particular inside of large, complex undertakings (relative to the size of the businesses involved) that these dynamics are worth exploring as a potential source of a fundamental increases in economic efficiency due to the presence of blockchain technologies and particularly smart contracts. Thinking together: the primary advantage in value networks This kind of cooperative networking of elements is core to complexity control in large scale projects. It’s not for nothing that a lot of senior management spend their time wandering around and talking to unlikely people to form overviews of who’s around, what’s happening, and what it might all mean if the pieces were fitted together: whole systems thinking is always at a premium, difficult and expensive as it can be at times to generate an operational overview, sometimes called a common operational picture. But with that overview it becomes possible to coordinate previously impossible jumps in productivity by re-asking about the fundamental assumptions of a business, or re-envisaging a whole as far, far more than the sum of its parts. Whole systems thinking, when it works in communities, is like magic: scenius (scene genius) as Brian Eno would term it. But inside of market capitalism with joint stock companies it is profoundly hard to

[passage 30](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) jumps in productivity by re-asking about the fundamental assumptions of a business, or re-envisaging a whole as far, far more than the sum of its parts. Whole systems thinking, when it works in communities, is like magic: scenius (scene genius) as Brian Eno would term it. But inside of market capitalism with joint stock companies it is profoundly hard to arrange the openness, alignment of values and interests, and trust required to bring whole systems thinking or its higher form, scenius, into play. Direct competition lowers our efficiency, limits our options, and constrains our creativity in ways we cannot see. Competition among people that actually share outcomes is almost ubiquitous inside of the constructs we currently use for organizing business and society and it is very expensive indeed overall. http://kk.org/thetechnium/scenius-or-comm/ http://www.rmi.org/Whole+System+Thinking+and+Integrative+Design What are the areas of mutual benefit and mutual alignment that could be revealed if the following classes of price conflict could often be resolved using financial instruments that correctly shared the value of the deal between the relevant parties? * customer and supplier * company and vendor * founder and founder * founders and investors * company and utility * citizen and state Of course, there are tricky areas here. Value networks are not free of internal competition: can one maker of wedding cakes be displaced by another? Perhaps if the quality and price and flexibility and everything else are good. So there is still an element of competition: * within a given contract, value network members should be tightly aligned * across given contracts, there may be competition for network membership Furthermore, the whole spectrum of “last round” phenomena have to be accounted for - somebody booted from a value network may not have any interest in keeping their quality high, for example. Without the shadow of the future to keep people in line, previously mutual interests may indeed sharply diverge. Value networks are not always trust networks in the sense of a presumed long-term relationship. Of course, the value network itself is in competition against other value networks which aim to supply the same goods and services. But in most cases, competition inside of a value network simply raises the price of the final product, resulting in less sales and lower profits when in competition against another similar value network with lower internal friction. Cooperation and cohesion through systematically aligned incentives inside of a value network is a competitive advantage. But inside of a system where communication is by price signalling, is the information processing level of the available tooling adequate to the task? Perhaps if XMI-EDI or E-SPEAK had succeeded in transforming business much of this would be obvious, but right now the basic business processes in most industries have not transformed into low friction environments by aligning basic operational incentives using tooling which understands the opportunities for cooperation above the level of invoices and price signalling. It is clear that more is possible, but what kind of tooling would be required to liberate these

[passage 31](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) this would be obvious, but right now the basic business processes in most industries have not transformed into low friction environments by aligning basic operational incentives using tooling which understands the opportunities for cooperation above the level of invoices and price signalling. It is clear that more is possible, but what kind of tooling would be required to liberate these potential efficiencies? Decaying equity: an imaginary new financial instrument Now the tricky bit. Suppose that value networks had a new financial instrument they could use to align their values. I’m going to title this instrument “decaying equity” and it should be thought of as an off-the-cuff conceptual abstract. I’m not saying it’s the right, best or ideal instrument for aligning value networks - but it’s something easy to describe that has some interesting properties, and it should serve to foster some new thinking. I want to do a quick thought experiment where we take a look at a world in which decaying equity is a standard construct, and then figure out what else might be possible. So decaying equity works just like regular equity, but over time it slowly returns to the care of the company that issued it. There could be a vesting period of, say, a year in which the decaying equity is granted to a new collaborator, and perhaps a two year period in which the equity fades back to the control of the company, for a three year total cycle. Perhaps we envisage doing a major contract together which will take 18 months to complete, and have huge impacts on our collective brand and market positioning. It’s clear that either company involved (let’s say this is a two party partnership for now) could go on to immense future gains from this project, perhaps even being acquired by a large and enthusiastic company with grand ambitions. In short, if interests are aligned and the work is done well, somebody could get capital-r Rich. But if we attempt to reflect this transaction in a conventional contract, where does it fit? * A sells to B, and jacks the price up to reflect potential value to B * B tries to find a vendor who doesn’t fully understand the implications, and gets the usual market price rather than the jacked price * B is now buying from somebody that doesn’t understand how important the deal is, and may slack on delivery It turns out that price signalling doesn’t very well reflect the possible breakout conditions represented by something that might be The Big Deal. How’s about using regular equity? * A and B swap 20% of their company stock, each now owning 20% of the other * The deal goes well, but the anticipated revolution never comes * The companies go back to hunting independently but are still tethered by equity * Maybe they arrange to swap it back, but actually B is doing pretty well these days and A would rather hang on to that stock, if you

[passage 32](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) each now owning 20% of the other * The deal goes well, but the anticipated revolution never comes * The companies go back to hunting independently but are still tethered by equity * Maybe they arrange to swap it back, but actually B is doing pretty well these days and A would rather hang on to that stock, if you don’t mind * We’re back at structural conflict because the equity instrument used is a poor fit for the actual nature of the value being cogenerated, created and shared in this instance. This should not surprise us. Equity in its current form was designed, roughly, for ship captains who needed gold to hire a crew to sail to India and return with peppercorns. 20% of the gold, 20% of the peppercorns, and it was basically a one-shot deal. Next voyage, new equity. Of course this is an oversimplification, but not so very far from the basic roots of joint stock companies as you might thing: the East India company was a very long, very complicated, very expensive “voyage of discovery” (ahem!) to a far off land to bring back... well, anyway, the less said about all that the better, for now. Messy. But back to decaying equity. Vests in one year, and fades back over the following two. Perhaps our companies agree that they will continually give the other partner small slices of decaying equity at every forward step on their mutual collaboration, so that as some equity begins to decay from the start of the deal, new equity is being piled on at the back as larger and larger shared contracts arrive. How does this shape up? * Deal goes well, one company is acquired, the other does very well from the deal * Deal doesn’t go that well, nothing happens, and two years later everybody’s equity is back where it started * Of course, there are edge cases * What if the sale takes two years to negotiate? * What if the expected 20% turns out to be a poor reflection of actual value generated, and 50% would have been fairer, given the degree of real cooperation? * What if the quality is simply terrible, but it takes more than two years to find out? So the decaying equity instrument clearly doesn’t immediately, durably and reliably perfectly align interests between the two companies involved. On a good day or on a bad day it is probably better than using either cash (“position”) or equity (“jounce”) to align the interests of the two companies involved. In the situation where an immanent acquisition seems possible, and made more possible by companies working together, it probably aligns interests better than either of the commonly used available tools. You can imagine, in fact, a deal which has a whole stack of parallel financial instruments stacked up on top of each other to give a much more precisely engineered exchange of value. Imagine a deal looks like this: * 10% decaying equity *

[passage 33](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) companies working together, it probably aligns interests better than either of the commonly used available tools. You can imagine, in fact, a deal which has a whole stack of parallel financial instruments stacked up on top of each other to give a much more precisely engineered exchange of value. Imagine a deal looks like this: * 10% decaying equity * 5% permanent real equity * 30% profit share * 10% revenue share * exchange of non-exclusive royalty free IP licenses * and we’ll all spend Christmas together at a ski lodge in British Columbia Now we have a situation where in the core case, things line up on a whole stack of different levels in parallel. Perhaps the overall deal performance is pretty close to 20% decaying equity and fair pricing on products. Perhaps it’s a little different. But in the edge cases, where things go very right or very wrong, clearly the two deals we are imagining here (basket of aligned factors vs. all decaying equity) have very different performance characteristics. Complex instruments for managing diverse long term outcomes These stacked instruments act very much like stock portfolios, in fact: each one (even in a simple two party A + B deal) performs slightly differently across a range of scenarios: perhaps gross goes up but margins go down because of large orders. Perhaps profitability is hit hard by world events, but the share price is semi-stable because it is understood to be a temporary condition. The resilience of using a basket of indicators to align interests is likely to be much higher than using a single indicator, which might even be faked by (say) artificially reducing profitability using transfer pricing to an offshore subsidiary. This approach makes sense for all the same reasons having a portfolio of different stocks and shares and bonds and so on makes sense: absolutely peak performance may be reduced (vs. one lucky bet!) but the reduction in risk and the corresponding improvement in average performance is good enough that, in many cases, complex alignment will seem like a far better option than a simple profit share or a simple equity swap. A durable, broad-based alignment of interests can be so much more internally diverse than just setting a fair price or co-owning each-other’s equity! Now multiply this effect over a complex value network, including a diversity of investors from hedge funds through to equity crowdfunding from people who may also be customers (or even employees) of the value network. I’m going to push this one step further, and assume that in most of these entities, very nearly all of the value of the company is going to be exported via profit sharing and revenue sharing agreements, leaving the equity basically worthless except as a way of gaining democratic control of the companies involved. This approach of stripping the companies of all value by using all the cash flow to pay people or do things is really just an abstract concept so that in this

[passage 34](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) is going to be exported via profit sharing and revenue sharing agreements, leaving the equity basically worthless except as a way of gaining democratic control of the companies involved. This approach of stripping the companies of all value by using all the cash flow to pay people or do things is really just an abstract concept so that in this mental model equity = political rights rather than an instrument of speculation on the basis of future value accumulation. This is an absolutely artificial construct, but it strips out something quite cleanly: * equity-as-control * profit * revenue are now three cleanly separable things. Across a value network is very easy to imagine customer-vendor relationships working in a variety of ways with whole systems design meeting quite tough price negotiations. Then we can add supply chains within a value network, that may wish to do things like equalize profit down that supply chain by taking the payment from the final customer and splitting it fairly using open book accounting so that, say, everybody makes a 25% margin rather than one business making 5% and another 80% in the same fundamental business. Then businesses who wish to minimize their risk might find another company inside of the value network whose business is countercyclical with their own (they’re up, we’re down, and vise versa) and exchange profit as a way of lessening the overall risk profile of the business. The result is a notional value network which has very, very tightly aligned incentives in some places, and a looser edge in others, all held together using a variety of contracting instruments which exchange value, risk, profit, cash, control and various other kinds of assets in manners that keep everybody (hopefully!) smiling and, more importantly, pointed in the same direction without creating a new type of value network czar in the centre. Decentralized decision-making within a framework which tightly aligns incentives without creating undue durable interconnection is, I believe, the holy grail of realizing some of the possibilities of Coase’s 1940s models about networks of small actors being able to compete with and out-compete the lumbering corporate behemoths of his day. Of course there is no doubt that a sufficiently advanced behemoth (and I’m looking at you, Google-Amazon-Yahoo-Microsoft-Apple) could not use these kinds of mechanisms internally to create fluid and powerful internal capital markets and risk/equity sharing markets (in which one kind of risk is exchanged for another) resulting in companies in which the managerial stick is smoothly replaced by precise alignments of financial incentives to actual value generated, a little like Singapore’s bureaucrats getting bonuses if GDP increases. https://en.wikipedia.org/wiki/Cabinet_of_Singapore#2011_review You know, of course, that I’m assuming that the implementation method for a set of interlocking financial instruments of this complexity would be smart contracts, probably on a blockchain given that’s the only currently viable smart contract platform that I know of. So companies could easily have blockchains shared with vendors in which these kinds of mutual equity, profit, cash flow, and other

[passage 35](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) course, that I’m assuming that the implementation method for a set of interlocking financial instruments of this complexity would be smart contracts, probably on a blockchain given that’s the only currently viable smart contract platform that I know of. So companies could easily have blockchains shared with vendors in which these kinds of mutual equity, profit, cash flow, and other value are exchanged using smart contracts. However, what if a vendor’s assets are already in one blockchain type system, and another vendor is using another system and the two wish to exchange? These kinds of use cases are either going to be met with a forest of protocols for moving value from one blockchain to another (possible) or by One Big Blockchain in which nearly all of this activity occurs. This approach is probably preferable because it does not set up barriers to collaboration at a technical level, where people wish to exchange equity but cannot actually form the necessary vehicles to do so without incurring a severe technical overhead. So what kind of use cases might we envisage? The Dotcom Mutual Union We know from Paul Graham’s infamous Black Swan Farming article that nearly all companies that Y Combinator invests in die: a 90% failure rate is discussed (although I think this might be industry wide rather than YC specific.) 10% of companies become healthy little businesses, making their investors back around 10x what they put in, and this is what pays (in principle) for the sea of failures unleashed by dotcom capital culture. http://paulgraham.com/swan.html The money is made on the moonshots, the “unicorns” - companies that have brand names you have heard of, that generate wealth extremely quickly, and spectacular valuations. 400 million users at a couple of bucks a user is suddenly a lot of money, even if you only own 7% (the standard YC cut) of the resulting company. YC has obviously done rather well at picking winners: something like 600 investments [[double check everything!!!]] with substantial stakes in AirBnB and DropBox [[and maybe one other]] is a much higher batting average than one might expect for getting into the big money. They have done well, and are rightly famous. But where does this leave the founders failures? If the capital guys are planning for a 90% failure rate, does that imply the average founder should be planning to be 90% likely to fail? I certainly believe so, but I’m a pessimistic jerk driven by pure reason and unholy, almost machine-like ambition, right? I can accept those odds of failure (see Severe Pandemic Flu Strategies[[]]) and still do brilliant work day in, day out, for years. http://guptaoption.com/6.SPRS.php So I’d like to be able to optimize my time at the roulette table by spreading my risk more intelligently. If my startup has a 90% chance of failure, just based on general principles, and I’m not investing in 600 companies so I have a vastly higher chance of getting to the all-elusive moon shot, then my expected outcome

[passage 36](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) http://guptaoption.com/6.SPRS.php So I’d like to be able to optimize my time at the roulette table by spreading my risk more intelligently. If my startup has a 90% chance of failure, just based on general principles, and I’m not investing in 600 companies so I have a vastly higher chance of getting to the all-elusive moon shot, then my expected outcome is failure and... return to the job market or try again. 90% odds of failure are not great odds even if the prize for a home run is that you get very rich. In fact if it wasn’t for the fact that the booby prize in the dotcom game is $100,000 a year working for Google, the entire thing would have fallen to pieces years ago because of the unacceptable risk profile. So what’s a boy like me to do to get a shot at the big time, the brass ring, the equity-in-the-moon-shot story that so animates most of silicon valley at some level? Here’s my suggestion: we should share equity with people who are doing companies that are nothing, nothing at all like our own, on a semi-random basis to avoid the risk our biases will blind us to the odds of success for somebody’s venture. This is more or less what the YC investors are doing: they spread their risk over 600 companies. Why shouldn’t I do that too? Hell let’s round it up to a thousand for easy math. So let’s think about this from the perspective of an early employee, a 1% equity holder in a significant enterprise. Suppose if everything goes well, the payout is $1 billion, which gives our 1% holder a handy $10 million payout when the shares are liquidated. * I keep $5m, and $5m is split 100 ways to my peers, $50k each. On the other hand, if 5 companies in that network of 1000 what I’m sharing equity with go big, that’s $250k per person in the risk pool. Am I willing to give up $5m I may never see in exchange for $250k that I’m very likely to get? Hell yes. And there’s a lot of room for strategy here: 10% buy in rather than 50%, or some kind of valuation panel that figures out what they think the equity is worth and then makes an offer in return for a person joining this dotcom equivalent of a labor union. Perhaps there could be half a dozen different risk pools that people could join one or more of, depending on how much of their potential future profit they wanted to exchange with other Here’s the fascinating thing: I think that companies where most of the staff are members of these risk guilds - risk unions - are actually going to do better than the average, because membership of a risk guild increases the likelihood that I, personally, am going to do OK from this venture. * $10m or nothing, vs * $5m or $250k really is a no-brainer. And

[passage 37](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) that companies where most of the staff are members of these risk guilds - risk unions - are actually going to do better than the average, because membership of a risk guild increases the likelihood that I, personally, am going to do OK from this venture. * $10m or nothing, vs * $5m or $250k really is a no-brainer. And companies with engineers who know that in all probability the price of a small house is going to fall on them simply because they’ve traded away a slice of their future billionaire bag... which they’re less than 1/100 likely to see anyway? I think employees in companies with that kind of safety net are far, far more likely to swing for the fences than people who are in companies where the logical strategy is to pack away the dollars now, and pray that when it all goes wrong you won’t lose your house. The Y Combinator doctrine as described in Black Swan Farming is entirely about the need for risk, risk and more risk because the 10x companies just don’t really do it for investors, and mutualization of risk for employees actually aligns the incentives for the employees and the investors far, far better than the $10m or nothing strategy. As an investor, you want risk-greedy madmen shooting for a $1bn Unicorn payout, and the big enemy is successful companies that play it safe to protect risk shy founders. By aligning staff, founder and investor interests, in the pursuit of unicorns, horizontal staff risk pools - mutuals for dotcom option risk - could seriously transform the industry into a fairer, more performant version of itself. And we would reinvent the labour union while we were at it. It all drops out of portfolio theory if you have the financial instruments necessary to make doing the optimal thing affordable, efficient and hassle-free. Let’s build one of these tomorrow! == energy mutuals [[tk]] == provenance and other supply chains [[tk]] == next gen financial instruments from Robin Hood Coop? [[tk]] [[A COUPLE OF PRETTY DAMN CHUNKY CASE STUDIES GO HERE, ILLUSTRATING THAT ALL THIS IS A LOT NEARER MARKET AND MORE CREDIBLE THAT IT MAY, AT FIRST, SEEM.]] [[fortunately we have the case studies to write up]] Enabling a new age of better financial machines So let’s restate the case from the beginning * First we considered the little red cash box, and the many million pages of law required to bring a petty cash drawer in an ordinary company into existence * Secondly we considered Dog Atheism, showing that the way things are is only one way they could be, and our historic models even (especially!) if they are thousands of years old can be out of step with scientific reality Together, these factors are the loosening up and shaking out of old ideas of, in fact, the status quo. The default reality that we operate in is in fact extremely arbitrary, and we believe it to be simple and objective

[passage 38](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) our historic models even (especially!) if they are thousands of years old can be out of step with scientific reality Together, these factors are the loosening up and shaking out of old ideas of, in fact, the status quo. The default reality that we operate in is in fact extremely arbitrary, and we believe it to be simple and objective for the same reason that I suppose fish lack an awareness that water is wet. In fact if we were to posit the little red cash box in an environment in which one had never existed, and then showed the truck load of paper required to regulate it (complex because of the context it exists in) people would laugh at us. Any asset within a conventional legal and corporate structure exists within this complexity: the simplicity of the part says nothing at all about the complexity of the whole. In problematizing the existing structures, by showing their amazing complexity, built up one broken-and-patched rule at a time, I want to make conceptual space for an alternative to exist. Just because a new thing looks complicated is no reason to argue that it cannot exist, succeed or grow. The everyday things around us are already incredibly complicated, and we have simply learned how to navigate through the simpler, easier, cheaper parts of that complexity in our everyday affairs. Similarly with our good friend the canine and Dog Atheism: a single species from dog to coyote to wolf, canis lupus. Science makes it possible to look at what we think we already know, and to see it again. The same is true of technology, from the microscope and the telescope, through to (for example) large scale monitoring of search by companies like Google. They build new models of human nature based on an ability to observe which only recently became possible. We cannot cling on to the known and the familiar, assuming that things are what they once were, and never get caught out. Dogs are not dogs, phones are not phones, and language lags behind reality at all times, because change is quick and culture is slow. These days the gap is so huge the conversation is fragmenting. So between understanding fully that the systems we have are complex and arbitrary, and that the old stories we drag heavily around about the world are badly out of date, a legitimate window of possibility exists: new things, with a similar level of complexity to the current instruments we use to manage companies and regulate trade, but closer to the modern technological base (rather than being based on quill-and-vellum ledgers) could come into existence. * Then we tour around the highly speculative idea that cash and equity are a bit like position and momentum, and that above them are a set of higher order operators which could be used to identify value and align interests in a way that neither cash nor equity currently can, including concepts like profit sharing and revenue sharing.

[passage 39](https://docs.google.com/document/d/1irVQ7bHgWAn5dkf7ucKkiXW_PauTFXB7EnPNzCzKR9E/edit) existence. * Then we tour around the highly speculative idea that cash and equity are a bit like position and momentum, and that above them are a set of higher order operators which could be used to identify value and align interests in a way that neither cash nor equity currently can, including concepts like profit sharing and revenue sharing. * Then we then go on a tour around a couple of proposed new systems for small company cooperation, based on the idea of sharing risk and reward in new ways. We take a look at “decaying equity” as one possible construct which might suit one possible situation better than either cash or real, permanent equity does, as an example of the kinds of things that turn up when you stop to look at the financial instrument situation again. Now, at the end of this long and arduous thesis, I have finally built out enough of the necessary language (and if you think it was hard to read, it was so much harder to write) to express the point of the whole piece simply. Here it is. Calculus for companies Building companies with current financial tools is like engineering complex machinery before calculus was invented. It is my belief that smart contracts will enable us to build financial instruments which actually represent modern value accurately enough to fully enable efficient and effective trade. Enormous value and productivity will be liberated as these tools are created, built out, and widely adopted. There’s a lot of trial and error. There are a lot of unnecessary flying buttresses. There are a lot of steam boiler explosions. Over-all, whatever it is we are doing, in business we appear to be flying by the seat of our pants, against a sea of constantly jostling, changing forces. But what if a lot of that is because we lack the necessary tooling to appropriately hedge and share the risk/reward all the way through the networks which support us and our companies? What if, in fact, with the right set of tools the chaos of business could be buffered and smoothed to remove a lot of the incidental chaos, fog of “war” and unnecessary conflicts? Such a world is hard to imagine, but perhaps it is harder to imagine than to implement. Generation of complex instruments which divide up reward (expressed as a variety of instruments, from cash through to equity via cash flow and dividends) is quite simple in a smart contract environment: define the rules, and write a little code to implement them, relying on the underlying power of the blockchain for security and stability. For example, let’s imagine a four level value exchange contract between two companies. They agree that they will exchange cash, a percentage of revenue, a percentage of profit, and some equity as part of a package of work. Let’s say that in addition there is a flow of physical goods. A smart contract to implement this might be a couple of

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Continues in https://guptaoption.com/texts/242-4.md (part 4 of 4).
End of [242] Dog Atheism: on smart contracts, risk, and value networks, part 3 of 4. Its connections are at the top of this file; the map is https://guptaoption.com/llms.txt.