Against the Democratization of Finance

How Axie and Robinhood show the limits of democratizing—rather than collectivizing—finance.

Imagine, for a moment, utopia—by which I mean, of course, a tech utopia, where future innovations have automated all essential economic functions. The year is 2040: food production is automated by drones, supply chains are automated by self-driving vehicles, and even our own bodily functions are all coded and automated by mRNA software. Production is self-sustaining, and we have no needs beyond money to afford our newly automated world. “But wait, money?” you might ask in the sort of erudite tone that is the fruit of utopia. “Isn’t that something of a devilish nuisance?” Isn’t it hard to find a job when jobs have all been automated?

Look, I say. Listen. This is utopia, dammit, a world of which the antiquarians could only dream, a land where everyone can make money—and have fun doing it. This new opportunity, too, is thanks to software. You see, in a gamified future, you don’t just make money to play games, but can play games to make money. Every day, you need only log into that popular virtual world, Worklandia, where bronzed, Lego-like warriors roam the metaverse, fighting Sith Lords for the possession of Pokemon by racing hijacked cars through the Mediterranean. The Metaverse! Even if you cannot afford to play as a level 83 liege, you can spend your days polishing shields in one of Worklandia’s Fun Factories, which allow you to take out armor with student loans that you can easily repay by burnishing them for top players.

You are wary to interject again after my last answer. But with your thumb growing numb pressing the X-button all day to polish virtual goods for resale to wealthy players to use in vanquishing opponents for much bigger prizes, you might peep up anyhow.

Whose utopia is this anyway?

After writing over the past couple weeks on the ways that NFTs open possibilities to financialize and open-source our habits, our taste, our knowledge, and even our spending, I got some skeptical responses that my proposal was, as one reader put it, “dystopian and depressing and hell.”

This is, well, fair. A fully-legible world in which everything around us can be revealed, reduced, and redirected as money represents a Midas-kind-of compromise. Yes, we would have more opportunities to get paid for our work (as we should), and yes, we would have more opportunities to call out the financial origins of our surroundings (as we should). But the complete financialization and legibilization of our personal lives also means, perhaps, that we have little framework for evaluating our lives except as money—and little left of ourselves beyond the moral verdict of a bank statement.

So today, I would like to make the case against the democratization of finance. I am, to be clear, playing devil’s advocate here: like everyone else, I am not so perverse as to be against financial opportunity, nor so unwitting as to believe that elite funds and firms should be our financial gatekeepers. But offering financial opportunity does not mean offering equal opportunity, particularly when the size of our bank account correlates directly to the financial privilege and opportunity we started off with. Quite the opposite, as the example of Worklandia shows, we can still find ways to create digital factories for what David Graeber would call “bullshit jobs” that help enrich wealthier players—who spend their time in fun battle-mode making real money with the most expensive weapons, tools, and creatures.

Indeed, games are a good way to understand the pitfalls of the democratization of finance, and not only because “democratization of finance” often just means “gamification of finance” in disguise. Games are a meaningful framework for finance because making money for wealthy financiers has always been a sort of game—outmaneuvering states and taking big gambles with calculated odds—while for the poor, it’s more often been a matter of staying alive. You might say that the gamification of finance incentivizes non-financiers to engage in the activities that have made the rich rich, but that isn’t really true. At their best, financial games for retail investors gussy up rote labor in the guise of a colorful story; at their worst, they punish enterprising workers with negative expected returns in playing against the house.

The most popular recent example of both these tendencies is Axie Infinity. The outward benefits of Axie, the most popular current crypto game, have been detailed over the past week by Nick deWilde, Packy McCormick, and William M. Peaster. And Axie, a kind of monetized Pokemon where the creatures are NFTs, is truly exciting: its play-to-earn model lets teenagers around the world make many multiples of their average national salary by playing a video game, as many have noted, but it also marks a pivotal moment of the internet coming into its own as a state that can compete with nations by offering a kind of global minimum wage on the work that people should accept. With video games, the internet is giving the world a job guarantee that no nation has ever offered. 

Axie, then, is very much the bellwether du jour of the democratization of finance—the first steps towards the internet dissolving the geographical boundaries of economic opportunity. I’ll put my wallet where my writing is, then, and note that in the past week, I personally backed an Axie sponsorship to let teens overcome the financial barriers-to-entry of play-to-earn. And I even bought a few of the creatures, the Axies, myself. But at the same time, I wonder how much Axie perpetuates the geographical boundaries of economic opportunity as well. Is it an exaggeration to say that Filipino players have to serve as workers plying a trade so that American and European players can have fun?

The deeper question here is not about Axie, but how much the democratization of finance relies on fundamental inequalities for richer players to incentivize poorer players to work (buying their creatures), or, worse, actively make money as rentiers off of their labor (renting out expensive Axies and taking a cut for any money they generate). Why, in an online world of infinite goods, is it continually necessary to invent seemingly unnecessary jobs in order to provide continual “financial opportunity” as a way to propagate a financial system for wealthier players to invest surplus capital in order to make money on the labor of those who need money the most?

Of course I know the answer: we don’t live online, the internet currently does a better job than most countries in providing our real-world needs, and artificial scarcity not only increases value but makes games more fun. A game like Axie can help alleviate the symptoms of global inequality, of socio-economic stratification based on zip code and borders, even as it perpetuates these in its core model. It is not Worklandia, where the wealthy get to enjoy their time making money passively, improving the stats, capability, and performance of their core skills, while the poor are forced to make money actively by neglecting core competencies in favor of rote labor. But at its best, it is a thoughtless addiction that will “sap [players’] ambition to move up or to invest in their lives outside of work,” as deWilde has put it, and at worst, it’s very much a grind for poorer players who need to spend all day ekeing out a few cents in endless repetition of battles and breeding of their creatures for the benefit of passive Axie-owners. Axie owners are very much the landlord class of the internet.

And here, we might note that even the kindest reading of the democratization of finance—that the rich are funding new financial opportunities for the poor rather than, say, exploiting their labor for gain—reveals what amounts to a Ponzi scheme. For the expected returns of financialized games are inevitably negative: as McCormick details, 95% of Axie’s revenue goes to players, which sounds good in theory, but also means that overall players are losing 5% of the money they put in. Axie is, ultimately, the casino, and playing its game is betting against the house. It is Axie’s Ponzi strategy ensures that’s not a problem, as long as new players continue to enter the ecosystem, subsidizing older ones well beyond their investment while driving up the fiat-value of the Axie currency in the meantime. (Breeding is one way to ensure this.) But what will happen when they stop entering?

I’ve focused extensively on Axie because Axie represents, in many ways, the best vision of the democratization of finance, one whose multilevel-marketing-growth enables incoming players to offer financial opportunity to a global working class—even if it doesn’t offer equal opportunity to wealthier players who can afford the top advantages for making far more money in turn. Axie, you might say, enriches everyone as long as it grows, even if the bulk of incoming money goes to the richest players. But the democratization of finance can also lead to a more insidious case of the opposite occurring, of the wealthy actively profiting off the poor at the latter’s expense. And for that, we need only look at the most famous example of democratized finance: Robinhood. 

Robinhood, we found out in its recent S-1, earns the bulk of its revenue from options trading, an activity that infamously puts seasoned quants on the winning side of the trade against less-equipped retail investors, Roaring Kitties aside. But most significantly, that money is earned through Payment-for-Order-Flow. Even while incentivizing retail investors to make $0-commission trades, it costs them money by working with Wall Street firms to keep the savings from bulk pricing of orders. As the SEC noted, “for orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares.”

With Robinhood, we can see that the “democratization” of finance just signifies what “democracy” has too often signified in the US: an unmoored individualism that leaves people to their own devices in trying to scale an economic system with the leverage of one tool, money, that’s precisely what they don’t have. Democracy, here, stands in for the freedom that comes from having little social support. Writing in Democracy in America, Alexis de Tocqueville noted that democracy often begets a lonely individualism: the American acquires “the habit of always considering themselves as standing alone... it throws him back forever upon himself alone, and threatens in the end to confine him entirely within the solitude of his own heart.”

So when we talk about the democratization of finance, we are seldom talking about creating financial opportunity, leveling financial opportunity, or giving people the educational tools to make good decisions. We’re talking, instead, about letting them make more decisions that are often designed to cost them financial opportunity and means. We not only place the onus of difficult challenging and specialized work on individuals to complete on their own, but reduce the challenges with games to the detriment of their decision-making ability, charge them more in the process, and incentivize them to take charge of disastrous decisions through casino tactics.

So if we really want to talk about creating financial opportunity, we might stop talking about a “democratization of finance” that gives everyone more opportunity to build wealth for the wealthy at best and fail with expected negative returns at worst. We might talk, instead, about the collectivization of finance that lets stakeholders work as multiplayer teams to bolster each other’s power, learn from one another, and increase their chances of good decision-making. In the past week, the case of Sushiswap’s stakeholders coming together against offering discounts to the wealthier investors has shown what that collectivization might look like even with the simplest online tools; DAOs will, of course, offer many more.

To be clear, the collectivization of finance won’t fix a real world that already handicaps the opportunities of the poor, and it is questionable whether these collectives will or can extend power beyond middle-upper class guys of financial means. Still, they point towards a future in which we not only can seize the few and often disastrous financial opportunities that we have—but can start to shape the size and scope of those opportunities as well.