Unavoidable Pyramids

In the future, every business will be a Ponzi scheme for 15 minutes.

Last year, I published a theory that pyramid schemes are not just becoming more common — but also becoming more necessary. The piece was quoted and shared by analysts and reporters from The Financial Times, Bloomberg, and Wall Street Journal, and authors and thinkers such as Scott Alexander, Michael Batnick, and Morgan Housel.

I'll provide the gist of the theory in a moment. But first, I'd look at some new evidence corroborating it. Yesterday, Ted Gioia published a piece that describes how music labels have lost the power to anoint stars. Gioia, a Music Historian, opens thus:

"With each passing month, record labels grow more attached to TikTok—but it now looks more like addiction. Some have reached the point where they won’t release an album until the music goes viral on TikTok."

Gioia proceeds to provide multiple examples of a growing phenomenon:

Musicians reach audiences directly on social media and no longer need record labels.
Labels know that success requires a large social following and thus refuse to back artists who aren't already famous.

This leads to a temporary trend where labels are willing to sign very generous deals with new artists that have proven social following. But by doing so, the labels acknowledge that they no longer have the power to launch artistic careers on their own. Gioia can see how this will end:

"If this TikTok-ification of the music biz continues, what will be the end result? Here it is, in a single sentence: Only unsuccessful musicians still need a label. Think over the deep implications of that fact."

Gioia is right. And he directly echoes my piece about The TikTokization of Work from last year. But the process he noticed will not stop there.

Musicians and producers will no longer need record labels, but they will need someone (or something) to help them stand out and de-risk their careers.

And the erosion of gatekeepers is not unique to music. It will affect all creative and cognitively-demanding professions. To paraphrase Gioia:

Only unsuccessful authors will need a publisher, only unsuccessful designers will need an agency, only unsuccessful programmers will need salary-based based employment, and only unsuccessful ventures will need venture capital.

The successful ones could tap directly into their audience and customers for promotion, funding, and a safety net. This is an exaggeration, but this is where we're headed.

This brings me back to my original theory. I am now able to state it more simply:

Old gatekeepers are losing their power to anoint winners. Launching new products and careers is becoming riskier and contingent on pure chance and opaque algorithms.

But there is a strategy that limits this risk and increases the likelihood of success. What is this strategy? Using unsustainable rewards to coordinate early-adopter behavior at scale.

As I wrote in Praise of Ponzis:

What if there was a way to pay millions of people to watch a specific video at a specific moment in order to ensure that video goes viral and makes enough money to cover the cost of paying all these people — and then some?

In the old world, this would be too complicated. Just getting everyone's bank details would take forever. But in our world, it is possible. It takes about five minutes to set up a smart contract that sends tokens to an unlimited number of people. The contract can be programmed to pay these people automatically once they complete a certain action online — and to pay them again when their actions bear fruit and drive up the value of a song/product/stock/anything.

This new strategy is not guaranteed to work, and, in fact, it will fail in most cases. But operating without this strategy is even riskier.

That's why the terms "pyramid" or "Ponzi" are no longer sufficient or accurate. In many cases, it is already impossible to know whether something is or isn't "legit." If the unsustainable rewards lead to sustainable success — we'll know they were worth it. But we'll only know that after it succeeds. In the interim, everything will be a pyramid.

Have a wonderful weekend. If you enjoyed this piece, please share it, subscribe, and let me know what you think on Twitter.