The Social Capital Market: Commoditized, Bundled, and Unbundled

TL;DR

It is a basic human need to accumulate social capital and convey status. Technology changes how social capital is built, distributed, and consumed, from the printing press to the Internet. But never has it been commoditized. Crypto/web3 is on its way to commodify social capital, creating a market where social capital can be manufactured and traded. This social capital market has exciting and terrifying consequences (duh). Technology cannot fix human problems.

Preface

If venture capitalists' superpower is to turn anything lackluster into buzz; if entrepreneurs’ superpower is to turn ideas into reality; then social scientists’ superpower is to tell you -- that there is nothing new under the sun.

No wonder we don’t get rich or make friends.

Today I start out with what is not new under the crypto sun -- social capital. And trace through what could be new, exciting, and terrifying when social capital is commoditized, bundled, and unbundled by crypto/web3.

The Urge to Accumulate Social Capital and Convey Status

There is power in holding onto what doesn’t change about human nature when trying to understand the constant change of technology. In Chinese, we say -- 换汤不换药 (same medicine, in a different soup). So here is the old idea -- social capital, and its many manifestations from expensive watches all the way to the buzziest Bored Ape Yacht Club (BAYC) [1], which inevitably will be replaced by something shinier. Nothing against BAYC. It’s just a fact of life.

Capital comes in many forms: economic, cultural, and social. Pierre Bourdieu defines social capital as [4]:

 "The aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance and recognition." 

That’s a mouthful. In plain English, Social capital refers to what your social ties can offer you. Social capital can be in the forms of your partner cooking for you (actual resources to a more or less institutionalized relationships of mutual recognition); that one friend who will always be there for you when you have a bad breakup (potential resources); alumni who can refer you to jobs (actual or potential resources which are linked to possession of a durable network).

When social capital accumulates, one gains social status. Social status then can be conveyed in verbal or nonverbal ways, and then distributed and consumed. Think about influencers. Or someone bragging at a party that they know so and so. And how creative we keep finding new ways to gain social capital and signal social status.

One particular form of social capital is belonging to a specific group, and usually the more exclusive, the better. The royal families are probably the OG exclusive clubs. Fancy schools. Elite companies. Memberships to certain establishments. Being invited to private parties. Owning particular things (e.g., cars, handbags, etc.).

Normal people like me would think it’s crazy to pay hundreds of thousands of dollars for an Hermès Birkin bag. But it’s the very fact that it’s so nonsensical for normal people that makes it special. According to handicap principle [3, 8]:

“Costly signals must be reliable signals, costing the signaller something that could not be afforded by an individual with less of a particular trait.”

In other words, being stupidly costly is a feature, not a bug. And being able to do that, puts one in a special social status group, which in turn produces more social capital.

How Technology Changed Social Capital and Status

I probably do not need to dwell too long on this point. Technology changed how we communicate. And communication is key to forming and consuming social capital.

From the printing press to the Internet, and most recently, social media, have significantly amplified the scale and importance of social capital. LinkedIn’s entire business model is on formalizing social capital. And I probably don’t need to go into details about Facebook and Twitter.

What’s interesting is that technology has made social capital efficient, but not necessarily new. For example, Mark Granovetter in his 1973 article The Strength of Weak Ties wrote about triadic closure [9, 10] (first suggested by Simmel in 1908):

“Triadic closure is the property among three nodes A, B, and C (representing people, for instance), that if the connections A-B and B-C exist, there is a tendency for the new connection A-C to be formed.”

But not until we have Facebook can we quantify this on a large scale. The whole field, computational social science and network science went on steroids -- and that’s why I have a degree and a job to begin with.

But here is the catch -- one crucial link is missing -- you can not trade social capital, at least not legally, nor at scale.

Crypto and Social Capital Commoditized

The genius of crypto and NFTs is that they commoditize social capital.

Traditionally social capital has to be built up. It takes time and lots of opportunity costs. You can’t trade social capital the same way you trade stocks. How does social capital transfer happen traditionally? Social introductions. Going to school. Getting married. Hanging out. Interacting online. Referrals. All very slow.

Social capital is not liquid. I can’t change the school I went to overnight and trade it with someone who went to a different school to get a different alumni group.

The genius of NFT-based communities is that social capital is standardized, priced, and tradable like a commodity. I can spend a fixed amount of capital (FIAT or crypto currencies) to purchase a BAYC and in an instant, I have access to a whole bunch of social capital I wouldn’t otherwise have. One day if I get bored (no pun intended), theoretically I can trade it for a CryptoPunks, which will grant me another set of social capital.

The newly gained social capital can also be used on existing infrastructure like social networks -- by changing profile pictures and many other uses to come. People are building all kinds of online galleries to display their NFTs. That’s all cool and all -- but the key thing here is that the nature of social capital has completely changed -- now it’s a commodity.

Best of all, because of crypto, the social capital is scarce and public by design. What more can you hope for? The social capital is created and conveyed at the same time.

The Social Capital Market: Bundling and Unbundling, Physical and Virtual

Once social capital is commoditized, then you can build really interesting things on top of that. We have essentially a social capital market, and to quote Ben Thompson quoting Jim Barksdale [6]:

“That the only way to make money is bundling and unbundling.”

Well, first, how about bundling some social capital perks to a particular kind of NFT holders? One can grant access to virtual spaces, private communication channels, and latest scoops, etc.

Things get interesting when you bundle physical resources with virtual resources in a hybrid model. For example, what if an NFT holder could access homes?

And this thread:

What if there is a speakeasy where only certain NFT holders can enter, and certain drinks only a particular type of NFT can access? It’s like a bar behind a bar behind a bar. You can build up these intricate and controlled access levels and logics, and have it scale -- all fusing the virtual world and the real world. To me, that’s the real promise of the metaverse, where the virtual and physical blend seamlessly.

What if I have an unlimited wardrobe IRL and the same items in the virtual world where I hangout in VR sometimes? Eyeing Maison Margiela cough cough.

On the other hand, you can build businesses that are based on unbundling social capital. What if social capital has “interoperability”? This is similar to a reputation system (a16z) [14] in a sense that can be used across different platforms. Finally, someone can build a dating app with a reputation system.

Open Questions

There are of course -- problems.

Some obvious ones include:

Even though crypto can control access in the virtual world, the weak link here is to grant access to physical resources based on some token. Real world gets messy -- think WeWork.

Governance and conflict resolutions -- see

Harassment and racism [14]

Impact on mental health

I will probably come back another day to unpack some of these open issues. But in short, repeat after me: technology cannot solve human problems.

Thanks for reading this long-ass essay <3

Look forward to discussions.

References

  1. BAYC

  2. Signalling theory

  3. Handicap principle - Wikipedia

  4. Social capital - Wikipedia

  5. https://www.hbomax.com/grw-suc

  6. Bundling and Unbundling – Stratechery by Ben Thompson

  7. Commodification - Wikipedia

  8. Handicap principle - Wikipedia

  9. https://snap.stanford.edu/class/cs224w-readings/granovetter73weakties.pdf

  10. Triadic closure - Wikipedia

  11. Lampel, J., & Bhalla, A. (2007). The role of status seeking in online communities: Giving the gift of experience. Journal of computer-mediated communication, 12(2), 434-455.

  12. CryptoPunks

  13. A Novel Framework for Reputation-Based Systems - Future

  14. In Facebook’s VR Headset, Racism and Other Abuses Showed Up ‘Like Clockwork’