This week's newsletter continues to explore how technology changes the distribution of rewards in different professions. Earlier pieces on this topic include:
The Risk-Sharing Economy
In 1997, David Bowie issued "bonds" that enabled their holders to earn a percentage of royalties from his back-catalog for the next ten years. An owner of a $1000 "Bowie Bond" would receive a 7.9% coupon each year. Prudential Insurance bought the first batch for $55 million.
At the outset, these securities seemed like a safe investment. Bowie's songs were played regularly on the radio, and his albums were selling well, even decades after they were published. Royalties from his work generated a steady income stream that was likely to continue. Bowie Bonds received a triple-A rating from Moodys, indicating they were as safe as U.S. government bonds.
But as online music sharing grew in popularity, Bowie's album sales declined, and the bonds started to trade at a discount. Bondholders were looking to sell them, expecting a further deterioration in the underlying income stream's quality. In 2004, Moodys downgraded Bowie bonds to Baa3, eight levels below its opening rating and one level above "junk." The bonds ultimately recovered somewhat thanks to the emergence of new, legal ways to listen and pay for music online. In 2007, the original Bowie bonds reached maturity and were repaid in full. But the journey was turbulent.
Bowie was not naive. He didn't issue the bonds because he thought his income would remain stable. Being a rockstar was a precarious existence, to begin with. But Bowie understood that the internet was about to make it much more precarious. As he told The New York Times in 2002:
"I'm fully confident that copyright, for instance, will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing… Music itself is going to become like running water or electricity."
Issuing the bonds was a way to share his risks with people who were more optimistic about the future of online media — or were passionate enough to want to own a "piece" of David Bowie, regardless of the risks. It was an experiment in new ways to make money from music, assuming that the old ways would soon be irrelevant.
It took two decades, but the music industry figured out how to make money on the internet. Music is streamed like water, customers are paying for it, and labels and artists are making money (but still not enough). Being a rockstar is still precarious, but the internet increased the overall number of people who can make money from music and how they can monetize their talents.
Rockstars will be fine. The problem is the rest of us.
ISAs going mainstream
Music is not the only thing that flows like water. So does any other type of content and many goods and services. On the internet, every individual has the power to become a star — to reach every person on earth. And a growing number of individuals face the anxiety that was previously exclusive to rockstars: the fear that whatever works today is just a fad and that someone or something will shortly come along and make you obsolete or expose you as a fraud.
But technology does not only democratize risk. It also introduces new ways to share and mitigate it. Back in 1997, Bowie had to work with investment bankers, rating agencies, and insurance giants to issue and sell his bonds. It was an expensive and time-consuming process that only a wealthy, established artist could pull off. Today, anyone can sell a piece of their future earnings to pay for their present lifestyle. One way to do so is via Income Share Agreements.
Lambda School enables students to sell a piece of their future earnings in exchange for tuition. The school teaches in-demand skills such as web development and data science. Courses can be completed remotely and are highly practical, focused on getting students hired once they complete the course. Lambda students pay nothing upfront but promise to give the school a share of their future income:
"The Lambda School Income Share Agreement (ISA) is a form of deferred tuition under which you agree to pay 17% of your post-Lambda School salary for 24 months, but only once you're making more than $50,000 per year. The ISA is capped at $30,000, so you'll never pay more than that for any reason. And if you don't get hired? You never pay."
If the skills end up being useless, the school will not get paid. This is true even if the student ends up earning money while working in another field. As Lambda's website points out, "you only have to make monthly payments when you are working in a 'Qualified Position' [which means] any role in any field where your participation in Lambda School helped you get the job."
ISAs are increasingly popular, and not just in the tech industry. Avenify offers a similar arrangement for aspiring nurses. Purdue University and other traditional schools offer a similar arrangement for students in a variety of academic programs. More than 1,600 Purdue students have entered such agreements so far, funding $17.9 million in tuition.
Students can rely on ISAs even if their university does not offer them. Platforms such as Edly enable individual investors to finance other people's education in return for a share of future earning. Investors around the world are constantly looking for alternative investments that are uncorrelated with traditional assets and promise a steady return. ISAs are one more investment product to add to the portfolio.
Isn't this the same as traditional student debt or, worse, indentured servitude? Not really. As Meratas, a software provider that helps organizations issue and manage ISAs, explains, ISAs do not accrue interest, have no principal balance, and do not trigger a penalty if the amount that students end up repaying is lower than the original cost of their studies.
ISAs are not for everyone and have their detractors. Overall, they are pretty quaint. They offer a way to share the risk of studying an in-demand profession. It's a far cry from making a 10-year bet on a rockstar.
But some people are already experimenting with more radical ways to finance their career.
Want a piece of me?
In April 2020, French entrepreneur Alex Masmej made an announcement on Twitter:
"I am announcing a $20,000 sale against 1M $ALEX (10% of supply) to fund my life as a founder in SF, where I'll move next month
Terms TBD but should be a mix of my net worth/yearly revenue in 5 years."
In English, this meant Masmej was selling digital tokens under his own name ($ALEX). The token sale would sponsor his entrepreneurial journey. Owners of these tokens will receive certain rights over Masmej's future income and career decisions. In a separate blog post, Masmej explained how he plans to use the money he would raise, and what benefits token holders would receive.
His plan was to "move back to San Francisco with a small safety net to maximize my potential. " In exchange for enabling Masmej to work in peace, investors would receive 15% of all income he would generate over the following three years, "capped at $100,000, distributed quarterly." Masmej also promised to share regular updates with token holders, outlining his plans and lessons.
In addition to regular income, owners could also benefit from value appreciation. As Alex (the person) becomes more successful and well-known, other investors might want to buy more $ALEX (the tokens) to own a piece of Alex's future earnings.
Masmej described the process as a "blend between a small Income Sharing Agreement and a human IPO." A few years later, Alex decided to take things further and gave token holders the right to vote on various life decisions — such as whether he should eat meat, when he should wake up each morning, and what type of exercise routine he should follow.
The $ALEX story sounds frivolous, but it allowed a young man from France to finance a trip to Silicon Valley and enabled him to share the risk of building an independent career. Unlike David Bowie, Alex Masmej was not a celebrity and did not employ bankers. He used open-source technology — the Ethereum blockchain — to create a financial derivative that anyone on earth could buy.
Masmej recruited other humans to share the risks of his early career in exchange for a share of the rewards. The same method would soon be relevant to all of us.
Celebrities and online influencers are already using digital tokens to monetize their popularity and share the risks of being a star. Bitclout, for example, enables celebrities to sell Creator Coins that fans can buy and sell.
Why would anyone want to buy such a thing? Bitclout explains:
"Creator coins are a new type of asset class that is tied to the reputation of an individual, rather than to a company or commodity. They are truly the first tool we have as a society to trade "social clout" as an asset. If people understand this, then the value of someone's coin should be correlated to that person's standing in society.
For example, if Elon Musk succeeds in landing the first person on Mars, his coin price should theoretically go up. And if, in contrast, he makes a racial slur during a press conference, his coin price should theoretically go down. Thus, people who believe in someone's potential can buy their coin and succeed with them financially when that person realizes their potential. And traders can make money buying and selling the ups and downs. "
Beyond pure speculation, fans can use the coins to deepen their relationship with creators. A celebrity can set up an inbox that only coin-owners can send messages to. Or let fans bid for the celebrity to mention their name on an Instagram or Twitter post.
By letting your fans own a "piece of you," you also incentivize them to support your continued success. If you own an Elon Musk Coin, it will make sense for you to promote Mr. Musk and try to get other people to buy his coins. By increasing demand for the coins you already own, you can become wealthier. And those who buy the coins after you will continue to convince others. And as long as the story is convincing and there are enough new people to convince — the coins will go up in value.
Celebrities are lucky to be able to make money in this way. But they also have no choice — being a star is a precarious existence, riddled with anxiety. And this anxiety and precariousness are no longer exclusive to celebrities and entrepreneurs.
Everyone is a (shooting) Star
Human work is becoming more creative. More of us spend our time producing code or content. The ability to work remotely means we're competing in a much bigger pool. To stand out within this giant pool, we are increasingly dependent on algorithms that determine who gets to hear about us and how our work is shared.
This means that more people have the opportunity to become superstars in their field. It also means that high-performers in a growing number of industries are facing unprecedented levels of uncertainty and anxiety. As I mentioned in The Rise of the 10X Class and in Surviving Abundance, technology is converting many professions from unscalable to scalable:
"Non-scalable occupations are the ones that must be performed in-person and are constrained by geography. A doctor, for example, can only be in one place at a time.
Scalable occupations are those that are not constrained by the physical world. A movie star or an author can reach millions of people at the same time. Scalable occupations offer more upside, but they also offer more risk.
The distribution of rewards for scalable tends to follow a power-law distribution. Meanwhile, the rewards from non-scalable occupations follow a more normal distribution.
In the 20th Century, most middle-class occupations were non-scalable. They had to be performed in person, in an office."
As more occupations become scalable, jobs that were previously stable are becoming risky. Telehealth enables superstar doctors to serve customers in markets that were previously inaccessible to them. Connected fitness devices like Peloton allow superstar instructors to serve thousands of customers at a time, making the average instructor in your local gym redundant. The same dynamic applies to many other service and knowledge jobs.
How to handle all this risk?
Masmej's human IPO experiment falls into a new field that Jesse Walden calls "The Ownership Economy." Public blockchains like Ethereum make it easy to issue and trade tokens to reflect ownership rights over any physical or digital product. As I mentioned in an earlier piece, these tokens are not simply "certificates of ownership"; they can be pre-programmed to behave in a certain way (for example, pay a dividend each time a predefined event happens).
Alex Mesmaj's experiment was unique when it happened. But today, any person can easily issue their own token and let other people trade it. And when more occupations become scalable, even the most succesful professionals are facing economic uncertainty.
The best way to handle the risks and uncertainty of scalable occupations is to share them. Doctors or fitness instructors or writers or investment advisors worried about the future can issue tokens and let their fans and customers participate in their careers' ups and downs.
And just like with celebrities, sharing risk is only part of the story. By letting other people invest in you, you are incentivizing them to promote your own story and do their best to increase your tokens' value.
In such a scenario, every career becomes a pyramid scheme. If you can attract enough people to buy your tokens, and they can attract enough people to buy even more tokens, the whole enterprise will continue to increase in value. This increase will happen regardless of how much revenue you can generate from doing your actual job. And it will continue until you run out of stories to tell, or until you run out of people to tell stories to.
There are a lot of people on the internet.
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