Will DAOs create a Facebook value trap?

Summarize

  • On paper, the Meta platform appears to be a very attractive investment, but new threats to innovation from Facebook, Instagram, and WhatsApp could weigh on its long-term upside.
  • DAOs (Decentralized Autonomous Organizations) are a compelling new type of institution that will continue to grow in utility and sophistication. This can challenge or even disrupt traditional models.
  • Experimental social media projects have been programmed into cryptocurrency blockchains. These could one day liberate users from the data gardens they have limited (if any) property rights to.

introduce

Facebook’s revenue has more than quadrupled (in LTM terms) since 2016, and its growth is as dramatic as the company’s growth plans. In 2020, Facebook (NASDAQ: FB) made a big and failed push into the digital currency market that could have brought Facebook to the tabletops of central banks by creating an SDR tool for ordinary people to use. The year ended with Facebook being accused of colluding with Google (NASDAQ: GOOG) to illegally rig an online ad auction.

The entertainment in 2021 is undiminished. Facebook accidentally labelled the Declaration of Independence as hate speech, reflecting the wisdom of launching “Instagram Kids,” and has been accused of colluding with Google to circumvent Apple’s new, stricter privacy protections. The anticipation of not being able to track users online posed a huge threat to Facebook’s business model, so the company changed its name to Meta platform Inc., reflecting its focus on its Oculus VR division as the company’s future.

Much of the year has been embroiled in controversy. Frances Haugen started her career at Google and earned an MBA from Harvard University with funding from Google. Less than 24 months after she joined Facebook, she leaked tens of thousands of internal Facebook documents to The Wall Street Journal. Few of the documents were particularly surprising, and they would have served as the basis for Jaron Lanier’s 2018 “Ten Arguments for Deleting Your Social Media” Accounts) footnote.

However, Facebook has suffered national stigma, while YouTube’s CEO (the former sister-in-law of Google co-founder Sergey Brin) has simultaneously claimed that YouTube is actually “valuable for teenage mental health”. Google’s former CEO and chairman (who spent Election Day 2012 in Obama’s war room) accused Facebook: “They know what they’re doing.” It’s worth noting that YouTube is a key venue for the QAnon conspiracy, One conspiracy YouTuber alone has garnered 33 million views.

It’s also worth mentioning that a former Google employee recently created a lobbying group to “remind Democrats that tech companies are on their side when it comes to progressive priorities.” Google just happened to dodge heavy criticism of Meta Platforms.

Feudalism at Facebook

Given the steady and impressive growth of Facebook and Instagram, it’s not hard to see why arguing that Meta, which has become an everyday transaction, is a technology-driven value game. Facebook’s 2010 revenue was less than $2 billion, but Meta Platforms’ long-term earnings were $112 billion. Long-term cash flow is $53 billion. Meta currently trades at 16 times TEV/EBITDA and an attractive price-to-earnings ratio of 24 times. Balance sheets are flooded with cash. Even qualitatively it bodes well, with Apple reportedly being forced to pay a $180,000 bonus to curb Meta’s looting of Silicon Valley talent.

Few people discuss Facebook and Instagram’s business model, which is a bit like monetizing surveillance. Facebook and Instagram users (who are products themselves) generate their own private data on these platforms and other sites they visit (where they are constantly tracked). For non-users, Meta simply creates a secret configuration file with available data.In other words, we are all Facebook users whether we have social media accounts or not.

The private data of over 3 billion people is the property of Meta Platforms and is owned by Meta shareholders. This data is used for sales advertising and other analytics. It’s a very profitable business, generating about $48 in total net profit for each of Facebook’s current 3 billion active users over the past 10 years (year 10 using the LTM basis). On top of that, it’s about $145 per user. At current rates, that would equate to $374 in revenue per user and $134 in net revenue over the next 10 years, all else being equal.

The venture capital firm Andreessen Horowitz, an early investor in Facebook, described the business model of Facebook and other “incumbent platforms” as feudal in private presentations, where users don’t have their own data serf. Horowitz, which recently raised $9 billion in funding, has been a pioneer in the Decentralized Autonomous Organization (DAO). In Anderson’s words, this alternative to joint-stock companies could return power over data to users, just as private property rights freed farmers from serfdom.

This will dramatically upend the business models of Facebook, WhatsApp and Instagram.

DAO theory

Will talented software developers bring their talents to DAOs and collaborative workspaces?

What is a Decentralized Autonomous Organization? There are many different interpretations, and most involve a change in the idea that contributors and stakeholders can be organized around decentralized projects built on the underlying protocol of a particular cryptocurrency. But this definition ignores the fact that cryptocurrency projects are essentially the same thing.

Take Bitcoin, for example; as Bitcoin’s blockchain network becomes more practical, Bitcoin’s developers have been rewarded by seeing the value of their ownership in Bitcoin go up. The same goes for Bitcoin’s massive infrastructure.Developers have created new software features for Bitcoin, such as the Lightning Network, which enables cheap transactions in El Salvador. Digital infrastructure companies like Core Scientific (currently in the process of merging with Power & Digital Infrastructure Acquisition Corp. (XPDI)) have made Bitcoin the most secure computer network in the world.

These independent groups collaborated to create Bitcoin. So Bitcoin itself is a DAO, although most people don’t see it that way.

Ethereum is a more complex example. Ethereum is backed by a core group of developers based in Switzerland. Ethereum is not only a form of digital currency, but also a highly sophisticated platform that allows developers to build decentralized applications and smart contracts. Developers have taken advantage of this feature to create applications such as domain name services, automated market makers, and various digital assets called NFTs. These projects are DAOs where different parties come together not only to make them work, but also to make additional improvements.

There is a general belief that the existing social media platforms suck and we need better ones. This is true for different reasons…the concept of engagement, and the kind of engagement that is valued, is very inconsistent with quality.

Vitalik Buterin (7/21/21)

Ethereum founder Vitalik Buterin even floated the idea of ​​creating a complex compensation scheme so that if an Ethereum developer’s idea turned out to be a significant contribution after the fact, they could be rewarded retroactively to the network. Of course, as the functionality and ubiquity of the network increases, users will also be rewarded. One fund manager believes that Ethereum could eventually touch half of all financial transactions.

Whether we think of DAOs as cryptocurrency-based organizations or cryptocurrencies themselves as DAOs, this is a new and powerful way to organize economic activity.

Will the Metaverse Decentralize?

In 2016, the CEO of Meta Platforms walked past rows of telecom and tech executives attending a trade show.

Today, these concepts and innovations are expensive to implement, although they can scale quickly. Executing a simple smart contract on Ethereum can cost hundreds or even thousands of dollars. Hosting files directly to the blockchain can cost hundreds of thousands of dollars (which is why many NFTs reside on traditional servers). That said, much of the infrastructure underpinning blockchains is still centralized, and decentralization is costly.

But this will change. There are projects like Solana, which provide the functionality of Ethereum with credit card-like speed, scalability, and cost. IPFS and Filecoin provide decentralized file storage; Internet Computer takes it to the next level with what can be considered decentralized AWS. There’s even the Helium Network, which rewards users for creating decentralized wireless infrastructure. It is worth mentioning that Anderson supported all of the above projects.

There are also projects aimed at creating decentralized, censorship-resistant social media platforms. Ethereum’s Buterin said it’s one of the prospects he’s most interested in. WhatsApp rival Telegram recently attempted to launch a blockchain-based decentralized computer network (the SEC intervened, but the situation continues). There’s even Steemit and THETA, both YouTube competitors. In theory, anyone could be rewarded for deploying supporting infrastructure, just like they do in Bitcoin mining.

These innovations pose a long-term threat to Facebook’s business model, and may also be limited by stronger privacy protections. In response to these challenges, Meta has moved to the Metaverse strategy by combining virtual reality video games and social media, driven by Meta CTO Andrew Bosworth.

We continue to expect that in 2021, regulatory and platform changes, especially recent iOS updates, will bring increasing resistance to ad targeting, and we expect that the iOS update in Q3 will generate a larger Impact.

– David Wehner, CFO, Meta Platforms (7/28/21)

Meta’s response to this disruption is to try to ensure that the digital world is entirely Facebook’s property. Until recently, all Oculus users were required to have a Facebook account. While Facebook colluded with Google to bypass Apple’s new privacy protections, Oculus is also working on integrating VR with Apple Health. The company is even exploring combining NFTs with digital wallets, the widgets offered to those users on the Metaverse data park.

Andresseen’s advice is pragmatic, suggesting that existing platforms (Meta Platforms) should “step forward,” a tongue-in-cheek suggestion to Sheryl Sandberg, COO of Meta Platforms. Andresseen likened the situation to Kodak, suggesting that these companies may choose to use legacy technology to go bankrupt.

What exactly does this look like when these new institutions are so disrupting core business models? Should governments force Facebook and Instagram to open up interoperability with other decentralized platforms (DAOs) to their users? What does this mean for investors? Can companies restructure to tokenize users’ data assets, allowing them to purchase a new DAO platform? Such a DAO platform would allow users to choose how, when, and where to put their data Monetize it?

in conclusion

Vitalik Buterin of Ethereum; in just six years, Ethereum developers and contributors have created a platform worth $383 billion. Meta Platforms is worth $913 billion.

The tech industry is full of giants of the past that failed to adapt to the new environment. Cisco, once the world’s most valuable company, has never been valued at more than 20 times TEV/EBITDA since 2004, despite significant growth.

It is too early to tell whether decentralized innovation can disrupt entrenched social media platforms. But given that the cost of creating competing platforms is falling rapidly, they can scale quickly, and the frictional cost of switching is low (if not a reward to users), the potential advantages of Meta Platforms may be limited. Interestingly, Jared Cohen, the head of Google’s paramilitary division, has joined Andreessen as an outside advisor on cryptocurrency.

While these threats could limit the monetization of Meta Platforms’ potential value, creating a value trap, it wouldn’t be surprising if Meta’s stock rose again in the near term. The slight change in interest rates (quite ironically) has sparked a speculative frenzy in stocks of companies that a few weeks ago were seen as having limited or lackluster future prospects.Facebook fits the “value” profile very well, even if it could end up being a value trap.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/will-daos-create-a-facebook-value-trap/
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