HOW HYPERLOCAL ECONOMIES EVOLVE

By: William Arrington

The original intent for this follow up to Hyperlocal Social Economies (HSEs) was to focus on how businesses can participate in these targeted consumption markets. I think this is an appropriate time to discuss how HSEs may evolve. Before diving in let’s quickly recap what comprises an HSE market:

  • A group of consumers with similar lifestyle and consumption patterns (i.e. friends)
  • Common set of goods/services consumed by the group
  • Competitive market for said goods and services
  • Goods and services are geographically unbound

The evolution of HSEs and the increasing commonality of them within marketplaces is rooted in technological innovation. As we discussed in the prior article, digital networks have transcended geographic bounds of social engagement allowing any individual to harness a collective global network to consume goods, services, and experiences. The role of technology will continue to shape and shift the underlying infrastructure powering these HSEs through more seamless integration of digital and physical lives. Smartphones and digital banking have reduced transaction time to seconds in many use cases, but how does that benefit an HSE?

At its core foundation, an HSE is the intermediary of consumption and commercial transaction. Swifter payment between counterparties allows the HSE to optimize and improve with the efficiencies leading to tangible benefits for the HSE’s participants, mainly time and/or money saved. Assuming these benefits to participants are recycled or reinvested back into the same HSE or another, the multiplier effect of those additional transactions expands the marketplace for all participants.

Role of Cryptocurrency

Cryptocurrency will be critical to maximizing these efficiency gains and cost savings. Through digital payments between counterparties and distributed ledger technology, cryptocurrency allows an HSE to leverage near instantaneous transparency to streamline transactions. For market participants, cryptocurrency provides the infrastructural elements of trust and efficiency, which are essential components to a sustainable HSE marketplace. Furthermore, counterparties have a public ledger of transactions available ensuring zero opacity between participants due to no asymmetrical information.

Another derivative of the cryptocurrency space is the Initial Coin Offering or ICO. Without going into extraordinary detail, an ICO allows an entity to create its own derivative token, or digital currency, to transact or trade among participants. ICO’s stand to pave the way for even more HSEs to develop as highly concentrated buyers of specialized digital currencies share common use cases for investing in these offerings. Let’s look at a quick example: an ICO for a real estate company creates digital tokens used to acquire commercial real estate. A sophisticated HSE may grow out of this offering as it attracts like-minded consumers interested in buying, investing, utilizing, renovating, or trading in commercial real estate assets. The digital tokens can be exchanged for membership interests among ICO participants allowing them to buy/sell tokens in exchange for fiat currency, receive a dividend from profits from acquired assets, or rent space within the buildings acquired using said ICO tokens. The tokens have an explicit value tradable within the HSE, while market participants can interact within the marketplace in a variety of ways that align with the overall group’s behavior.

Digital currencies represent a more novel approach to ensuring trust and efficiency to thrive within an HSE marketplace. As blockchain and distributed ledger technology expand across different industries, there should be an expected increase within HSE marketplaces given more options for market participants to leverage common consumption behavior.

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Regulation Matters

In some cases, regulations can upend or stall HSE marketplaces from growing further or developing in the first place. As a point of note related to ICOs, securities regulators and many governments have questioned the legality and legitimacy of such offerings, which could seriously jeopardize the subset of market participants investing and transacting within that segment of the cryptocurrency market. With that said, one can assume that HSEs can be temporary in nature, as short-term benefits are exhausted by regulatory overhaul.

Nevertheless, regulation can benefit HSE markets and help in their development and growth. The sharing economy in many ways has directly benefited from the lax oversight and slow implementation of laws covering this area. Businesses like AirBnB and Uber are great examples of this being the case, but I wouldn’t define either as an HSE. In the case of home sharing, the HSE may be a close-knit network of self-employed friends that “rent” their living spaces to each other while they travel and work. A subset of the entire home-sharing market, where the consumers share common lifestyles, travel frequently, work for themselves, have mutual trust between one another and have flexible schedules. AirBnB creates this type of exponential effect matching unknown parties together to book rooms/homes and acts as the trust filter in the middle. Again, not exactly what an HSE represents.

Even more important to understand is that regulations may not apply in the traditional sense to HSEs. The example of friends acting as an HSE has been used several times because its highly relatable. But let’s take an example of how an HSE can exist in a grey area of regulation using professional poker players. First, let’s define professional as someone who makes a living primarily off poker and make a few assumptions to define our HSE of poker players:

  • Group of like-minded individuals: players are active online and live in both cash/tournaments requiring various amounts of travel
  • Common Goods/Services: gambling, restaurants, accommodations, transportation, recreational activities, nightlife
  • Competitive Market: domestic and international offerings of poker in various derivatives forms
  • Geographically Unbound: accommodates players anywhere, anytime

Within this HSE of poker players, you have significant amounts of comingling and bundling of funds between parties to facilitate buy-ins, accommodations, and travel. Competing schedules creates a subset market of swapping accommodations with other players who’ve built a mutual trust through their working relationship at the poker table. Essentially, any player trying to keep information asymmetrical from others within the HSE would be hard-pressed given the significant overlap of professional and personal lives across geographies. Players face significant regulatory issues related to banking (large wire transfers and foreign exchange), expense accounting, capital gains/losses, and so on leading this HSE to operate largely in a grey area of regulation. Nonetheless, the numerous HSEs operating within the poker economy today facilitate millions of dollars in transactions on an annual basis…all largely in the grey areas of regulatory oversight.

Future of HSEs

Hyperlocal social economies will evolve in step with technology going forward, especially with the increasing adoption of digital currencies creating new economic models of trust and efficiency between counterparties. The dynamics of the broader economy can indirectly effect HSEs through regulation and macroeconomic events, however HSEs will continue to thrive as the groups of consumers continue to work together in terms of consumption habits and lifestyles.

The evolution of our digital identities and privacy will certain play a role in shaping that future. The willingness to hand over personal information to largely anonymous corporate interests in the spirit of making it easier to share with your social circles is both a cost and benefit of HSEs. These micro-economies have grown out of increasing overlap of our personal and professional lives, making it even simpler to align habits with similar-minded consumers. One thing many would agree on is that if HSEs can help improve the participants’ lives within that group, adoption of similar structured micro-economies could help foster growth in economically-challenged communities.

Read first article – HYPERLOCAL SOCIAL ECONOMIES (HSEs)

William Arrington loves to converse on venture capital and startups. This is the second in a series on the HSE concept. Contact him at arrington.william@gmail.com

Graphic credits: William Arrington

 

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. Please perform your own due diligence. It’s not our fault if you lose money.
.Copyright © 2017 John Jonelis – All Rights Reserved
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  1. Pingback: HYPERLOCAL SOCIAL ECONOMIES (HSEs) | The Gamemaker's Father