The imperfect fungibility of time
Disclaimer: wild NFT economic experiment up ahead
The NFT ‘mania’, for want of a better word, is a bit like watching people stick an especially large spoon of Marmite into their mouths. It either yields deep pleasure & interest, or a rapid torrent of disgust. Some in the latter camp routinely say to me: ‘What the hell Dom! Why would you want to waste your time & hard earned cash on something like that!?’
I have been toying with understanding the value of time, and how to measure it, for quite a while now. Mainly because I hate squandering it, have done so routinely when I was younger, and am obsessively aware that once ‘spent’ it is not coming back. Which is why I’ve been particularly intrigued to explore whether smart contracts / NFTs can be utilised to help value and trade units of time.
This is an article that explores the fungibility of time, the drawbacks of wage labour v.s. owning assets, and introduces a new model for trading our time that embeds elements of asset trading by utilising smart contracts / NFTs. If you’re directly interested in the smart contract / NFT section without the preamble, skip to the last two parts of this article.
Let me explain why this matters. Whether we like to believe it or not, our economic contributions in this world derive ultimately from past time spent, both on an individual basis and also collectively across societies. Our salaries are a reflection of our labour correlated to the number of hours we commit to the job, and the manner in which we utilise them in pursuing targeted goals. The gig-worker’s hourly rate is directly associated with the time that individual commits to their occupation, whether that is ferrying deliveries on Deliveroo or serving rides on Uber. Even investments (‘capital’ in the parlance of economics) can be fundamentally traced back to the culmination & effort of many hours spent by a group of individuals within the context of a company, working together to tackle a problem deemed worth solving.
So if we believe that time is the fulcrum of value creation, how do we access its value and trade it today?
The unique characteristics of time
Let’s begin this exploration by considering the fungibility of time. Elon specified that time is the ‘ultimate currency’. Currencies are fundamentally fungible. It matters not which US Dollar I hold, or which particular Bitcoin. I can switch one Bitcoin for another, and both will retain the same market value to any buyer or seller. They are perfectly fungible.
Time is often not perfectly fungible like a currency. And it is not often perfectly non-fungible like a piece of unique original artwork. It is often living somewhere on a spectrum in-between. The fungibility of your time is closely linked to the rarity of the services that you can provide efficiently in a given unit of time. In simple words, labour competition. To give a sense of the spectrum:
- [A buyer’s market] People who provide broadly commoditised services where there is a lot of supply (i.e. delivery drivers, customer support etc) can be (unfortunately) swapped out for one another. Their time is highly fungible due to a large supply pool of labour. Often these labour pools are characterised by on-demand gig economy marketplaces (i.e. Uber, Deliveroo, Gorillas etc).
- [A seller’s market] People who provide highly specialised services where there is very little supply are usually highly sought after. They are not easy to replace, and are often compensated handsomely for their time (i.e. corporate executives, highly skilled developers etc). They are able to negotiate very well for compensation. For all intents and purposes, their time is not particularly fungible.
- [Tug-of-war between buyers and sellers] People who provide reasonably specialised services but where there’s some supply of labour. Replacing these individuals is not impossible nor is it trivial (i.e. search costs of finding an alternative etc.). These individuals have some negotiating power but not a lot. This is quite characteristic of salaried employees and most pools of freelancers (both covering the majority of us). There is a balance of power between buyers and sellers of labour.
In general, the more non-fungible your labour is, the more valuable your time will be, assuming of course there is demand for your services.
As most people advance in their lives they pick up additional skills and experience, whether through their job(s) or otherwise. Quite often individuals develop deeper and deeper expertise in their particular set of services that they can offer others. Others widen their services to become broader generalists and in doing so develop more differentiated offerings that specialists are not able to compete against. In both cases, people transition their time from being more fungible to being more non-fungible, and in doing so, command better compensation for the time they offer to others.
The two graphs below illustrate these points. The first from the Tax Foundation from a couple of years ago highlights empirically the average increases in labour value for an individual over time. The second, from the Economic Pay Institute, showcases the disparity within wage inequality: labour returns compound to the highest earners which very often are those with more non-fungible characteristic labour.
How time relates to the fruits of labour and the aggregation of capital
Ultimately, there are two means by which you, I ,and most of the (working) population generate value today, and by extension the means to our economic survival:
- Work for a wage (‘labour’; i.e. time -> asset): we trade blocks of time to commit to an occupation to solve problems for others. The length of time committed, and the variability of that commitment, determine the nature of our labour. I trade significant blocks of my time as an employee for a salary. The freelance consultant may trade a block of hours dedicated to a client for a currency-denominated amount that values their time. The gig economy worker gets paid an hourly amount for every hour they commit to the occupation at hand. And we get paid in an asset (i.e. USD, GBP etc) that we can use to purchase other assets, goods or services.
- Own assets (‘capital’; i.e. asset -> asset): we acquire ownership in assets (i.e. stocks, debt, real estate etc). Ownership of a portion of an asset can convey certain rights: dividends, rental income, debt repayments (to name a few). In addition, the ownership of a portion of an asset can increase in value over time, and can be sold in the future for a capital gain. The price of an asset is driven by the expected future value that ownership of that asset conveys; the nature of having ownership of the asset in the future itself is a driver of its value. Most often we buy assets with other (highly fungible) assets (i.e. I buy a Tesla stock with USD).
The value of an asset is, at the end of the day, determined by the buyer’s beliefs of how much it is at least worth today, how much it could be worth in the future; and whether that is higher than what the seller considers it to be. It matters not whether the belief is attempted to be scientifically construed or grounded in pure speculation. If someone believes that a particular NFT is worth at least $5m, and the seller is willing to sell at that price, then a transaction occurs and the NFT is worth $5m today. If I invest in a start-up at a valuation of $100m, it is because I believe that the start-up will be worth at least $100m into the future (and hopefully considerably more). A private equity tycoon may buy a company based on a belief of its value driven by expected future cash flows. If the Federal Reserve prints unfathomable amounts of USD, buyers of USD may believe that each USD is worth less respective to what it can buy (i.e. inflation). Beliefs drive prices.
A similar analogy applies also to labour. If I supply my labour as an employee, I have a view of how valuable my time is. This may be informed by what I see others similar to me being paid, but my belief of the value of my time is fundamentally what matters. My employer, who buys my time, has a belief on the value of my time working for their organisation, where ideally the true value of my labour is above what I am paid (i.e. profit). If the latter is above the former, then an economic transaction takes place for my time. Beliefs drive wages.
Capital is very often an indirect aggregation of the fruits of labour. In giving our labour, we trade time for an asset (i.e. a currency). In buying other assets using our hard-earned currency, we translate our buying power earned through time into ownership of assets. To see this more starkly, entrepreneurs skip this intermediate step entirely; putting in long hours (often at low wages) to increase the value of their equity ownership of their companies.
Why is capital often more valuable than labour?
When someone pays you for your time, they do not claim ownership over future fruits of your labour. You commit your time to the tasks at hand, and after completion of time and/or deliverables, you are compensated for your efforts. This is true in the vast majority of labour models, from salaried employees to zero-hour contractors.
As an individual grows more skilled in the services that they can provide, or is able to generate a differentiated offering from others, they can offer their time for higher compensation. At any point in time, these experienced individuals command a higher compensation due to the accumulation of all the experiences & skills that they have attained over giving selling their historic labour. The value of one’s labour is a reflection of how non-fungible their labour is today, which is a function of their previous skills & experience.
Owning an asset however, has different characteristics. You not only gain from any economic benefits that you might receive at the point of purchase, but you also get the right to any expected economic benefits in the future. Therefore you would value the asset today based on the expected gain that you foresee.
Let’s conduct a thought experiment. Imagine that you could buy an asset that offered you a one-off cash payment at the point of purchase, say $100. What would you value that asset at? At $100. Now let’s imagine that if you bought that asset you would get the $100 at the point of purchase, but also $100 in one year’s time. It would be logical to value that asset at <$200 (depending on the discount factor that you would apply to getting the cash next year, which can be subjective across people). Most people would use the inflation rate, so at 3% p.a., most people would value the asset at $100 + $100/1.03 = ~$197.
You could extend the cash flows for the asset to any finite or infinite time. For infinite time, assuming an inflation rate of 3%, a reasonable asset valuation would be $100/(1-(1/1.03)) = ~$3,433. You now have an annuity (it’s a geometric series with a closed solution).
Now let’s engage in a stranger thought experiment. Imagine that if you bought the asset you would get $100 straight away, but get no further cash in the future. However, you could sell that asset to someone else, and if there’s a new buyer then that individual would receive $100 when they buy the asset from you. How would you value this asset? Logically, it would be worth less than the annuity example I just walked through. After all, you have a non-zero probability of not being able to sell this asset and you would not get a cash payout if you failed to sell it. So let’s say that in a given year there’s a 95% chance of selling this asset. A quick back-of-the-envelope reasonable valuation would then be $100/(1-(0.95/1.03)) = ~$1,287.
Even though you do not get the future cash flows of this asset, the value of the asset is significantly higher than $100, because ownership of the asset conveys some potential economic benefit to someone if the asset changes hands.
Why did I walk you through this? Selling your labour today is the equivalent to someone buying an a share of your time (i.e. the one-off ‘asset’) that gives them $100 worth of value. There’s no future claim to any of your labour for anyone. An individual who bought your time for your service, and then had the opportunity to sell that right to someone else, has the potential to recoup part of their investment and even possibly profit from it.
Labour’s failure to directly securitise itself as an asset with encapsulated expected future value is, in my belief, one of the key reasons why returns to labour have been dwarfed by the returns to capital over the last few decades. To benefit from ownership of future value, many people have to sell time to earn a fungible currency in order to acquire assets to build wealth.
I’m not making this up. Labour as a share of total US GDP has fallen steadily since 1950 and dropped like a stone post 2000, and this is before the impact of QE inflating asset prices (thank you McKinsey for the graphic).
Making labour (directly) tradable: the theoretical set-up of the experiment
Before I joined VC at the latter end of 2019, I was freelance consulting. The biggest time-sink I faced by far was finding new clients (a common problem). In the end I relied on my network and referrals to win new work (again, a common solution) but I felt as if I was spending as much time trying to win new work as I was actually selling my time.
This method of selling services for time, which by the way, represents an extremely large part of the economy (professional services accounts for $2 trillion of GDP in the US), is deeply inefficient. Winning new work is often a key time-sink for freelancers, agencies and anyone who sells their time for revenue. Which is why many try to opt for retainers to try and create some source of predictable income.
Referrals are often noted as by far the most effective means to win new work efficiently. After all, there’s no stronger signal from an ecstatic prior customer in your next pitch, or to have a past customer open doors previously inaccessible to you. But the incentive for the would-be referrer is purely subjective: they refer out of creating goodwill for a service well provided, and/or want to maintain a good relationship going forward. There is no explicit monetary gain that a referrer gets from providing the referral in the first place.
Recall the strange thought experiment we walked through in the previous section. Imagine that instead of selling a service for a unit of time that a customer buys, you (i.e. the “service provider”) sell the right to a service for a unit of time. This right can be exercised only once for the buyer, but is refreshed if the right is sold to another. If the right is sold on, a portion of the sales price is passed back to the service provider to compensate them for the time rendered when the right is refreshed with the new buyer. This right is only exercisable if the portion of the sale price going to you is above a pre-defined reserve valuation (to ensure that future time spent providing the services is worth it to the service provider).
What are the economic incentives of such a system? The seller of services benefits up front from a primary sale of a right which is priced according to the buyer and seller’s negotiation at the transaction. The price will be at the minimum of what the seller values their services to be as defined in the right, and potentially considerably higher depending on the buyer’s expected future gains from ownership. The initial buyer benefits from buying the right to the service which can be exercised, but also from the potential to sell the right to another willing buyer in the future. And why would a buyer’s expected future gains from ownership be higher than the value of the service provider’s time today? Because there’s a non-zero probability that by the nature of providing services over time, the service provider’s future value of time becomes more and more valuable. Therefore by nature of the right being tradable, a portion of its value today is linked to the future value of the service provider’s time, and hence the value of the right today can be higher than the value of the units of their time that they offer when the right is exercised.
Therefore the buyer has the opportunity to recoup part of their investment, or even make a profit from selling the right to a future buyer at a higher price than at which they had bought it (something they’ve never been able to do prior in today’s status quo world). They now have an incentive to become an active referrer.
If you think that this is completely bonkers (and quite possibly I am), have a look at ISAs (income sharing agreements). ISAs are routinely used by students to finance education whereby they give a portion of their future earnings to an entity who finances their education for them up-front. The value to the entity who has an ownership in a student’s future earnings is that they are betting on the future earnings being significantly higher post-education compared to before, and therefore believe that the up-front cost of paying for such education will be sufficiently lower than the stream of future income. And most certainly, I’m sure issuers of ISAs securitise them and sell them onto other institutions at a significantly good price because ISAs warrant a take of the future value of a student.
Going back to the rights mechanism, the service provider benefits because it can lower CAC (customer acquisition cost) significantly. By providing a valuable service and generating a new means for creating economic value in the act of referral, the service provider greater incentivises the buyer to act as a stronger referral which in turn helps the service provider win more clients. And in any subsequent transaction of the right, the service provider never economically loses out, since there’s a reserve portion of the sales price payable to the service provider that has a floor value, otherwise the right cannot be exercised.
Cynics might reasonably question whether a buyer has good motives to acquire the right and may try to ‘pump’ the price to a subsequent buyer in the chain. Sure, that’s possible. But if the owner of the right tries to excessively pump the price at some point there will be no willing buyers. The service provider can then issue a new right for their time at a lower price, and by (eventual) arbitrage either the new right will be the one that will be traded or the owner of the new right will lower the price to find a willing buyer. A service provider may try and generate as many rights as possible to sell, but this implies that their time is highly fungible. And the more fungible their time, the implication to the market is that their time is less valuable.
And what of non-fulfilment of services post-payment? Again, very possible, but unfortunately no different to what we face today when you buy most goods. When a service provider defaults they risk their reputation in the market. The owner of the right can therefore refuse to sell the right on (thereby the service provider has to issue a new right, making their time more fungible) or even sell the right back to the service provider (or even gift it back for free). In a distributed ledger system, this is even more powerful given the traceability and public accessibility of the transaction history of an asset; it can be interrogated by a potential future buyer of the right.
What tools can I use to hack & build such a system today?
To quickly test and experiment with this idea, and see if it has any legs whatsoever, I’ve minted an NFT on OpenSea representing a right to 2 hours of my time. Anyone who buys this NFT (and who can prove ownership) has the right to exercise it for 2 hours of my time, where I offer services linked to my expertise: pitch deck review, business plan & model dissection, fundraising advice etc. Or they can just have a relaxed chat for 2 hours if they so prefer. I’ve also quickly thrown together a personal website on Beacons to explain the rights model and how it works.
I’ll set a reserve price of $100 in WETH ($50 per hour; yes far too low I know). I do this because annoyingly OpenSea caps the royalties on secondary transactions to be 10% of subsequent sales prices. Therefore I’ve issued the NFT with a primary sales price of $1k. If someone buys the right for less than $1k then the right cannot be exercised. This sets a floor price on the right. Frankly, I don’t yet know how much gas fees will impact the transactional flow, but let’s see over time.
The OpenSea collection is here: https://opensea.io/collection/tradable-tokens-of-time
I’m intrigued to see what happens in the coming weeks. It could spark the imagination of others to try differing ways of monetising their labour. Or it could be another one of my ideas that transcends into my ‘idea graveyard’. But as they say, nothing ventured, nothing gained.
