Signaling on the Internet

Taking signaling from IRL to URL

In a prior post we talked about how technology turns scarcity into abundance. And how, when it does this, a new scarcity emerges. So companies are both in the business of conquering scarcity and creating new forms of it in the process.

This week we’ll talk about a new scarcity that emerges more frequently in on a place as abundant as the internet — “positional scarcity”.  This kind of scarcity isn’t objectively desirable so much as it is positionally desirable: having a nice watch or sports car or brand name college degree may have some objective utility, but the majority of its value is in the standing it grants you relative to others. Many of the world’s oldest and biggest industries, like fashion and real estate, are built entirely around positional scarcity. 

We talked previously about how education is built on positional scarcity:

“College isn’t insurance — It’s a nightclub. If colleges were normal businesses, with the entire world clamoring to get in, they’d increase enrollment. If they’re offering a great product, more people should benefit from it. But not universities. Because it's not about learning, it's about status. Indeed: Colleges don’t gain their power from how many people benefit from it, they get their power from how many people can't benefit from it. We have a massive velvet rope with a long line of people trying to get in, and the more exclusive you make it, the more valuable it is...like a nightclub.” 

Sidenote: It’s interesting to compare scarcity in education to the startup world. YC has grown its class size 25x+ in the last 10 years while elite universities have mostly kept class sizes the same. The startup ecosystem embraces more founders because their status is determined by exits; elite universities keep classes small because their status is determined by acceptance rates.

There are different kinds of positional scarcity, as Alex Danco aptly describes: 

There’s curation: an abundance of people creating music creates demand for record labels, DJs, and other tastemakers to do the job of picking, “Out of all these options, which song should get heard? (e.g. Product Hunt, Gartner,)

There’s prestige: an abundance of prosperity makes it harder to preserve and distinguish high status: “Now that everyone has a car, how do I make sure that my car is the most impressive, and everyone knows it? (e.g. Porsch, Tesla)

There’s access: an abundance of people all vying for each others’ attention and patronage creates a high premium for moving to the front of that line: “How much would you pay to skip the congestion and get to where you need to go?”

What these challenges all have in common is that they’re symptoms of abundance. In environments of real scarcity, these problems don’t exist. But in environments of abundance, when some new technology or paradigm has created a huge bounty and a variety of new stuff we enjoy, positional scarcity inevitably emerges, creating new bottlenecks and new opportunities.

Since we’re predominantly living on the internet, we’re starting to enable different forms of signaling. Let’s compare and contrast physical and digital forms of signalling:

Paraphrasing this great piece by Julian Lehr: Consider Nike shoes: What message do they send? I can spend $120 on a pair of shoes. I have an active lifestyle. Etc. 

How does the signal get distributed? You wear the shoes in public. 

How does the signal get amplified? You buy a limited edition pair, or otherwise find some shoes with a unique design. 

But what about signaling for digital products? Consider a fitness app where you pay $150 per month. If you pay $150 a month to work out in a forest, does anyone see it?  Paying the subscription still signals that you have an active, healthy lifestyle, but now the signal gets distributed via social media. 

Until the advent of NFTs (and more specifically CryptoPunks), digital products mostly amplified physical signals. We’re now seeing the creation & distribution of natively digital signals as well. 

IRL, one major reason physical books have persisted is because of their signaling effect. A physical bookshelf is a status symbol. So what's the digital equivalent of an in-home library? Or a Louis Vuitton bag? One way is to tie digital status to something physical people can show off, like a credit card. Another way is to exit the IRL system entirely, creating a new asset entirely bought, sold, traded, and displayed online. This is exactly what’s happening with NFTs.

"Membership is the message" and the more exclusive a club is to join, or the more impressive the criteria members need in order to join, the more membership is a signal.

For social networks, one way to monetize is via social amplification. Instead of cutting off your users by imposing a paywall or membership, charge them to separate themselves from the crowd. Tinder does this with super likes. Fortnite does this with virtual skins. And nowadays, some DAOs, like FWB, are token-gating their Discords so members can join only if they hold 75 FWB tokens — not only does the cost to enter increase as more people join, but token holders share the financial upside as the token price increases. And since everything is on-chain, you can see how many FWB tokens someone holds, and thus, how much their holdings are worth in USD, or any other currency. Now that’s signalling.

It’s fair to look at something like a CryptoPunk and ask why it costs so much. But it’s also worth looking at sneakers and asking why they cost so much. It cost $5 dollars to make the shoe, so the rest of the value comes from signaling based on the shoe’s rarity and the narrative told around the shoe. 

Indeed, the difference between a painting and a CryptoPunk is small. And if you didn’t grow up with the internet, you might say “Oh, but one is real and the other isn’t”. But for people who grew up with the internet, IRL and URL are the same. 

Scarcity is scarcity, and in a world where we’re increasingly living on the internet, we need digital ways to signal.

Luxury Beliefs

One way to signal is with NFTs. Another way is with our opinions. Rob Henderson has a theory he calls "Luxury Beliefs", the idea being that if people buy expensive luxury goods to showcase how well-off  they are, people also hold “expensive” beliefs for the same reason. 

Think of it this way: luxury goods bring people high status precisely because they're useless. The message is: "I'm so rich I can afford to waste money on this." But today, luxury goods are more affordable than before. And in a remote world, they're harder to show off. Thus, they're less reliable as indicators of social status. So instead, people signal how well-off they are by their opinions. Hence, luxury beliefs. If luxury goods are IRL billboards for status, luxury beliefs are URL billboards for status. 

This idea is not new: Jared Diamond has suggested one reason people engage in displays such as drinking, smoking, drug use, and other costly behaviors is because they serve as fitness indicators. The message is: “I’m so healthy I can afford to poison my body and continue to function."

Luxury beliefs are ideas and opinions that confer status on the rich at very little cost, while taking a toll on the lower class.

They're the ideological equivalent of a luxury good: They signal how well-off people are that they can afford to have beliefs that make them worse off. The tragedy with luxury beliefs is that, since they're free, and since the non-elites aspire to eliteness, the beliefs themselves trickle down to the masses. It'd be as if the masses bought a ton of expensive luxury products they didn't need and became saddled with debt. Not good.

And since being high status means avoiding what the masses are doing, as soon as the masses adopt something, the elites drop it. So if luxury beliefs are originated by the elites, who get the benefits of short-term high status, the long-term costs are ultimately borne by the masses.

Consider the phrase “Defund the police” as an example, a call back to our post the other week. This phrase was popularized by highly educated elites who will certainly not move to areas with high crime and a defunded police force. The phrase is then adopted by a broader set of people, including people in high-crime areas. Polyamory is another example. It’s popularized by the affluent who often end up in monogamous relationships after flirting with polyamory. The elites are in a better position to experiment since they can afford protection (and abortion if needed) and they can otherwise recover thanks to their financial and social capital.

A cycle emerges: An elite flaunts their belief, the masses copy it, and the elite discards it. Then a new luxury belief emerges, while the old one causes chaos for the masses.

Luxury goods only cause limited damage because they’re expensive. Beliefs are free and viral, which, paired with the internet, exacerbates the problem.

This is an underrated element of the internet: it increases variance. The internet significantly expands the opportunities to gain status, but also exacerbates the problems positional scarcity creates.

From NFTs to luxury beliefs, new signalling mechanisms will continue to emerge to help people further differentiate themselves in our digital worlds.

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Read of the week: Following our release of On Deck’s series A memo from earlier this year, we published a piece called “Organizing The World’s Ambition” that details more about where we’re going.

Watch of the week: Martin Borch Jensen on Aging

Podcast of the week: Joe Norman on The Dangers of Civilization at Scale

Until next week,

Erik