When the old order collapses, Web3 becomes the new outlet for capital.
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When the old order collapses, Web3 becomes the new outlet for capital.
Legitimacy is infrastructure.
Navigating Web3 tides with focused insightsAuthor: owockis gitcoin 3.0 arc
Compiled by: AididiaoJP, Foresight News
The old system is still profitable, yet it can no longer benefit the majority. Meanwhile, new Web3 tools that can help people collaborate fairly and share value may become the next crucial domain for the transfer of power and capital.
In 1250 AD, after the death of Frederick II, the Holy Roman Empire entered a long and turbulent "Great Interregnum." The imperial throne was nominally vacant, but in reality, no one could truly control it. In the absence of credible central authority, princes, bishops, free cities, and merchant leagues each groped their way toward new orders. Power tended to disperse; the old institutions persisted but became mere decoration, while new structures gradually took shape through silent use. It was an unresolved era; people could feel the old world fading and a new one emerging, though its final form remained hazy.
Introduction: Why Legitimacy is Crucial for Capital
In the current era, there is a pervasive and growing sense of "institutional fatigue." The collaborative systems that once drove widespread upward social mobility now struggle to sustain the very premises of their own existence. Ordinary people feel stagnation of opportunity, decline in public services, and markets that no longer act as engines of mobility but rather as arenas for wealth extraction. These contradictions manifest on the surface as cultural conflicts, but the deeper issue lies in the systems of capital allocation and collaborative participation themselves being dysfunctional. Public disputes are merely symptoms; the root cause is structural.
For a system to feel "legitimate," it must meet several practical conditions: participation tangibly improves one's situation; effort and reward remain consistently linked; and actual outcomes align with the system's stated goals. Only then are people willing to invest and continue participating. Once these relationships break, even if incumbents still profit, the system's legitimacy quietly erodes.
This article attempts to clarify a point: declining legitimacy has become a key bottleneck constraining capital allocation.
Despite the noise and profit-chasing nihilism within the Web3 space, the tools it provides precisely allow system designers to confront and leverage this bottleneck, rather than evade it. The following will attempt to explain how this situation arose, what structural adjustments are emerging, and how these adjustments constitute a coherent investment logic.
Capitalism, in Essence, is a Collaborative Technology
Capitalism is often seen as an ideology or a reflection of personal morality. Once such debates ensue, dialogue easily becomes emotional and unconstructive. If we view it pragmatically rather than oppositionally, capitalism is more like a technology—a technology for coordinating resources. Its core lies in organizing labor, capital, and risk through a series of mechanisms—such as future income rights, market-based allocation, corporate ownership structures, and financial accounting systems. These mechanisms do not necessarily bring fairness, but under certain conditions, they can produce outcomes widely accepted by society.
Historically, capitalism remained legitimate because growth genuinely translated into broader participation and opportunity for more people. Even amidst inequality and crises, most participants had reason to believe that effort, skill, or risk-taking could improve their future situation. This belief stemmed from both ideology and tangible calculation. The numbers had to add up.
But at the current stage, the numbers no longer add up. When the rate of return on capital consistently exceeds real economic growth, wealth accumulates faster than opportunities are created. Wealth concentration is no longer an exception to the system but a built-in feature. For most people, "participation" is no longer a ladder upward but a treadmill running in place. The system continues to allocate resources efficiently for those with existing capital but gradually loses its coordinating credibility for others.
The so-called "legitimacy crisis" is less a philosophical critique and more an objective description of systemic failure. Capitalism continues to optimize internally while failing externally: the process of maximizing returns erodes the very conditions of participation upon which the system itself depends. The machine still operates as designed but moves towards an endpoint contrary to its proclaimed goals. Anyone paying attention can sense this design failure.
Mathematical Contradictions and Institutional Collapse
The erosion of legitimacy is particularly evident in areas where the logic of capital maximization clashes sharply with basic social functions. We are talking about the "load-bearing" systems of the economy.
Take housing, for example. In major metropolitan areas, median home prices are now 20 times median incomes (compared to a reasonable ratio of 3 times that supported middle-class formation), while home prices rise 15-20% annually, yet wages increase by only 2-3%. For ordinary earners, homeownership has become mathematically impossible. The asset's appreciation function devours its residential function. This breaks capitalism's core promise: labor participation should lead to wealth accumulation. Workers cannot afford to live where they work, leading to the gradual hollowing out of entire regions.
The healthcare system is similarly rife with contradictions. Systems built around "revenue cycle optimization" (e.g., billing volume, pre-authorization hurdles, automatic claim denials) achieve high financial returns precisely by adding friction to the care process. In this architecture, administrative complexity becomes a profit center, not a cost, and deteriorating health outcomes are a predictable byproduct. This "cruelty" is inherent to the system. Legitimacy erodes because performance severely diverges from purpose, and both those serving and being served see it.
Digital platforms follow a similar trajectory. Early collaborative dividends attracted users, creators, and laborers. Once network monopolies form, incentives shift towards extraction—manipulating user experience to maximize attention capture and ad inventory. This leads to "enshittification": participation becomes a necessity rather than mutually beneficial. Even as profits grow, legitimacy continuously erodes. Apps get worse, yet earnings calls remain optimistic.
In these areas, institutions still operate based on outdated assumptions, severely misaligned with the real environment. The results of this mismatch, while still profitable, are increasingly unstable. It is this pattern that constitutes the practical basis for legitimacy erosion. Profitability no longer signifies health; in many areas, it instead signals accelerated decay hidden behind efficient extraction. Quarterly reports may look good, but the foundations are rotting.
Structural Response: The Legitimacy Tech Stack
The collapse of collaborative systems also breeds another kind of creativity. Beneath all the noise, scams, and self-soothing, Web3 offers a new set of tools for rebuilding incentive mechanisms at the protocol layer. A coherent architecture is emerging across the ecosystem: distributed issuance, peer-to-peer distribution, integrated economic governance, and multi-faceted verification (MRV). Together, they constitute what we call the "Legitimacy Tech Stack": a set of collaborative primitives that tightly bind participation, governance, and outcomes—a structure difficult for traditional institutions to achieve.
Distributed Issuance reopens the monetary design space. It shows that tokenized distributed issuance can replace monopolistic money creation, forming a diversified trust graph not reliant on the state. Value is no longer solely carried by base money controlled by a single central bank's balance sheet but flows between interoperable units (credit networks, local stable value instruments, domain-specific tokens), connected through increasingly efficient liquidity routing strategies. When issuance rights shift from a privilege of a few institutions to a property of the network itself, the entire game changes.
Peer-to-Peer Distribution enables scalable governance of public goods. Ethereum has validated a series of genuinely effective allocation mechanisms: quadratic funding, retroactive public goods funding, hypercert markets, etc. These tools direct capital based on breadth of support or verified impact (not depth of pockets), correcting bottlenecks from long reliance on bureaucracies or charities. They practice "Ashby's Law" at scale: the more diverse the input, the better the output matches. This is coordination without committees.
Economic Democracy directly addresses the structural agency problems of managed capitalism: opacity, regulatory capture, value flowing upward rather than outward. Tokenized governance models like DAOs and guilds turn these chronic issues into programmable collaboration. Ownership and governance become inseparable; decision logic becomes auditable; residual value becomes shareable. Regardless of one's opinion on any specific DAO's operations, its architecture provides a more advanced framework for aligning contributors with outcomes.
Multi-faceted Verification broadens the dimensions of socio-economic signals. Goodhart's Law has shown that once a metric becomes a target, it ceases to be a good measure. Web3 deployments can reverse this by making measurement multi-faceted: multi-capital accounting, distributed verification systems, on-chain attestations representing verifiable impact (not indirect claims). If well-designed, multi-dimensional verification systems can become signaling devices, constructing feedback loops that point towards "alignment" rather than "deviation."
The Legitimacy Tech Stack offers Web3 an opportunity to move beyond its existing image as a "casino" or a "long-shot exit plan" and gain genuine cultural and economic relevance. By lowering trust costs and automating rule enforcement, these protocols make organizational forms possible that were previously too slow, fragile, or expensive to scale. As DAO cooperatives expand globally, public goods allocation becomes programmable, and money issuance becomes a community undertaking, crypto will no longer be seen merely as an asset class but as what we know it can be: a foundational layer for collaboration, a source providing solid bedrock for a new era of political-economic innovation.
Protocol "Sink Value" and Where Capital Accumulates
These structural changes reshape where value aggregates.
In the era of industrial capitalism, enterprises controlling scarce assets or markets captured the largest share of value. In the network economy, value accumulates at the protocol layer—the systemic level upon which activity flows. The "Protocol Sink Thesis" proposed by the Bankless community explains this dynamic within Ethereum: all activity on Layer 2 and DeFi applications ultimately settles in ETH, so value "sinks" to the base layer. We extend this insight more broadly: across the entire economy, exchanges, payment channels, distribution mechanisms, governance platforms, and settlement layers can all become "protocol sinks"—because they reduce friction for all that flows through them, economic activity naturally converges there.
A protocol with high "sink value" typically possesses three characteristics (fittingly aligning with some classic "legitimacy theories"):
- High Transaction Velocity: Genuinely used for collaboration, not pure speculation; activity persists even if token prices are stable. People use it because it's useful, not because "the number will go up."
- Trust Stability: Operates reliably under crisis conditions, possessing the resilience required of critical infrastructure. It remains effective when everything else fails.
- Minimal Extractive Leakage: Value flows primarily by providing collaborative services, not by charging rents; fees correspond to genuine efficiency gains, not artificially created bottlenecks.
These protocols profit by providing services (not by creating scarcity). Their legitimacy strengthens with utility. As economic systems fragment and monetary systems diversify, the strategic significance of protocol sink value becomes more pronounced: regardless of ideological shifts, the need for collaboration is eternal. Capital positioned in these "sinks" can maintain its relevance amidst changing institutional environments because, no matter the future, collaboration needs a place to land.
Convergence Optimization: An Investment Framework
Even if all the above analysis is correct, it remains empty talk if it cannot guide actual capital allocation. Legitimate responses to institutional drift may be slow, uneven, and fraught with resistance. Betting too early on systemic transformation is costly. This raises a practical question: how should capital be positioned when the timing of transition is unclear?
The "Convergence Optimization" framework answers this by identifying systems that generate returns under the status quo while gaining additional value when legitimacy migrates:
- Under stable conditions, high sink-value protocols generate revenue by lowering collaboration costs. They earn fees for real utility (facilitating transactions, governing public goods, verifying outcomes). These returns compound via network effects as adoption grows, providing robust value in the near term.
- Under crisis conditions (financial shocks, regulatory realignment, political turmoil), in areas where contradictions are sharpest, "switching costs" collapse fastest. Housing, healthcare, platforms, finance... wherever the disconnect between purpose and performance is most severe, participants become more willing to switch to truly effective alternatives. Protocols that have proven their utility will capture this migration. Crisis becomes a catalyst.
The two paths ultimately converge. Capital patiently allocated to legitimate collaboration infrastructure can achieve moderate returns in the present while occupying a position to capture massive asymmetric gains during transition windows. This framework redefines "legitimacy" as an undervalued variable in capital allocation—a variable whose value grows even if ignored by short-term metrics.
Contradiction Arbitrage and Regulatory Arbitrage
The best opportunities for "Convergence Optimization" appear where two forces intersect, which we call Contradiction Arbitrage and Regulatory Arbitrage.
Contradiction Arbitrage targets industries where internal economic dynamics have already caused severe decoupling of purpose and performance: housing, healthcare, platforms, agriculture, finance. In these areas, alternatives from the "Legitimacy Tech Stack" perform better due to structural advantages (not brand marketing). The old system fails at its stated goals; the new system solves the collaboration problem.
Regulatory Arbitrage targets regions where economic thinking has crossed the action threshold due to exposure to real pressures or appetite for the new: innovative city-states, climate-vulnerable islands, Global South nations seeking monetary sovereignty, post-conflict areas rebuilding institutional frameworks, inner-city and rural communities feeling left behind by "progress." The logic is simple: deploy where the old system fails and new experiments are permitted to flourish. Go where demand is most urgent and permission most genuine.
Contradictions generate demand for new structures; regulatory and cultural openness provides the "surface area" for these structures to operate. Identifying regions where these two axes intersect clearly reveals the terrain where the next generation of collaborative technologies is most likely to succeed.
Conclusion: Legitimacy as Infrastructure
Starting from observing "institutional fatigue," we ultimately arrive at an investment logic. Legitimacy itself is a form of economic infrastructure: systems losing it face ever-higher costs to maintain participation; systems retaining it naturally attract cooperation and gain resilience.
This article proposes three interrelated frameworks to understand and respond to this dynamic:
- The Legitimacy Tech Stack: Describes the structural toolset enabling new forms of collaboration.
- Protocol Sink Value: Extends the "Protocol Sink Thesis" from Ethereum to the broader economic system, describing how value accumulates in collaboration layers with high transaction velocity, trust stability, and low extractive leakage.
- Convergence Optimization: Identifies opportunities that create returns in the present while gaining asymmetric value when legitimacy migrates to new collaboration infrastructure.
These frameworks are not purely theoretical constructs; they stem from observable reality: the "mathematical collapse" of housing and healthcare, the extractive logic of digital platforms, the proven utility of quadratic funding and retroactive funding mechanisms, and the growing adoption of tokenized governance structures. They attempt to elucidate what the capital world often treats as "unreadable": the structural relationship between systemic legitimacy and long-term value capture.
Capital faces two paths.
One is to reinforce extraction, financialization, and regulatory moats, attempting to stretch the return cycle long enough to satisfy portfolio requirements. This path remains viable but is becoming increasingly defensive and fragile. It is essentially "sinking with the ship" and hoping to get off before it goes under.
The other path treats legitimacy erosion as information. It reallocates capital to infrastructure that resolves contradictions while generating profits. It accepts longer cycles in exchange for structural advantage.
The "Legitimacy Arbitrage" thesis sets aside ideological and even moral judgment, proposing a pragmatic analysis: outdated collaborative technologies show signs of systemic failure, while smarter, flatter, more participatory technologies are replacing them. At this unique historical moment, well-positioned capital can achieve outsized returns while nudging the world back onto a track of "alignment." It is a rare "trade" that is both profitable and beneficial for the world.
The Great Interregnum has arrived. Frederick II is dead; Rudolf has not yet risen. We live in the interstice between orders. This interval belongs to those who see legitimacy as a design problem, collaboration as an engineering challenge, and institutional failure as "surface area" for innovation. The capital flowing into collaboration infrastructure during the Interregnum will define the rules of the next era.
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