When the old order collapses, Web3 becomes the new outlet for capital.

Writing: owockis gitcoin 3.0 arc

Compilation: AididiaoJP, Foresight News

The old system still makes money but can no longer benefit the majority. The new Web3 tools that can help people collaborate fairly and share value may become the next key area for the transfer of power and capital.

In the year 1250 AD, after the death of Frederick II, the Holy Roman Empire entered a long and turbulent “Great Interregnum.” The throne was nominally vacant, but in reality, no one could truly control it. In the absence of credible central authority, dukes, bishops, free cities, and merchant alliances each explored new orders. Power became decentralized; the old system persisted but had become mere decoration; new structures gradually took shape through silent use. This was an era of unresolved tension—people could feel the old world fading away, and a new world emerging, though its final form remained hazy.

Introduction: Why Legitimacy Matters to Capital

Currently, there is a pervasive sense of “institutional fatigue.” The collaborative systems that once propelled broad social progress now struggle to sustain their very existence. Ordinary people feel opportunities stagnating, public services declining, and markets no longer functioning as engines of mobility but more like arenas of wealth extraction. These contradictions surface on the surface of cultural conflicts, but deeper issues lie in the failure of the systems for capital allocation and participation. Public disputes are just superficial; the root cause is structural.

For a system to feel “legitimate,” it must meet several practical conditions: participation must genuinely improve individuals’ situations; effort and reward must always be linked; actual outcomes must align with the system’s proclaimed goals. Only then will people be willing to invest and continue participating. Once these relationships break down—even if those in power still profit—the system’s legitimacy will quietly erode.

This article aims to clarify a point: the decline of legitimacy has become a key bottleneck constraining capital allocation.

Despite the noisy and profit-driven nihilism in the Web3 space, the tools it offers can directly confront and leverage this bottleneck rather than evade it. The following will attempt to explain how this situation has formed, what structural adjustments are emerging, and how these adjustments constitute a coherent investment logic.

Capitalism, at its core, is a form of coordination technology

Capitalism is often viewed as an ideology or a reflection of personal morality. When debates focus on this, conversations tend to become emotional and unproductive. If we adopt a pragmatic rather than confrontational perspective, capitalism is better understood as a technology—a technique for coordinating resources. Its core is to organize labor, capital, and risk through mechanisms such as future income rights, market-based allocation, corporate ownership structures, and financial measurement systems. These mechanisms do not necessarily guarantee fairness, but under certain conditions, they can produce outcomes broadly accepted by society.

Historically, capitalism has maintained legitimacy because growth has translated into increased participation and opportunities for more people. Even amid inequality and crises, most participants still believe that effort, skills, or risk-taking can improve their future circumstances. This belief stems both from ideology and practical calculation. The numbers must add up.

But at present, this accounting no longer works. When capital returns consistently exceed real economic growth, wealth accumulation outpaces the creation of opportunities. Wealth concentration is no longer an exception but an inherent feature of the system. For most people, “participation” is no longer a pathway upward but a treadmill in place. The system continues to efficiently allocate resources to existing capital owners but gradually loses its credibility in coordinating others.

The so-called “crisis of legitimacy” is less a philosophical critique than an objective description of systemic failure. Capitalism continues to optimize internally but fails externally: the pursuit of maximized returns erodes the very conditions for participation that sustain it. The machinery still runs as designed but toward a destination contrary to its proclaimed goals. Anyone paying close attention can sense this design failure.

Mathematical contradictions and systemic collapse

The loss of legitimacy is especially evident in areas where the logic of maximizing capital sharply conflicts with basic social functions. We are talking about the “load-bearing” systems of the economy.

Take housing as an example. In major metropolitan areas, the median home price has reached 20 times the median income (where a reasonable ratio supporting middle-class formation was once 3), with annual price increases of 15-20%, while wages grow only 2-3%. For ordinary earners, owning a home has become mathematically impossible. Asset appreciation has swallowed the function of housing as a residence. This breaks the core promise of capitalism: that labor participation should lead to wealth accumulation. Workers cannot afford to live where they work, leading to regional hollowing.

The healthcare system is similarly contradictory. Systems built around “income cycle optimization” (such as billing volume, pre-authorization checkpoints, automatic claim denial) achieve high financial returns by adding friction to medical processes. In this architecture, administrative complexity becomes a profit center rather than a cost, and worsening health outcomes are an inevitable side effect. This “cruelty” is built into the system. Legitimacy erodes because performance and purpose are severely misaligned, and both providers and patients see this clearly.

Digital platforms follow a similar trajectory. Early collaboration benefits attracted users, creators, and workers. Once network monopolies form, incentives shift toward extraction—maximizing attention capture and ad inventory through manipulation of user experience. This leads to “platform fecalization”: participation becomes a necessity rather than mutual benefit. Even as profits grow, legitimacy continues to decline. Apps get worse, earnings calls remain optimistic.

In these domains, systems still operate based on outdated assumptions, severely disconnected from reality. The mismatch produces results that, while still profitable, are increasingly unstable. This pattern forms the tangible basis of legitimacy erosion. Profitability no longer equates to health; in many cases, it masks accelerated decay behind efficient extraction. Quarterly reports may look shiny, but the foundation is rotten.

Structural response: the legitimacy tech stack

The collapse of collaborative systems also spurs a different kind of creativity. Amid all the noise, scams, and self-delusions, Web3 offers a new set of tools to rebuild incentive mechanisms at the protocol layer. A coherent architecture is emerging across the ecosystem: distributed issuance, peer-to-peer allocation, integrated governance, and diversified verification (MRV). Together, they form what we call the “legitimacy tech stack”: a set of primitives that tightly bind participation, governance, and outcomes—structures that traditional institutions find difficult to replicate.

Distributed issuance reboots the space of monetary design. It demonstrates that tokenized, distributed issuance can replace monopolistic money creation, forming a trust graph that is not dependent on the state. Value is no longer solely carried by a base currency controlled by a single central bank’s balance sheet but flows among interoperable units (credit networks, local stable-value tools, domain-specific tokens), connected through increasingly efficient liquidity routing strategies. When issuance rights shift from privileged few to the network itself, the entire game changes.

Peer-to-peer allocation enables scalable governance of public goods. Ethereum has validated a series of effective distribution mechanisms: quadratic funding, traceable public goods funding, super-certificate markets, etc. These tools guide capital based on support breadth or verified impact (not just funding volume), correcting long-standing bottlenecks caused by reliance on bureaucracies or charities. They scale the practice of “Ashby’s Law”: the more diverse the inputs, the better the output. This is coordination without committees.

Economic democracy directly addresses the structural agency issues of managing capitalism: opacity, capture, and upward rather than outward value flow. DAO, guilds, and other tokenized governance models turn these chronic problems into programmable collaboration. Ownership and governance become inseparable; decision logic can be audited; residual value can be shared. Regardless of one’s opinion on specific DAOs, their architecture offers a more advanced framework for aligning contributors and outcomes.

Diversified verification broadens the dimensions of social and economic signals. Goodhart’s Law shows that once a metric becomes a target, it ceases to be reliable.

Web3 deployment can reverse this problem by diversifying metrics: multi-capital accounting, distributed verification systems, on-chain proofs of verifiable impact (rather than indirect claims). When designed well, multi-dimensional verification systems can serve as signal devices, creating feedback loops that point toward “alignment” rather than “drift.”

The legitimacy tech stack offers Web3 an opportunity to transcend the “casino” or “fading exit plan” image and gain genuine cultural and economic relevance. By lowering trust costs and automating rule enforcement, these protocols enable organizational forms that were previously too slow, fragile, or expensive to scale. As DAOs expand globally, public goods become programmable, and monetary issuance becomes a community enterprise, crypto will no longer be seen merely as an asset class but as what it can truly be: a foundational layer for collaboration, a source of a new era of political-economic innovation.

Protocol “value pools” and capital accumulation sites

These structural changes reshape the venues of value aggregation.

In the industrial capitalist era, companies controlling scarce assets or markets captured the largest share of value. In the network economy, value accumulates at the protocol layer—the system level that underpins activity. The “protocol sink theory” proposed by the Bankless community explains this dynamic within Ethereum: all activity on Layer 2 and DeFi applications ultimately settles in ETH, so value “deposits” into the base layer. We extend this insight more broadly: across the entire economy, exchanges, payment channels, distribution mechanisms, governance platforms, and settlement layers can become “protocol sinks”—because they reduce friction for all participants, economic activity naturally converges there.

A protocol with high “sink value” typically has three features (matching some classic “legitimacy theories”):

High transaction speed: used for genuine collaboration, not just speculation; even if prices are stable, activity persists. People use it because it’s useful, not because “the number will rise.”

Trust stability: reliable operation under crisis conditions, resilient infrastructure. When everything else fails, it still works.

Minimal extractive leakage: value flows mainly through providing collaborative services rather than extracting rent; fees reflect real efficiency gains, not artificially created bottlenecks.

These protocols profit by providing services (not by creating scarcity). Their legitimacy increases with practicality. As the economy fragments and monetary systems diversify, the strategic importance of “sink value” in protocols becomes more apparent: regardless of ideological shifts, the need for collaboration is eternal. Capital deployed in these “sinks” can maintain relevance amid changing institutional environments because, no matter what the future holds, collaboration must find a place to land.

Convergent optimization: an investment framework

Even if the above analysis is correct, it is meaningless if it cannot guide actual capital deployment. Responses to systemic drift may be slow, uneven, and resistant. Early bets on systemic transformation are costly. This raises a practical question: when the timing of transition is uncertain, how should capital be allocated?

“Convergent optimization” addresses this by identifying systems that can generate returns under current conditions while also capturing additional value during legitimacy shifts:

Under stable conditions, high-sink-value protocols generate income by reducing collaboration costs. They earn fees because of real utility (facilitating transactions, governing public goods, verifying outcomes). These returns compound with adoption through network effects, providing steady value in the short term.

Under crisis conditions (financial shocks, regulatory restructuring, political upheaval), the most acute contradictions—such as housing, healthcare, platforms, finance—see the fastest collapse of “conversion costs.” Places where purpose and performance are most disconnected are where participants are most willing to switch to genuinely effective alternatives. Proven utility protocols will absorb this migration. Crises can even act as catalysts.

Ultimately, two paths converge. Capital patiently allocated to legitimate collaborative infrastructure can earn moderate returns now while positioning itself to capture asymmetric gains during the transition window. This framework redefines “legitimacy” as an undervalued variable in capital allocation—a variable whose value continues to grow even if short-term indicators overlook it.

Contradiction arbitrage and regulatory arbitrage

The best opportunities for “convergent optimization” occur at the intersection of two forces: contradiction arbitrage and regulatory arbitrage.

Contradiction arbitrage targets industries where internal economic dynamics have caused purpose and performance to diverge severely: housing, healthcare, platforms, agriculture, finance. In these areas, “legitimacy tech stack” alternatives outperform due to structural advantages (not branding). The old system fails its proclaimed goals; new systems solve collaboration problems.

Regulatory arbitrage targets regions where exposure to real pressures or a desire for new things has pushed the economic tide beyond the action threshold: innovative city-states, climate-vulnerable islands, countries in the global south seeking monetary sovereignty, post-conflict regions rebuilding institutions, inner cities and rural communities feeling abandoned by “progress.” The logic is simple: deploy where the old system is failing and new experiments are allowed to flourish. Focus on the most urgent needs and genuine permission.

Contradictions generate demand for new structures, while openness in regulation and culture provides the “surface area” for these structures to operate. Identifying regions where these axes intersect reveals the most promising landscape for successful deployment of next-generation collaboration technologies.

Conclusion: Legitimacy as Infrastructure

Starting from the observation of “institutional fatigue,” we arrive at a set of investment logics. Legitimacy itself is a form of economic infrastructure: systems that lose it become increasingly costly to sustain participation; those that retain it naturally attract cooperation and resilience.

This article proposes three interconnected frameworks to understand and respond to this dynamic:

Legitimacy Tech Stack: describes the structural toolkit enabling new forms of collaboration.

Protocol Sink Value: extends the “protocol sink theory” from Ethereum to broader economic systems, illustrating how value accumulates in collaboration layers with high transaction speed, trust stability, and low extractive leakage.

Convergent Optimization: identifies opportunities that generate current returns while also capturing asymmetric value during legitimacy migration to new collaboration infrastructures.

These frameworks are not purely theoretical; they are grounded in observable realities: the “mathematical collapse” of housing and healthcare, extraction logic of digital platforms, proven utility of quadratic funding and traceable grants, and the growing adoption of tokenized governance. They aim to clarify what is often seen as “opaque” in the capital world: the structural relationship between systemic legitimacy and long-term value capture.

There are two paths ahead for capital.

One is to reinforce extraction, financialization, and regulatory barriers, attempting to extend return cycles to satisfy portfolio demands. This path remains feasible but is increasingly defensive and fragile. Essentially, “sinking with the ship,” hoping to escape before it goes down.

The other views legitimacy erosion as information—reallocating capital into foundational infrastructures that resolve contradictions and generate profits. It accepts longer cycles in exchange for structural advantages.

The “legitimacy arbitrage” argument sidesteps ideological or moral judgments, offering a pragmatic analysis: outdated collaboration technologies show signs of systemic failure, while smarter, flatter, more participatory technologies are replacing them. At this unique historical moment, well-placed capital can help steer the world back onto an “alignment” track while earning outsized returns. It’s a rare “deal” that benefits both profit and the world.

The great interregnum has arrived. Frederick II is dead; Rudolf has yet to rise. We live in a gap between orders. This interval belongs to those who see legitimacy as a design problem, collaboration as an engineering challenge, and systemic failure as an “interface” for innovation. Capital flowing into foundational infrastructures during this interregnum will define the rules of the next era.