It’s no secret that wealth inequality has steadily risen post World War II. Recently, Oxfam released a report showing how the COVID pandemic has exacerbated the inequalities between the very wealthy and the rest of the population. This chart from the World Inequality Report 2022 succinctly portrays the point. It shows the average wealth growth over the period from 1995 to 2021 (that’s including the pandemic) across all wealth groups. Clearly, the richest people saw their wealth increase the most.
The pandemic has laid bare just how unequal our system is. Large wealth inequality leads to lower levels of economic growth and lower satisfaction among population. The billionaire founder of the world’s largest hedge fund Bridgewater Associates, Ray Dalio writes about this in his latest book “Principles for Dealing with the Changing World Order“, stating that large wealth gaps produces conflict and vulnerability.
The Haves and the Have Nots
The wealth inequality basically boils down to ownership: those that have assets and those that do not. Those who have assets, will see their wealth go up, while those that don’t are left behind. The point is that the ones who are likely to have assets are the wealthier parts of the population. A recent study from the New York Times showed that wealthier people are far more likely to be invested in the stock market than middle-class and poorer people. This chart shows that only 46 percent of households in the 40th-49th percentiles of net worth have any brokerage or retirement accounts that include stocks, while among households in the 80th-89th percentiles, 84 percent are invested in the stock market.
It’s therefore no surprise that the pandemic led to increased wealth inequality. The wealthy own the stocks, so when stock prices rise, so does wealth inequality.
It’s all about “access” to value
This disparity has given rise to platforms like Robinhood that democratised access to financial markets by enabling anyone to invest in stocks with zero commission. This gave the regular investor the same opportunity as a big investor, without have the commission erode the return on investment for the little guy.
More broadly, people don’t have equal access to value. For example, to be able to invest in real estate in the US, you generally have to be an accredited investor, meaning you need to have an income of $200,000 a year or have a net worth of $1 million or more. Yes, there are instruments like REITs, but the point is small investors don’t have the same access to value as large investors. The same thing applies to investing in early stage ventures or art. These are either too high tickets for the average individual or regulation prevents them from participating (as if the amount of money someone may have serves as a single gauge to determine if someone is capable enough to decide what to do with their money).
Democratising access to value is a value proposition that has been applied many times before. An early example of this, coming from 1986, is NetJets. It offered individuals and corporations access to private jets through fractionalised ownership, a service previously unaffordable to most people. Mutual funds provide another example of value creation through increased access. This innovation made it possible for even those with modest wealth to build diversified investment portfolios. Democratised access to value reduces wealth inequality!
Enter web3, the great democratisation of access to value
For this first time in history, web3 provides a way to capture value digitally, liquify it through tokenisation, attach ownership to it and make it transferable across the internet.
In web3, tokens are internet-native atomic units of value that can represent anything of value in a digital form. This new form of value democratises access to value in two different ways. The more obvious one is that, through tokenisation, we can offer fractionalised ownership of assets. Basically, the NetJets model, applied to many different types of assets, from real estate to expensive art. But there’s an even more exciting category of value that was previously entirely unaccessible to the individual, which is now being made accessible through innovations like DAO’s, NFT’s and social tokens.
In web2, value is generally captured through platforms. A platform derives its value from the users that are on the platform. For example, social media platforms derive their value from the users that are interacting with each other. The more user interaction, the more advertising revenue. The value that is created on the platform, however, is only being captured by the shareholders of the platform. The users don’t receive any of the value they themselves create. In web2, you would only have access to the value of a platform once it’s publicly traded. Remember, though, that most of the value is already created by then, as the users of the platform will have helped it reach significant scale. The only people who will have had access to that value are the company founders, early employees that received stock options and VC’s. The ones that are left out are the users and the average investor. There have been platforms that have tried to give their users shares in the company, but the legal hassle to make the a reality is enormous, making it realistically impossible.
Tokens, on the other hand, are internet-native atomic units of value that are as easy to transfer as information. This means that for the first time in history, we are no longer limited by the impracticalities of the physical, paper-based world that kept value locked up in too many places to count. In the above example, with tokens it’s totally feasible to reward users exactly for their contributions, providing them access to (part of) the value they add on the platform. Decentralised social media offers a more democratised model to distribute the value that is being created where all stakeholders (developers, investors and users) get rewarded proportionally for the value they add to the network. These mechanics enable tokenised networks to radically democratise access to value in web3.
Democratising access to value has always been a winning value proposition, which is why web3 is inevitable. And in the process of democratising access to value, it will inadvertently reduce wealth inequality.