“Aim for the top. There is plenty of room there.”

- Sam Insull

Will Blockchains Be Cost-Plus Utilities?

When Sam Insull became president of the Chicago Edison Company in 1892, his staff informed him that the total addressable market for electricity in the city was 25,000 people.

In response, he asked what the population of Chicago was. 

Told that one million people lived in Chicago, Insull told his staff to aim higher: The total addressable market of electricity in Chicago was one million people. 

That seemed impossibly ambitious because electricity generation was prohibitively expensive at the time — having electric lights in a home was considered a luxury only wealthy people could afford.

Insul flipped that calculation on its head: Instead of starting from how many people could afford electricity, he started from how many people could want electricity.

The answer, of course, was everyone. So Insull set out to make electricity so cheap that everyone could afford it.

The only way to do that, he thought, was by making the Chicago Edison Company a monopoly. 

Unlike every other monopolist, however, Insull believed that the purpose of monopoly was not to raise profits but to lower prices. 

Insull wanted to be the sole supplier of electricity in Chicago, because the only way to generate electricity cheap enough that everyone could buy it was to have everyone buy it from him.

It worked. 

Insull’s strategy of “massing production” gave him the scale to transform electricity from a luxury to a utility — first in Chicago and then across North America.

The term “mass production” should therefore be attributed to Insull, but no one’s ever heard of Insull, so Henry Ford is universally credited with that innovation.

I hadn’t heard of Insull either, until listening to the Founders podcast this weekend.

As usual, I looked at the title, “Samuel Insull,” and thought, I don't need to learn about that guy. 

Also as usual, I forced myself to listen and, as always, I learned something fascinating — and most times I even learn something that offers, in some tangential way, an insight related to crypto.

In this case, the insight is the societal benefit of thinking big on total addressable markets.

So let’s think big. 

By my math, the total addressable market for crypto is everyone with a smartphone plus every AI robot that’s soon to be on-chain, which adds up to…something close to infinity.

If so, this is bullish for crypto adoption.

But maybe not for crypto prices.

Numba go down

To get to mass adoption, crypto fees will have to be near zero.

How close could they get?

By Sam Insull’s logic, fees should be only marginally above the electricity and hardware costs of running a blockchain.

On a recent podcast, Solana founder Anatoly Yakovenko estimated that it costs validators collectively about $50 million a year to run and secure the Solana blockchain. 

This means that the Solana network should only need to collect fees equal to that $50 million cost plus a profit margin that’s a little above the validators’ cost-of-capital — so, maybe $55 million in total.

Thanks in large part to Sam Insull, this is how utilities already work.

Utilities charge us their cost of production plus a small (government-mandated) margin that’s a few percentage points above their cost of capital.

If that small margin is enough to incentivize power companies to provide electricity, why shouldn’t it be enough to incentivize validators to secure blockchains?

That would helpfully drive fees to effectively zero — but it would also leave nothing for token holders, many of whom are counting on fees to eventually provide them a return.

Worse still, blockchains, unlike utilities, don't necessarily have to be profitable — vested interests like stablecoin issuers and centralized exchanges might happily run validators at a loss if it’s mission critical to their businesses. 

If blockchains were run at a loss, that would leave token holders with…less than nothing?

This is not the future that crypto tokens are priced for.

Aim high (by aiming low)

At his height, Sam Insull controlled hundreds of utility companies offering gas, electricity, water, blocks of ice, bus lines and streetcars in 5,000 cities and towns across North America.

His companies held $4 billion of assets and his personal wealth exceeded $100 million, making him (inflation adjusted) one of the richest individuals of all time.

But you’ve never heard of Insull, because leverage cost him everything.

His ownership stakes in the hundreds of companies he controlled was a tangled web of cross holdings and borrowed money that unraveled disastrously after the 1929 stock market crash — one of his bankers later said that he ended up too broke to be bankrupt. 

He never recovered.

Blockchains can’t really go bankrupt, so this is not a cautionary tale for the crypto industry as a whole, only its investors (the leveraged ones, especially).

In fact, it’s just the opposite: Insull’s utilities continued to operate long after his personal crash, much to the benefit of customers.

My takeaway from the latest Founders podcast, then, is that crypto’s developers should feel free to keep thinking big by maintaining a laser focus on driving down fees, irrespective of what that means for token prices.

Because in order to go mainstream, the industry needs to think as big as Sam Insull — even if that means risking everything for investors.

― Byron Gilliam

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