By Craig Calcaterra and Wulf Kaal
Abstract
This Chapter examines the future of decentralization. While humans who were raised in a centralized world by default turn to centralized solutions for societal problems, decentralized approaches are more effective for global problems. Decentralized networks encourage interoperability through bureaucratic transparency. While the decentralized developer community is moving remarkably fast, inevitable improvements are still necessary. The chapter demonstrates that Bitcoin and Ethereum have provided primitive decentralized versions of currency and business contracts. The real task at hand is the construction of decentralized versions of all the rest of the institutions that business and society rely on. The chapter provides a guide for navigating the future decades of decentralization with a view towards the required experimentation with and failure of decentralized structures that help filter out the centralized impurities of a flawed understanding of decentralization.
The book can be accessed here:
and here:
https://www.degruyter.com/view/title/569051
Chapter 3. Future Decentralization
The goal of decentralization is to give most individuals more power, improving the entire group. But it does not remove all walls and regulations. With this new individual power we will make more walls and more cryptographic security. But the new powers of information technology gives us the power to make regulation more complex, more dynamic and responsive. IT helps people to make doors, empowering us to move between spaces securely, anywhere on the planet.
IT advances secure your spaces by walling off those who don’t want to make positive contributions, protecting material and ideal spaces from Tragedy of the Commons degradation, free riders, and rent-seeking. Cloning successful open source DAO governance structures will allow people to collaborate on any projects they wish, opening other doors for those not interested or capable of contributing to the spaces they are walled off from. Digital doors and walls can be much more powerful than material walls and doors have ever been.
Vision of human-centered, AI-enabled Internet of Things
“It is remarkable how closely the history of the apple tree is connected with that of man.”
— Henry David Thoreau, “Wild Apples: The History of the Apple-Tree”
The Atlantic, November 1862
The Internet of Things (IoT), organized by a decentralized platform with many collaborating DAOs, is an example of how decentralization can add significant efficiency to the economy. IoT is the idea that in the future, all of our devices will communicate through wireless internet technology and share information so they can work together more efficiently. Since the 1960s there have been futuristic designs for our refrigerators to monitor our pantry and automatically send orders to the grocer for deliveries. With cheap processors and WiFi, IoT promises to unite every device in our society. This provokes privacy concerns and the question of who owns and controls the data.
To achieve the promise of IoT, several ingredients are required. A system of device identification is needed, as well as a coherent system for communication between many different devices with different broadcasting and memory capabilities. Neutral business territory — a decentralized marketplace — is needed to contractually agree on the protocols of automated collaboration between devices owned and controlled by independent businesses. And the entire structure must be transparent, so that audits of the system can be performed to maintain integrity as it continually evolves.
Web3 P2P technologies embody these properties of decentralization, autonomy, efficiency, personal privacy, and bureaucratic transparency. Web3 is being built to develop the smart contracting environment for providing precisely these solutions. But an evolutionary structure that encourages continual systemic improvement for business collaboration is needed.
Consider the market orbit of an apple, its supply chain: all the organizations and resources involved in bringing the apple to a consumer. The apple’s entire history is full of valuable market information, from before the origin of the seed of its tree, until after its core has been composted. If each step along its history can be reliably recorded and verified by a host of independent companies, we can regulate its quality, and objectively verify its value. This will improve efficiency and ensure satisfaction for all parties involved — from producers, handlers, shippers, holders, vendors, and customers, to all the ancillary parties which supply each of these parties with products or services. In point of fact, the strong interconnectivity of contemporary markets means the supply chain of an apple is ultimately linked with every actor in the entire economy — a violin lesson in Vietnam is three degrees of separation from an Austrian Apfelstrudel.
When the apple seeds are sold to the farmer, their provenance can be verified. When the seeds are planted, the planting can be verified. When the tree is watered, the sprinkler can verify the position, the weather, and the amount and quality of water used. The consumer scans the tag on the apple, which verifies the exact moment the apple was harvested, processed, shipped, delivered to the vendor, and placed on the shelf. Then a program will analyze how the apple’s history indicates its quality and nutrition according to a scientific algorithm. If its shipment was delayed at the warehouse, it’s not as fresh as it could be and not as valuable. If the apple was handled optimally at every step along the way, it’s worth more.
At this point the apple’s market orbit is only half finished. Who buys it, how long it’s stored, where it’s stored, how it is used or wasted, whether it’s composted, what procedures the composter uses, what products that compost fertilizes, what happens to those products, are all part of the apple’s supply chain. If each step can be reliably and economically recorded, each actor can be fairly rewarded, giving all parties the confidence to do business while minimizing corruption and rent seeking. Big data generated by mobile telecommunication and all the devices in the Internet of Things allows researchers to understand new correlations, which allows better decision making and improves efficiency at every level. Contrary to the criticisms that have been lobbed against blockchains as being designed to dodge regulation, the actual goal is to ensure effective, efficient, adaptive regulation in a truly decentralized manner, ultimately exceeding the current level of oversight. (Their adherence to transparency means their understandable disdain for slow and unresponsive centralized regulation often leaks beyond their development circle.)
In order to create a sustainable infrastructure for IoT, we need an endlessly expandable platform that properly incentivizes productive collaboration. The endless expansion includes countless smart contracts that need to be continually developed, maintained, policed, and improved, to intercommunicate at every step of the market orbit of every material item in our lives. Smart contracts will provide immediate business negotiation and resolution in dynamic AI-enabled interchanges. For this we need a diverse list of DAOs for each of the business interests along the supply chain, with the relevant background expertise. We need a system which incentivizes productive collaboration between numerous independent DAOs and individual actors. The system must negotiate fair valuations of each and every fine-grained contribution.
P2P collaboration provides the neutral territory where independent companies or organizations can do business. Smart contracts provide cheap and efficient automated regulatory mechanisms, linking the processes of the supply chain.
There are two major structures from our contemporary economy, however, that are still missing in the Web3 environment.
First, we need an incentive mechanism for productive collaboration. Like the Maghribi traders, Web3 needs a secure and meaningful reputation system to maintain their decentralized structure of collaboration in the face of the centralizing tendency of competition for profits. Reputation enables the self-policing that is necessary to maintain a DAO’s integrity.
Second, the decentralized economy needs effective governance structures. It must adapt to rapid technological and organizational innovation in a network of diverse parties with diverse goals. The decentralized economy needs many different DAOs with rigid governance protocols, to harmonize the diverse groups, yet allow them to adjust to market changes. Like the architecture of 19th century democracies, these DAOs need a dynamic system to maintain their integrity and protect individual autonomy.
It is conceivable that the IoT infrastructure will be governed by ever evolving DAOs. A DAO that has mastered decentralization internally can thus help IoT infrastructure products utilize such decentralized governance structures for their own governance and interoperability. We believe that effective decentralized DAO governance necessitates reputation verification systems. DAOs that are internally well-governed by a reputation verification engine allow other IoT infrastructure entities to simply clone the DAO governance for their own purposes and run a DAO with the same governance metrics. As we will explain further below, this system of transplanting governance has several beneficial aspects.
Each process in the supply chain must self-police in separate DAOs. For example, orchard farmers will be part of a DAO which verifies their particular reputation for growing apples. They will choose protocols for watering their orchard when the conditions require it, and will record that they have performed the task with GPS devices attached to their sprinklers. The orchard farmers themselves have the best knowledge for protecting the value of their own reputation. If some of their members are not following protocol — if someone attempts to game the system and provide inferior products by cutting corners — the farmers themselves are best able to anticipate and respond to the attack, developing the most efficient protocols to police bad-faith actors and support those with good faith. The power of decentralization is individual autonomy. Self-policing their own members is more effective when the members have the power, unlike a centralized hierarchy which is more prone to structural corruption when each member holds distinct powers and responsibilities. Each DAO is motivated to continually improve their own processes and protect their own reputation, in order to attract business from the other systems in the supply chain.
The GPS-enabled sprinkler-monitoring device will be installed by members of a separate DAO whose expertise is to police their own industry. They will cooperate with the orchard farmer DAO in order to attract their business, so the orchard farmer DAO will rely on the device DAO’s reputation and smart contracts to police the farmers’ growing operations. Working together, each of the DAOs’ reputations become more valuable in the larger economy when they help each other provide a superior product.
This dynamic IoT object-automated economy will be integrated with the human-experienced economy. Each persons’ contributions can be fairly valuated for their present and future value to the decentralized economy with smart contract protocols. Rights within and between numerous DAOs can be parsed and negotiated, automatically and immediately, according to the protocols of each DAO. Contributions that previously were ignored as too insignificant to be efficiently accounted for, can now be fairly evaluated, thanks to improved processing and transmission power. This will encourage greater participation and a culture of meritocracy that will incentivize authentic collaboration.
For the whole supply chain to work in harmony, numerous DAOs must cooperate. Countless protocols will vary amongst and between the various expertises. On-demand products and services will be automatically negotiated and engaged through dynamic programming. Unanticipated legal contracts will regularly be invented through micro-second AI calculations to optimize business outcomes in a dynamic environment which moves too quickly to wait for human corroboration.
The system which hosts such a complex network of DAOs with such a variety of business behaviors must be general enough to adapt to the endless protocol innovations required, but expressive enough to rigorously capture the specific protocols needed for each individual expertise. The core structure must be designed to generate any type of DAO and provide the choices needed to make effective governance structures. In Chapter 7, we detail the necessities for secure and effective decentralized governance. Before that, in Chapter 6, we detail the construction of secure and meaningful decentralized reputation, which gives the proper incentive mechanism for gluing the whole decentralized collaboration together.
The Internet of Things is a complicated structure to wrap our heads around. But more complicated systems are already guiding our daily decisions. Before we discuss the details of DAO governance, we should delve deeper into our understanding of the technology we rely on today.
Algorithmically automated control
Automation is responsible for the majority of material advances humanity has enjoyed since World War II. Since before Watts’ steam engine, ideas from control theory have been making humanity ever more materially powerful.[1] Improvements in computer processors have made increasingly sophisticated algorithms for automating systems that are controlling more functions in every aspect of our lives. The list of instructions that automated machines can now be given is seemingly unlimited, since an algorithm can now be as long as the memory the computer controller can hold — and with Wi-Fi controllers, that expands to include the entire internet.[2] Artificial intelligence — especially in the form of neural networks and evolutionary programming — is making another technological leap past the most complicated human-designed algorithms.
Algorithmic automation optimizes human outputs, performance, and interactions, elevating every material function in society. At the same time, the conveniences and benefits bring with them risks to humanity that cannot be fully quantified. As we use new technologies we come to rely on them, until we can no longer survive without them. This has been true since humanswe first invented spears and shoes. Our societies grew to a size that could not be supported without the technology. Without the Haber process, a technology that creates fertilizer from the air, the Earth would not be able to support its 7 billion people.
Algorithmic automation is affecting society at a large scale. Since the early 2010s, algorithmic functionalities and algorithms that utilize big data from sensors, IoT devices, GIS systems[3], and other big datasets, have begun dominating social and business decisions. As internet-based applications are becoming increasingly prevalent and used by humans, such as Google, Facebook, and Amazon, such applications not only provide conveniences in humans’ daily lives, but the algorithms themselves are accumulating more power due to their usefulness in society. We are becoming conscious of the fact that we spend a lot of our time devoted to doing tasks that serve the computers, instead of the computers serving us. As a single example, the Google search engine already dictates many mundane decisions we make in our daily lives, such as what to buy and where to buy it; it settles arguments and tells us what is true and important by guiding us to authoritative information. Algorithmic automation guides societal outcomes and therefore it benefits some groups over others — whether or not its owners and developers intentionally manipulate these outcomes. Centralized ownership and control of algorithmic automation is an important issue for society. Decentralized systems can counteract the downsides and threats of algorithmic automation, thereby enhancing the long-term benefits of technological solutions for humanity.
Algorithmic functions can transcend bounded human rationality. Human actions and outcomes are increasingly optimized through the use of big data and its analysis. The quantification of human thought, feeling, and action and their algorithmic optimization can improve social behaviors in ways that are too complex for humans to understand without the data-driven algorithmic aids. For example, the increasing availability of health data and analytics improves human health-related choices, especially if reinforced with algorithmic applications that interact with humans. Health data through sensors, wearables, and internet monitoring gives us recommendations on how to improve our lives and treat and prevent disease.
Given the analytical and predictive skills of algorithmic applications, data and algorithmic oracles can improve individual behavior, experiences, and achievement. But they can also improve the achievement of large networks of people, even larger society. For example, algorithmic applications can incrementally upgrade democratic processes in society. Big data and algorithmic data analytics today enable centralized algorithmically automated systems (such as Google, Facebook, and Amazon in the early 2020s) to discover individuals’ political preferences better than the individuals can themselves.[4] Algorithmic data analytics-driven human choice transcends humans’ bounded rationality.[5] As algorithmic analytics and predictions of human preferences and choice become increasingly accepted, exercising human political will by proxy through algorithmic interpretations may become increasingly common.
Taken to the extreme, centralized control of algorithmic automation could negate human input in data systems if the systems are designed to ignore individual choice, in preference to the goals of the platforms’ owners. Humans’ bounded rationality creates inefficiencies that can be improved upon. Human consciousness is more limited on many matters than networked computer systems.
However, decentralized systems can preserve human power and control, while providing superior outcomes by objective standards. Decentralized systems can outcompete centralized systems. Centralized algorithmic automation uses centrally collected data to enhance decision-making and outcomes with opaque algorithms to further the goals of the few owners. Decentralized systems are guided by the wisdom of the crowd, from humans and machines. Where centralized algorithmic automation would systematically remove the human presence in an effort to optimize efficiency and outcomes, decentralized systems use the power of algorithmic applications to enhance its features and outcomes with an omnipresent human backstop. Where centralized algorithmic automation would create an autocracy powered by centralized algorithmic human predictors, decentralized systems would create a meritocracy powered by optimized human decisions that increase diversity of choice for all.[6] Decentralized organizations give their members more power and autonomy. A decentrally controlled and owned algorithmically automated control system puts ultimate choices (such as design) back in the hands of people.
How can complicated algorithmic systems that are beyond individual human comprehension be built with foundational human backstops? How can we build systems that profitably exploit the wisdom of the crowd? Decentralization is the key. For example, in the early 2020s, cryptocurrency startups have started to experiment with more sophisticated upgrades to democratic systems. Complex voting schemes are being explored with a focus on incentive designs. These evolving technologies with human voting inputs can, over time, become automated to regulate the most minute decisions with decentralized consensus. The voting structure can be abstracted to scale decentralized power: mundane choices like “which self-driving car gets to pass” can be automated, while sophisticated choices such as “which social programs deserve more funding” or “how to design the automated voting systems” can be consciously and manually controlled by humans. We will explore how these systems are being designed in Chapter 7 and the consequences of such a microdemocracy.
Decentralized Commerce
Decentralized technology solutions create disruptions for existing legacy commerce. The emergence and proliferation of distributed blockchain applications (DApps) in the aftermath of the invention of the Bitcoin protocol in 2009 demonstrate that a nascent market for such applications and consumer demand already exists at the beginning of the 2020s. Consumer preferences continue to shape the DApps market and the solutions it may offer for commerce and society. Significant markets for blockchain applications will be the corporate marketplace, banks, legal, realty, and insurance. These markets will all be impacted significantly. DApps create solutions for business and society that are subject to far fewer and rather different transaction costs compared with centralized legacy businesses in the same industries. Through code-based solutions, DApps can help increase the overall trust of consumers and market participants at an unprecedented scale. Despite many cybersecurity issues associated with cryptocurrencies, among others, code-based trust can help lower transaction costs, but it also increases consumer and overall market confidence and certainty, which facilitate economies of scale that are only occasionally and temporarily possible in centralized structures. Through the lower cost structure, decentralized platforms have the ability to remove consumer fees that are an integral part of their centralized competitor businesses. Removing such centralized fees also allows for the removal of downward pressure on the platforms’ worker compensation as costs are less likely to increase and be passed on to workers and consumers. The lack of fees can help create a more efficient marketplace through the removal of the rent-seeking intermediators.
Decentralized technologies’ ability to lower transaction costs by removing otherwise needed intermediaries disrupts existing business models. For example, in the early 2020s blockchain technology provided numerous examples of evolving decentralized technologies that create an independent and transparent platform for establishing truth and building trust. Intermediaries, bureaucracy, and old-fashioned procedures are replaced by code, connectivity, crowds, and collaboration. An example here is the decentralized finance (deFi) market, where financial products are increasingly offered on top of digital assets to facilitate disintermediation of legacy systems such as underwriting, banking, and trading — the middlemen are removed. The technology increases transparency, openness, and speed, while at the same time significantly reducing costs by automating the functions of traditional intermediaries.
The many applications of evolving blockchain technology have the potential to change business models. Because of its implicit code-based guarantees, the technology allows a qualitatively different solution for agency, a foundational element of capitalism. Blockchain technology can replace agency constructs for many business relationships. The guarantees ensure that participants cannot circumvent the rules embedded in the code, contracts execute only if and when all contract parameters are fulfilled by both parties and verified by a majority of miners/nodes in the system. Blockchain-based guarantees remove agency costs because principals are less essential for monitoring agents, which addresses the inherent agency problems in modern finance and corporate governance.
Similarly, decentralized technologies reform business, administrative, and legal processes that rely on intermediaries. Any such processes may be updated and improved with decentralized technologies. For example, corporate processes that have ledger functionality but rely on legal intermediaries could be streamlined very quickly by implementing blockchain technology. When blockchain technology becomes more widely accepted and applications further spread into consumer-facing markets, legacy business processes and structures will likely be among the first to be amended. The combination of blockchain technology startups with platforms and machine learning present enormous opportunities to improve business and society. These technologies used in combination with big data and machine learning are becoming increasingly profitable and efficient. These tools, in turn, creates a surge of new and innovative platforms with disruptive effects for many industries.
Decentralized payment systems’ ability to rely entirely on cryptocurrencies creates comparative advantages over centralized systems. Centralized legacy fiat payment systems and platforms typically require some form of an existing banking relationship in order for consumers to utilize their services. Holding and storing cryptocurrencies does not require a banking relationship. While many legacy banks are cognizant of their limitations and are ready to embrace cryptocurrencies, centralized legacy fiat payment systems remain subject to payment processing issues and slow processing times for payments. Intermediaries such as banks and PayPal also require high fees. The fees make it only economically viable for higher volumes of transactions, creating barriers to entry in the process. Decentralized payment systems are not subject to these limitations, as anyone connected with the internet can create a free digital wallet and participate on decentralized platforms. Finally, while money laundering has traditionally been a problem in these markets, anonymity of market participants in cryptocurrency networks can also increase participation in certain markets and economies. As the technology and its uses evolve, traditional markets are increasingly encapsulated by it.
Legacy payment systems, cash, and bank notes are gradually losing ground to other payment systems.[7] At the beginning of the 2020s, in Northern Europe, as few as one in every five transactions is made in cash.[8] Cash usage in the United States, the United Kingdom, the Netherlands, Sweden, Finland, Canada, France, among other industrialized nations, has fallen well below 50% of total transaction volume.[9] In the United States, transacting in cash costs the consumer around 200 billion dollars annually — about $637 per person annually, which is a result of the cost of production, storage, and transportation, among other factors.[10]
The end of technological life cycles of legacy systems in the early 2020s and associated emerging trends in payment systems necessitate central banks’ enhanced examination of alternative payment systems.[11] Central banks and governments around the world have been experimenting with government-sponsored digital and cryptocurrencies since 2015.[12] In the case of central banks, such experimentation was already close to launch[13] or fully operational in the early 2020s.[14] Most major tech companies in the private sector have been experimenting with cryptocurrency projects since 2017. Several governments have issued their own digital currencies. Examples include Tunisia (eDinar),[15] Senegal (eCFA),[16] Sweden (eKrona),[17] Dubai (EmCash),[18] Japan (Jcoin),[19] Estonia (Estcoin),[20] and Ecuador,[21] among others.[22]
Reputation systems and Orwellian nightmares
In order to build politically decentralized networks devoted to profit, we argue that it is necessary to follow the Maghribis’ example. In order to keep a decentralized organization aligned in the pursuit of their goals, you must provide something more valuable than money: reputation. With our new information technology we can build global networks of billions of people united with a single set of protocols. We can track their reputation with digitally accurate computer processing and storage.
Fiction has already furnished many cautionary tales about developing a reputational system to monitor citizens in a society. The fear is in our collective unconscious, as demonstrated by the many recent novels, television shows, and movies devoted to portraying dystopias of injustice generated by poorly-designed automated reputation systems.[23]
But the tools of information technology are too powerful to deny. Back in 2013, publisher Tim O’Reilly (who was instrumental a decade earlier in promoting the term Web 2.0) explained its inevitability.[24] Using the example of the Uber ride-sharing app, he argued how decentralized feedback loops are more efficient for self-policing and regulating social behavior than top-down hierarchical governance. The scandals that have pestered Uber in the intervening decade have almost always derived from centralized decision making.
Centralized reputational systems are already functioning and guiding peoples’ behavior. eBay has had a feedback reputational system for customers and vendors since its inception in 1995, with an updated Seller Rating system in 2008. Insurance companies are employing apps to monitor and reward or punish customers based on their behavior. Most major automobile insurance companies have smartphone apps to monitor their customers’ driving habits. Most major health insurance companies have apps to monitor their customers’ exercise and dietary habits, tracking their movements and purchases. Currently these are opt-in, given traditional Western attitudes on privacy, but it is easily foreseeable that the information could be valuable enough to make it too punishing for members to opt-out, de facto mandatory.
Temporary gig workers in the platform economy are subject to reputational systems, such as TaskRabbit and Upwork. All major centralized social media platforms have opaque reputational systems for monitoring their users. Since 2018, to combat the spread of fake news on their platform, “Facebook has begun to assign its users a reputation score, predicting their trustworthiness on a scale from zero to 1.”[25] Throughout civilized history governments have instituted surveillance programs, judging their citizens for trustworthiness. Singapore, Estonia, and Israel have especially sophisticated contemporary programs.
The most ambitious and pervasive reputational system for controlling peoples’ behavior is easily the Chinese Communist Party’s Social Credit System (SCS). The Social Credit System[26] gathers information on minute behaviors, such as jaywalking, littering, and helping your neighbors. The SCS then uses computer algorithms, including artificial intelligence, to analyze the data and give you a Social Credit Score. This score is then used to determine whether or not you are eligible for a particular job, whether your children can attend better schools, even whether you can travel to other provinces.
The Social Credit System evokes reflexive fear in the average Westerner, but it is received much more positively in mainland China. The mainlanders[27] have a very different culture than Western societies, due to a very different experience from their recent history. “The result of decades of control…is that Chinese society suffers from a lack of trust, says veteran sociologist Zhang Lifan. People often expect to be cheated or to get in trouble without having done anything. This anxiety, Zhang says, stems from the Cultural Revolution (1966–1976), when friends and family members were pitted against one another and millions of Chinese were killed in political struggles. ‘It’s a problem the ruling party itself has created,’ Zhang says, ‘and now it wants to solve it.’ The stated purpose of the social credit system is to help Chinese people trust each other again.”[28]
The fact that people were starving in the streets in the 1960s, the fact that most people have family members in living memory who starved to death, means the entire society past a certain age were severely traumatized. Everyone else was raised by people who were traumatized. Many social ills derive from this experience.
Mainland Chinese often mistrust the people in their own society. They have a dim view of human nature. So, they follow Han Fei’s Hobbesian philosophy of Legalism and rigid centralization. They don’t believe in democracy — people should not be trusted to rule. The West’s attitude is not currently quite as cynical. More often Westerners believe people are good at heart, despite all the evidence to the contrary, since every human society appears to be founded on traditions and laws reflecting historical violence.
Second, the Chinese have had a tradition of formal social policing on a much more pervasive scale than the West. Baojia is a formal system of communal self-policing that had been in place continually for the last 1000 years with only occasional interruptions during major revolutions.[29] Roughly, a Bao is a basic watch group consisting of 10 families who rotate their policing duties. A jia is a collection of 10 Bao, or 100 families whose representatives meet to report and unify their standards. Since the last major revolution in 1949 policing became much more personally invasive as speech and thought were carefully controlled by the Chinese Communist Party (CCP), e.g., with danwei, hukou, Golden Shield, and modern grid policing.
Third, mainland Chinese naturally feel like other countries in capitalistic systems are adversaries; they feel that other countries are trying to exploit them (cf., the Century of Humiliation); that they are still in an economic crisis and need a system which can efficiently and rapidly respond. So, they naturally choose a centralized solution to outcompete their enemies.
For all these reasons and others, the existence, nature, and current popularity of the SCS system should not be particularly surprising, though its obvious Orwellian overtones provoke an automatic negative reaction in the West.
There are many good reasons to implement the SCS. (But its likely use to oppress minorities, such as Uighurs and Tibetans, makes it uncomfortable to discuss any positive aspects.) It is a powerful tool that is being used to improve many social conditions, especially corruption, on a personal level, at the corporate level, and in public institutions.[30] The SCS uses the new tools of information technology in a formal manner with respect to their government. That can be incredibly powerful and valuable to improving society.
A similar type of social monitoring was implemented in 2020 in response to the Covid-19 pandemic. The Alipay Health Code is an app created by the local Hangzhou government with the help of Ant Financial, a sister company of the e-commerce giant Alibaba. People in China sign up through Alipay. On any given day the app assigns its users a color green, yellow or red to judge their health. Then users display their color to guards before they are allowed into markets or on subways. Ant says the system is already in use in 200 cities and is being rolled out nationwide. [31] The opaque algorithm monitors its users’ locations and assigns a score based on how close the users were in contact with known outbreaks of the virus. The New York Times studied the algorithm and “found that as soon as a user grants the software access to personal data, a piece of the program labeled ‘reportInfoAndLocationToPolice’ sends the person’s location, city name and an identifying code number to a server.”[32]
Many in the West are afraid the success of the SCS in furthering social harmony, efficiency, and productivity will force other countries to adopt a version, to remain competitive. However, the West doesn’t have the same fundamental factors motivating its implementation. If they do implement such a system, in a centralized form, it will be from fear of social unrest or due to an abdication of individual responsibility. Just as the Snowden leaks in 2013[33] revealed the U.S. governments abuses of its citizens privacy has led to no meaningful reform, centralized authorities have a long record of using crises to justify the introduction of monitoring tools that outlast their original purpose. The Covid-19 pandemic led to centralized nationwide monitoring of citizens with contact tracing apps in many countries, and the expansion to reputational systems would be a simple modification.
But implementing any centralized nationwide reputational system would be a major mistake, since a decentralized system would be far superior in most every way.
Centralized and opaque systems like the SCS are unstable in the long run. They are particularly dangerous, because their computerized bureaucracy makes them inherently rigid. Their early successes will make them more and more brittle. The SCS will certainly be successful in the beginning, and it will justify the strengthening of the centralized government of the PRC. However, within a few years it will lose its relevance and efficiency, because society will change faster than the centralized governing bureaucracy can adapt — its effectiveness will not help, since that will only accelerate the social change. Suggestions that AI will solve these problems are misguided, and will fail for the same reason. Neural networks are merely a complex mathematical architecture for performing statistical regression, which is always extremely unreliable when applied to novel situations. Successful new business arrangements lead to successful new business arrangements. There will always be new social situations to monitor. Any success achieved by automating the SCS will only make it more brittle, and more dangerous.
Until the Chinese people trust each other, they will not choose transparency and decentralization of power. Assuming the CCP continues to use the SCS for propaganda, showing violations on the nightly news, they can maintain the Hobbesian view of the world, and prop up the SCS and the opaque power centralization of the CCP, no matter how poorly it eventually functions, until the only solution is violent revolution.
The SCS is the complete opposite of the reputation system we suggest. Without being able to look at the actual design of the CCP Social Credit System, we infer it has the following design properties:
Synthesizes all types of reputation into one type of token. The reputation token tells you whether you are a good or a bad citizen.
Completely closed membership. You cannot opt in or out.
No privacy. You are not anonymous in the system. You have 1 account with strict identity control. You have no power over your own information.
Centralized with opaque governance. Complete lack of transparency in the operation and protocol updates.
The Web3 reputation systems that will be detailed in Chapter 6 make precisely the opposite design choices:
Many types of reputation tokens. 1 for each type of DAO. DAOs should be split into many different types with many different DAOs for each type of expertise.
Open membership with anonymous accounts gives you complete freedom to join or leave.
Privacy enabled by public key cryptography. Digital signature technology and other ZK proofs allow you to use your information without revealing it.
Decentralized governance. Total transparency in operation and protocol updates. An open source design is necessary to run any program in a P2P environment, because decentralization means the source code needs to be shared by all if it isn’t controlled centrally.
As Karl Popper argued in 1945, an open society can outcompete closed societies.[34]
“It was Popper’s great insight that where knowledge is subjected to competitive evaluation and peer review by autonomous communities of scholars, theories that genuinely advance human progress can be tested and improved. The unseen advantage of open societies over authoritarian ones lies here, in their capacity to innovate, to unleash creative minds, and to turn their knowledge into insights, products, techniques, and systems that reduce human suffering and improve our life together. […] Single party states have made a very different bet: they are gambling that they can reconcile innovation and progress with political control and single party domination. The key unanswered question about how the twenty-first century turns out is which kind […] of institutional form — open societies or single party states — will turn out to be the more successful, which society will best fulfill the needs and aspirations of their people.”[35]
The old vs. the new
Engineers are rapidly building the tools to decentralize our economic institutions. There are many well-funded proposals for dispute resolution for smart contracts that bypass our centralized justice system. Our traditional institutions are failing to respond to these alternatives. The correct response in a democracy is not to fight against progress, but to adopt these new tools — to decentralize power and make bureaucratic information more transparent.
But these institutions are old. Their original legal constitutions were drafted with goose feather pens on sheepskin parchment, bound together and stored in a single library, placed at the center of town. The technology of the time did not permit a conception of information processing that gives these new tools for decentralized governance and transparency.
The amount of democracy and transparency the founders of our current system did achieve has been subverted in the intervening decades by the natural concentration of power that evolves under competition. The hierarchies have ossified. They are likely too brittle now, to adopt processes that come from such radically different information technologies. Changes are likely to be seen as a threat to power and resisted. If that is the case, engineers will continue to build systems which sidestep them as irrelevant obstacles to efficiency.
On the other hand, changes can be a threat to the order and efficiency we have already achieved. The new is not always better, and ignorant engineers can be more dangerous than obstinate bureaucrats.
The fallacy of Uniformitarianism and Chesterton’s fence
In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”
–G. K. Chesterton, The Thing (1929)
People tend to believe that the experience they have today has been the same throughout history. That contemporary attitudes and opinions are natural and have never changed and will never change.
We assume the peace we live under today emerges automatically, perhaps because of human nature. The social harmony we enjoy is taken for granted. The paved streets and water and power lines maintained with taxes collected peacefully and efficiently are not perceived as any miracle of social engineering. Somehow this wealth of peaceful cooperation seems natural to me, despite the fact that I reflexively curse the idiot who always seems to be driving in front of me.
The fallacy of uniformitarianism is to believe that the social harmony we enjoy today, especially in economically advanced nations, is natural and automatic. We falsely believe that if we dismantle our cultural and public institutions, we will still enjoy our current level of social cooperation and its resulting wealth. Some even believe that our cultural and civic institutions have always been the primary obstacles to greater material prosperity and social harmony.
Ignorant of history, our software engineers are building technological workarounds to fight corruption and inefficiency by eliminating escrow lawyers, and police, and insurance salesmen with Web3 solutions. Engineers see the improvements they can make by removing the cost of these middlemen without always understanding the original reason for their existence.
Engineers see the corruption, the business friction, and they build systems to eliminate it. But you shouldn’t mistake the catalyst for the friction. Friction in a system is inevitable. So, in order to overcome the friction and achieve motion — achieve liquidity in an economy — you need catalysts. Catalysts provide activation energy.
When synthesizing a chemical, in the lab or in our living cells, we often use a chemical catalyst to start the reaction. Every cell in every living thing devotes much of their activity to building chemical catalysts, like the ATP catalyst constructed in the mitochondrion. The mitochondrion adds three phosphate ions to adenosine to build ATP, adenosine-tri-phosphate. The third phosphate ion gives ATP an abundance of energy. ATP then jiggles around in the cell until it meets up with a protein with a phosphate receptor. The ATP bonds with the protein, dropping off its third phosphate ion, giving the protein an energy kick. This gives the protein the activation energy to do its protein-y job. Remove the ATP catalysts from a cell and it will quickly stop moving and die. Catalysts are the key to temporarily avoiding the inevitable deterioration the Second Law of Thermodynamics promises — ordered systems degenerate toward disorder. We need to provide energy to catalysts so that our systems don’t stop.
Middlemen are the catalysts that exist to overcome the friction of economic corruption. Police, lawyers, and insurance salesmen eliminate threats to business activity from different angles. These middlemen are paid to overcome these corruptions and frictions. Unfortunately, they have an incentive to not entirely eliminate the corruption. Whether these overhead industries become corrupt themselves, or if they are merely falsely identified with the corruption itself because of their close association, we sometimes think that the middlemen are responsible for the business friction. We often miss the original reason for their existence. “No greater mistake can be made than to think that our institutions are fixed or may not be changed for the worse.”[36]
Remove the middlemen business catalysts and the economy will soon die. Liquidity will dry up. A few people will unfairly lose on business deals, then no one will take the risk to initiate a business deal. The goal should not be to eliminate these middlemen. The goal is to make these industries more efficient. The goal is to automate them, to eliminate their own corruption and friction.
Automating these middlemen functions makes them more efficient, like the chemical catalysts in a cell. Unlike human middlemen, automated middlemen can be designed so that they don’t contribute to the corruption they were designed to fight. If we automate these processes, then we have the power to maintain these functions for ourselves. Individuals become more autonomous and powerful. We can choose the level of catalyst protection that we need.
Carelessly dismantling these institutions could be catastrophic. Socio-cultural advances from the past are necessary for successful business.
But ignoring the inefficiency and corruption of these institutions to protect entrenched hierarchical power will also lead to catastrophe. Decentralization and transparency can save these institutions, making them more relevant and efficient.
Both sides are wrong when they fail to understand each other. We need to transform our institutions to match the new technological advances, without losing the value they currently provide.
Obstacles to decentralization
For 10 years the Bitcoin network has been running without any centralized oversight. No authority has ever stepped in to refund a single transaction. Many billions of USD worth of bitcoin has been stolen and embezzled from centralized organizations which provide service to customers using bitcoin. But the network itself has never made a single mistake. No network transaction has ever sent the wrong quantity of bitcoin or mistakenly sent anything to the wrong account. No digital token has ever disappeared or was mistakenly duplicated. Not a single bug has been found to create any type of accounting error in a system worth hundreds of billions of dollars.
This is a spectacular success. Bitcoin illustrates the power of decentralized cooperation and transparency.
Nevertheless, there has been no significant adoption and use of bitcoin currency in the economy in the last decade. Neither has there been any serious use of Ethereum smart contracts, or the InterPlanetary Filing System, or any of a host of other decentralized P2P services that have been promised. These radically decentralized tools have not pervaded the mainstream economy despite billions of dollars in investment. Why not? What is missing?
In short, almost everything. We are still waiting for a single application, a killer app for Web3. What will be the killer app for the decentralized economy? The answer is a DAO.[37]
The idea of a profitable DAO is to make a company which is governed autonomously by smart contracts and organized in a decentralized way, without any single permanent governing authority, no concentrated ownership. Decentralized companies would give fair distributions of power to its workers, according to how they benefit the group. The existence of diverse types of DAOs would drive the economic output of the large-scale decentralized economy, justifying the existence of the other decentralized overhead tools — like cryptocurrencies, smart-contract escrow, decentralized insurance and justice.
But there aren’t any DAOs, yet, The crypto economy is hollow. Why? Well, partly because the first DAO failed spectacularly.
The 2016 DAO
In 2016, within the first year that Ethereum created programmable contracts which could autonomously govern the behavior of a decentralized organization, the first DAO was built, called confusingly enough, The DAO. This 2016 DAO was to be a decentralized venture fund, set up as an organization based purely on code and smart contracts. It did not have a conventional corporate structure, no incorporation, and had no physical address or headquarters. All traditional control mechanisms employed by principals in agency relationships had been entirely removed. People who worked for the 2016 DAO had a different kind of agency relationship. Workers were engaged in a dynamic set of relationships that continuously self-organized around projects and outcomes, not corporate hierarchies with implicit hierarchical biases.
The 2016 DAO instantly attracted thousands of members and US$150 million in investment, 14% of Ethereum’s total value. It failed almost as quickly. Within two weeks, 30% of the money, $45 million, was stolen, causing the Ethereum network to collapse and reboot its network. The 2016 DAO had a programming bug called re-entrancy, where two lines of code were in the wrong order.[38] But that technical design flaw was not its most serious problem. The system would have eventually failed more spectacularly, because it was designed poorly on other levels. For example, if someone ever gained 51% power in the system, they could have taken the money by outvoting the rest of the members to invest the group’s money in their own worthless pet project. Voting power could be purchased, so we know precisely how much money it would cost to destroy the 2016 DAO. If it were more successful, and lasted longer than a month, someone would have eventually amassed the money to arbitrage the trivial governance structure.
Since the failure of the original DAO, the community has been scrambling to provide new DAO alternatives. New DAO proposals appear almost quarterly in the 2020s. Most fail because of a lack of decentralized governance solutions.
Most organizations that use P2P technology are not decentralized and they are not autonomous. They are governed by a centralized group of developers and owners. The desire to invest in DAOs was not quelled by the failure of the 2016 DAO. For example, Aragon collected US$25 million within 26 minutes in a capped ICO[39] in 2017. Since then, the group switched focus a few times, and developed one of the most sophisticated general DAO governance protocols in the blockchain space. That is a backhanded compliment, though: their reputation system and legislative and judicial governance protocols are trivial.[40] In 2020, Aragon declined to use their own protocol to arbitrate an internal dispute, which is testimony to the lack of trust of their system designers in their own system capabilities.
The 2016 DAO has a lasting impact on emerging DAO designs. It creates core commonalities and associated path dependencies in future generations of DAOs.[41] The common denominator for all DAO token members is the unifying desire to optimize the DAO token value. Accordingly, performance assessment in the DAO structure is based on value optimization, not on hierarchical or political processes. On the upside, token holders and contractors work towards a common goal of optimizing the DAO and the token value. Non-performance reputational penalties can minimize racial or cultural biases inasmuch as anonymity is maintained. Yet, the focus on the value enhancement of fungible tokens can lead to short-termism and may ignore ethical and governance issues.
Creating a true DAO, one that is successful and stable, is a lot more difficult than it sounds. Even a centralized company is difficult to create, though we have plenty of successful centralized examples to copy. In recent history, the only long-term successful examples of politically decentralized companies devoted to profit have been Bitcoin and its permutations. We’re all holding our breaths wondering how long they can defy gravity. We’re not impressed by how little agility they’ve demonstrated. The Bitcoin network has not had much of a record of innovation, which is not surprising considering its complete lack of formal governance, and the fact that its inventor has remained anonymous.
Path dependencies
Path dependencies create a major obstacle to decentralizing our institutions and businesses. Humans have psychological inertia, and cling to any familiar system, but especially those that have given them comfort in the past. Groups have lived in hierarchies since before civilization began. Our human history is one of organizing in centralized networks. We understand hierarchies on a deep animal level. It is reasonable to fear the chaos that naturally follows the cataclysm from the collapse of a hierarchy. The conscious intervention necessary to prevent the chaos is not as certain to occur as the revolution and change of power.
Similarly, decentralized organizations that take advantage of our contemporary advances in information technology allow global participation, blithely trading across borders. This violates basic principles of territorial integrity in nations, which is a foundational principle of international law.[42] Forced imposition of a border change is an act that traditionally justifies war. However, as society increasingly adopts powerful new technologies, such as the cell phone or internet which cross borders with new forms of collaboration and value creation, these traditional notions of protecting territorial integrity by controlling the natural resources, products, services, and behavior of its citizens become obstacles to improved efficiency in business.
In the early 2020s, government-controlled regulation of the evolving digital asset space is perhaps the leading obstacle to decentralization. The Securities and Exchange Commission, among other regulatory agencies in the United States, is attempting to fit decentralized technology solutions and their digital assets into the existing regulatory infrastructure. Carve-outs and safe harbors were discussed but not seriously considered. The emphasis of regulatory initiatives in the 2020s was on securities tokens and legal ways to trade such tokens in the then existing securities law infrastructure. Government control of the industry was an indispensable aspect of the legal initiatives. Yet, decentralized technology solutions, at their core, negate external control, censorship, and oversight. Accordingly, the then-proposed approaches largely undermined the evolution of decentralized technology. Without the ability to experiment in a legally protected environment, decentralized products and technology cannot evolve, and consumer protection rightly trumps decentralized product experimentation. Switzerland in the 2020s has been at the forefront of legal experimentation with decentralized infrastructure products and DAOs.
The regulatory infrastructure solutions for decentralized products and technology of the early 2020s is largely following the characteristics of the product issuers. Tokens issued by government entities (government coins) are compliant with and followed the legal environment established by the issuing government. Similarly, tokens issued by corporations in a given jurisdiction (corporate coins), are designed to be compliant with the legal guidance available at the time of their issuance in the given jurisdiction. More decentralized products and technology solutions (people coins) typically do not fit into such regulatory solutions in a given jurisdiction. As a result, the more decentralized products that are more censorship resistant, autonomous, and cannot be controlled by regulatory agencies, are largely left in a regulatory vacuum. The associated legal uncertainty limits their expansion, reach, and evolution.
The regulation of government coins versus corporate coins versus people coins bifurcates the established regulatory infrastructure for decentralized technologies. Government coins and corporate coins are able to develop and evolve with regulatory oversight. Governments, such as the PRC, are able to promote the use of the technology through the tokens they sponsor and force users and merchants in their jurisdiction to embrace the technology. The government sponsored use of the technology, through government coins and corporate coins, also enable a flourishing ecosystem that evolves around the government-sponsored decentralized technology solutions. In the case of corporate coins, just as in other industries like the oil and gas industry, corporate influences support and enable regulatory approaches and solutions they could comply with, support, and control. Such corporate-driven legal solutions operate at the expense of more decentralized products and technology that are not always as compliant with the centralized legal infrastructure for the cryptocurrency and blockchain industry. People coins and the innovations they create are largely subject to regulatory uncertainty and evolve much more slowly or not at all. As a result, evolving government coins and corporate coins create their own path dependencies and engrained product deficiencies with suboptimal levels of decentralization.
These are some of the external and internal obstacles to building the decentralized economy. But there is an even larger problem. We’re simply not ready to build a DAO which can compete with centralized corporations. When someone tries to form a centralized company, they are supported by an enormous infrastructure devoted to helping them succeed. That infrastructure is called “all of civilization”. All our civilized institutions have evolved over the centuries and millennia to make centralized business a little easier and a little more efficient. The entire environment of the decentralized economy needs to be built before it can support its first truly successful DAO.
Overhead institutions are catalysts for the economy
“Environments are not just containers, but are processes that change the content totally.” –Marshall McLuhan, American scholar, Volume 35, p 200 (1965)
The modern legal system promises no one will steal from us in any stage of our business. It regulates markets to create an efficient and level playing field without a warlord tipping the scales. In developed countries, we don’t need to bribe anyone to begin a new business arrangement — the licenses and certifications are publicly known and transparently reported and audited. The invention of the modern police force centralized personal defense. Instead of every individual constantly expending the energy to display our personal imperviousness to predation, we’ve concentrated the effort into a centralized institution which protects everyone, by outsourcing revenge.
The contemporary legal system needs to incorporate the new advances in information technology. Or the Web3 vision of the future needs to build the efficiency of our current legal system into its vision of the future economy. In the early 2020s, decentralized legal infrastructure solutions are almost entirely missing. The incompatibility of decentralized technologies with the existing regulatory frameworks suggest that decentralized legal infrastructure solutions should flourish. While some startups are experimenting with ERC-20 tokens and forms of decentralized arbitration, such solutions lack sufficient scale, decentralization, anonymity, and autonomy.
Cyber security attacks erode the trust that people might build from the sophisticated cryptographic tools that are available. The open access of cryptocurrency-based tools makes it nearly impossible to police cyber criminals in varied national jurisdictions. Global trust in internet security is in steady decline, with the U.S. being significantly more suspicious than average.[43] This lack of trust is exacerbated by majority ownership of traffic control in a few geographical monopolies. These monopolies create information silos and constrain knowledge exchange. The resulting lack of competition and cooperation impedes innovation, including at the protocol level and diminished consumer protection and rights. Skype video-messaging and teleconferencing service started with a decentralized P2P backbone (based on the decentralized music sharing app, Kazaa). This P2P service distributed more than 660 million worldwide users by the end of 2010.[44] Skype was sold to Microsoft the next year. In 2013 the Snowden files revealed that Microsoft shared American and international users’ information with U.S. security agencies.[45] Whenever decentralized organizations pose a threat of disruption to any established centralized industry, they will naturally face competition and resistance.
The strong libertarian focus of some of the most influential Web3 developers means the crypto community is extremely reticent to cooperate with mainstream institutions and corporations. This ornery streak extends to the lack of cooperation within the crypto community on different projects. Many projects are attempting to build the “Bitcoin killer” or the “Ethereum killer”. Instead of building compatible technologies in the service of interoperability, most are competing with each other, contradicting the open source culture that should pervade the space if it has any hope of thriving. But collaboration would require an environment with clear ground rules — an overarching governance process that everyone could agree upon. Without such basics, the fraud and regulatory uncertainty that currently characterize the crypto community — which are certainly exaggerated by establishment media, but are still based in reality — will inevitably continue. However, any such scheme of broad governance over multiple P2P seems unlikely to emerge in the current climate, even though that system is exactly what their mainstream centralized corporate competitors enjoy.
The current political system provides the material infrastructure so that our centralized businesses can run efficiently — taxes are peacefully collected to build roads to help deliver our supplies, to provide electricity, water and sewers. It marshals a military, to give us confidence our investments will not crumble in March each year, when armies feel like pillaging. Our religious and educational institutions are designed to make customers, workers, and partners who will behave well in all their dealings.
The contemporary political system should incorporate the new advances in information technology. Otherwise the Web3 vision of the future needs to build at least the features and social advantages of our current political system into its vision of the economy. Otherwise the decentralized economy will merely be a parasite on the dying host that is the traditional mainstream economy; in that case, once the host is dead, the social advantages we enjoy today will be lost.
News media and other communication infrastructures have been influenced throughout history to serve business. Early adoption by business has always driven advances in electronic information technology. Some of the first financially successful ventures in telegraph technology were commercial stock tickers for businesses. They remained in use until the 1960s when businesses became early adopters of personal computers for telex transmissions. In the 1860s transatlantic telegraph cables were laid with the express purpose of providing London with market information from New York exchanges to improve trade and reduce prices. The efficiency gains are estimated to have been “equivalent to 8 percent of export value”.[46] A large percentage of early radio broadcasts throughout the world were market reports, especially through telex technology, which adapted telegraphy to wireless radio transmissions for business. Early adoption of telephones and later cellphones and smartphones, Blackberries for texting and apps, etc., was driven by business uses.
In the decentralized economy, trusted news sources become even more important, as business contracts become more automated. Automated news services in P2P systems are called oracles. Many oracles exist today, but most are centralized. To make a DAO secure, many different trusted decentralized oracles need to be developed. (We’ll come back to this in Chapter 9.)
Still more institutions have evolved over the centuries to subtly improve centralized business, including banking and underwriting. Most people have no sense of how important underwriting and insurance is to business. Nothing happens in any business transaction, in any market, without underwriting to improve its efficiency. Every transaction is a gamble on the future, and insurance gives people the confidence to take the risk, which provides the liquidity to make the markets more efficient. (See Chapter 8.)
When these overhead institutions work well, they are extremely efficient, because business then uses them less. When the legal institutions work well, business is less corrupt, so there is less need to appeal for justice. The better the system runs, the more these institutions fade into the background.
The natural hope of most Web3 engineers is that these institutions can be automated away until they vanish. The hope is that self-regulating smart contracts will never require an appeal to justice. Decentralized oracles will eliminate the need for any original investigation from independent media. Automated systems will eliminate the middleman. These hopes are largely misplaced.
The middleman provides an essential service. Business contracts are not getting simpler as our technology becomes more sophisticated. Each successful business agreement leads to more complex arrangements for more sophisticated systems of cooperation. If the services these middlemen provide can be automated away, they most certainly will be. Many functions in society have been automated away in the past, especially manual labor. But many types of middlemen have persisted. Why? There are certain junctures in business where novel problems regularly arise whenever circumstances change. These problems require creative solutions, and people step in to capitalize. These persistent junctures become business institutions.
The imagined future decentralized economy is missing almost all of the functions these institutions provide. Without decentralized versions of these services, DAOs will not be able to compete with centralized companies.
Summary
What’s missing from the decentralized economy? Almost everything.
What are the obstacles to decentralization? Most of the economy — most of the world — is centralized and sees new structures as a threat to power. Many people can’t imagine an alternative to centralization.
Is resistance futile? Certainly not. Decentralized organizations are as natural as centralized organizations. In many situations they are superior and will outcompete centralized institutions without the need for direct conflict.
Interoperability, the API economy, is most efficiently achieved, in the long run, on decentralized platforms. Negotiations made on a level playing field are fairer, resolve quicker, and encourage more business. When a centralized corporation owns the playing field there is less incentive to participate, knowing they will always take a piece of the action — as much as the market will bear. Monopolies are bad for the economy. Centralized companies are already trying to build platforms according to decentralized principles, like Google’s Play Store, and open-source design, such as TensorFlow.
As our experiences and decisions move online, our privacy is being diminished. Our behaviors are monitored by computers, and our decisions are guided by them. Auto insurance apps monitor our driving. Health insurance apps monitor our exercise and diet. Credit card companies monitor our purchases. With the Covid-19 pandemic, contact tracing apps are being instituted with continuous global monitoring of peoples’ locations.[47] Centralized companies are building the tools faster than decentralized organizations, but people are resisting the threats to their privacy, making the apps less effective.[48] People more willingly participate with decentralized apps, if their information remains under their personal control. ZK proofs allow people to do exactly that, sharing complex information for the purposes of social improvement, while maintaining control of their personal information.
The 2020 Covid-19 pandemic was the first 21st century global crisis demanding global coordination of peoples’ information, but it certainly won’t be the last. Government by algorithm is already here.[49] Reared in a centralized world, we reflexively turn to centralized solutions. But a decentralized approach is more effective for such global problems. Decentralized networks encourage interoperability through bureaucratic transparency. This allows us to integrate data (on human movement, medical information, and more variables we haven’t anticipated) more effectively than if one source attempts to dictate the development. With the privacy controls of decentralized technologies, with open source culture allowing public audits to guarantee security, we promote an atmosphere of participation. [50]
Decentralized developers are moving remarkably fast, but they still have much to improve. Bitcoin and Ethereum have provided primitive decentralized versions of currency and business contracts. How do we build decentralized versions of all the rest of the institutions that business and society rely on? What should we expect to see before we can confidently participate in the decentralized economy? The rest of this book analyzes these questions and provides a guide for navigating the future decades as we experiment and fail with decentralized structures, as we filter out the centralized impurities that our flawed understanding of decentralization will inevitably expose.
Evans, Dave (Apr. 2011). The Internet of Things: How the Next Evolution of the Internet is Changing Everything. CISCO White Paper, https://www.cisco.com/c/dam/en_us/about/ac79/docs/innov/IoT_IBSG_0411FINAL.pdf (accessed June 1, 2020).
Wikipedia. Last Universal Common Ancestor, https://en.wikipedia.org/wiki/Last_universal_common_ancestor (accessed June 1, 2020).
[1] For example, Christiaan Huygens invented flyball governors in the 1600s. Huygens’ governors were used to regulate the speed of windmills by automatically adjusting the angle of its vanes when the flyball spun quicker. The physicist Maxwell did careful research explaining their function, which was used on 1788 by Watt in his steam engine.
Enrique Fernández Cara & Enrique Zuazua Iriondo, “Control theory: history, mathematical achievements and perspectives”, Boletín de la Sociedad Española de Matemática Aplicada, 26, pp 79–140 (2003).
[2] According to the IDC the internet held more than 18 zettabytes in 2018. That’s more than 18,000,000,000,000,000,000,000 bytes of data — a number too big to be intuitively comprehended by humans. https://www.seagate.com/files/www-content/our-story/trends/files/idc-seagate-dataage-whitepaper.pdf (Retrieved 8/6/20).
[3] GIS stands for Geographic Information System is a framework for integrating numerous types of global geographic data. There are layers that map the location, quantity and type of minerals in the ground; a layer describing the location and quality of groundwater; a layer describing every detail of civil engineering projects, such as streets, buildings, sewage, and electricity; a layer describing social patterns, such as traffic, crime, and monetary flow. Algorithms built for analyzing this public data can be used to make more accurate valuations of property, so that McDonald’s knows whether a location will give a successful franchise before they invest.
Neal Ungerleider, “How Fast Food Chains Pick Their Next Location”, Fast Company (8/25/2014) Available online at https://www.fastcompany.com/3034792/how-fast-food-chains-pick-their-next-location (Retrieved 8/6/20).
[4] Kahneman, Daniel, Fredrickson, Barbara L., Schreiber, Charles A., & Redelmeier, Donald A. (Nov. 1993). When More Pain is Preferred to Less: Adding a Better End. Psychological Science, 4:6, 401–405.
[5] Ibid. Kahneman’s cold water experiments suggest that humans listen to a narrating self in political decision making, follow a peak-end rule, forget the vast majority of political events during a given legislation period, focus exclusively on a few extreme outlier events, and give largely disproportionate weight in political decision making to the most recent events. Ibid.
[6] As Karl Popper put it: “The growth of knowledge depends entirely on disagreement”, Popper, Karl R. (1994). The Myth of the Framework: In Defence of Science and Rationality. Routledge: London.
[7] Rogoff, Kenneth S. (2016). The Curse of Cash. Princeton: Princeton University Press: Princeton; Brugge, Jonathan, Denecker, Olivier, Jawaid, Hamza, Kovacs, Andras, & Shami, Ibrahim (Aug. 20, 2018). Attacking the Cost of Cash. McKinsey & Company: Our Insights, https://www.mckinsey.com/industries/financial-services/our-insights/attacking-the-cost-of-cash (accessed June 1, 2020).
[8] Ibid.
[9] Ibid.
[10] Ibid. The cost of cash is primarily associated with counting, managing, storing, transporting, guarding, and accounting for bank notes. Berensten, Aleksander & Schar, Fabian (2018). The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies. Federal Reserve Bank of St. Louis Review, 100:2, 97–106; The theft of cash alone costs U.S. retail businesses losses around $40 billion annually. Yakowicz, Will (Sept. 20, 2013). Cash Costs U.S. Businesses $40 Billion a Year. Inc., https://www.inc.com/will-yakowicz/dealing-with-cash-costs-american-businesses-55-billion.html (accessed June 1, 2020).
[11] Bech, Morten & Garratt, Rodney (2017). Central Bank Cryptocurrencies. BIS Quarterly Review.
[12] Hileman, Garrick & Rauchs, Michel (2017). Global Cryptocurrency Benchmarking Study. Cambridge Cenre for Alternative Finance, https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-04-20-global-cryptocurrency-benchmarking-study.pdf (accessed June 1, 2020); Mersch, Yves (July 24, 2017). Central Bank Speech at the Cent. Bank of Malaysia Monetary Policy Conference [transcript available at https://www.bis.org/review/r170807c.htm]; Digital Currency Initiative, MIT Media Lab, https://dci.mit.edu; Monetary Authority of Singapore, Financial Stability Review (Nov. 2017), https://www.mas.gov.sg/-/media/MAS/resource/publications/fsr/FSR-2017.pdf; Meaning, Jack, Dyson, Ben, Barker, James & Clayton, Emily (May 2018). Broadening Narrow Money: Monetary Policy with a Central Bank Digital Currency. Bank of England [Staff Working Paper №724]; Koning, J.P. (2016). Fedcoin: A Central Bank-Issued Cryptocurrency, R3 Report, 15; Motamedi, Sina (July 21, 2014). Will Bitcoins Ever Become Money? A Path to Decentralized Central Banking, TannuTuva.org, https://tannutuva.org/2014/will-bitcoins-ever-become-money-a-path-to-decentralized-central-banking.
[13] The Bank of Canada and Bank of England announced in 2016 that the technology was not ready for a central bank-sponsored cryptocurrency. Yet other central banks, such as in Singapore and Sweden, have already launched their e-currency projects.
[14] Chohan, Usman W. (Feb. 7, 2018). Cryptocurrencies as Asset-Backed Instruments: The Venezuelan Petro [unpublished paper], https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3119606; Zagaris, Bruce (2018). U.S. Bans Venezuela’s New Cryptocurrency and Adds 3 Officials to Sanctions List. International Enforcement Law Reporter, 34:3, 157–161; Hirschfeld Davis, Julie & Popper, Nathaniel (Mar. 20, 2018). White House Bans Venezuela’s Digital Currency and Imposes Further Sanctions. New York Times, A1.
[15] Kastelein, Richard (Dec. 28, 2015). Tunisia to Replace Its National Digital Currency, eDinar, with Blockchain-Driven Monetas Currency. Blockchain News, https://www.the-blockchain.com/2015/12/28/tunisia-to-replace-its-national-digital-currency-edinar-with-blockchain-driven-monetas-currency/ (accessed June 1, 2020).
[16] Das, Samburaj (Nov. 28, 2016). Senegal Will Introduce a Blockchain-Based National Digital Currency. CCN, https://www.ccn.com/senegal-will-introduce-blockchain-based-national-digital-currency/.
[17] Afraid of a few commercial entities controlling cash supply in Sweden, the Swedish central bank has kicked off its digital currency project e-krona. Billner, Amanda (Oct. 26, 2018). Now There are Plans for ‘e-Krona’ in Cash-Shy Sweden. Bloomberg: Economics, https://www.bloomberg.com/news/articles/2018-10-26/riksbank-to-develop-pilot-electronic-currency-amid-cash-decline.
[18] Buck, Jon (Oct. 1, 2017). Dubai Will Issue First Ever State Cryptocurrency. Cointelegraph, https://cointelegraph.com/news/dubai-will-issue-first-ever-state-cryptocurrency.
[19] Kharpal, Arjun (Sep. 27, 2017). Japanese Banks are Thinking of Making Their Own Cryptocurrency Called the J-Coin. CNBC: Tech Transformers, https://www.cnbc.com/2017/09/27/japanese-banks-cryptocurrency-j-coin.html.
[20] Korjus, Kaspar (Dec. 18, 2017). We’re Planning to Launch estcoin — and That’s Only the Start. Medium, https://medium.com/e-residency-blog/were-planning-to-launch-estcoin-and-that-s-only-the-start-310aba7f3790.
[21] Rosenfeld, Everett (Feb. 9, 2015). Exuador Becomes the First Country to Roll Out Its Own Digital Cash. CNBC.com, https://www.cnbc.com/2015/02/06/ecuador-becomes-the-first-country-to-roll-out-its-own-digital-durrency.html.
[22] Thomson Reuters (Oct. 25, 2017). Cryptocurrencies by Country, https://blogs.thomsonreuters.com/answerson/world-cryptocurrencies-country/.
[23] Cf., MeowMeowBeenz from the television show Community, Season5, Episode 8 “App Development and Condiments”, March 6, 2014. Black Mirror, Season 3 “Nosedive”. The Orville, Season 1, Episode 7 “Majority Rule”. https://en.wikipedia.org/wiki/App_Development_and_Condiments (Retrieved 8/8/20)
[24] Tim O’Reilly, “Open data and algorithmic regulation”, pp 289–300, in B. Goldstein (ed), Beyond Transparency, Code for America Press, San Francisco (2013).
[25] Elizabeth Dwoskin, “Facebook is rating the trustworthiness of its users on a scale from zero to 1”, Washington Post, August 21, 2018.
[26] The article https://en.wikipedia.org/wiki/Social_Credit_System (Retrieved 8/8/20) uses 150 references attempting to explain the extremely complicated system. Any paragraph-sized distillation misses important aspects. For instance, there are many different Social Credit Systems in different regions in China as they experiment with what systems will be most effective.
[27] It is easy to argue Chinese people have a greater diversity of attitudes than Europeans. The Chinese who live in Hong Kong, Singapore, Taiwan, Mongolia, Xinjiang, Tibet, and elsewhere, in every country around the world, obviously have extremely diverse history and experiences. Within mainland China the perspectives vary widely. A Chinese attitude toward any subject is impossible to pin down, yet we persist in speaking as if the Chinese are a monolith. Simplifying and generalizing in this way is necessary, however, in order to say anything about cultural and historical trends.
[28] Simina Mistreanu, “Life Inside China’s Social Credit Laboratory”, Foreign Policy, April 3, 2018. Available online https://docs.house.gov/meetings/FA/FA18/20180711/108531/HHRG-115-FA18-20180711-SD001.pdf (Retrieved 6/18/20)
[29] Sui-wai Cheung, “Baojia System”, in Encyclopedia of Modern China, Gale Cengage Learning, pp 136–137 (2009)
[30] Official purposes are described in the document “State Council Guiding Opinions concerning Establishing and Perfecting Incentives for Promise-keeping and Joint Punishment Systems for Trust-Breaking, and Accelerating the Construction of Social Sincerity”, GF №33m State Council, May 30, 2016, posted on China Copyright and Media, October 18, 2016, available at https://chinacopyrightandmedia.wordpress.com/ (Retrieved 6/18/20)
[31] Paul Mozur, Raymond Zhong, & Aaron Krolik, “In Coronavirus Fight, China Gives Citizens a Color Code, With Red Flags”, New York Times, March 1, 2020. Available online at https://www.nytimes.com/2020/03/01/business/china-coronavirus-surveillance.html (Retrieved 8/8/20).
[32] Ibid.
[33] https://en.wikipedia.org/wiki/Global_surveillance_disclosures (Retrieved 8.8/20)
[34] Karl Popper, The Open Society and Its Enemies, Vol. I: The Spell of Plato, London: Routledge (1945)
[35] Michael Ignatieff, Rethinking Open Society, pp 15–16, Central European University Press (2018)
[36] Charles Evans Hughes, Conditions of Progress in Democratic Government (1909), published by Forgotten Books, 2019.
[37] This language borrowed from a 2017 speech by Andreas Antonopolous, https://www.youtube.com/watch?v=OWI5-AVndgk (Retrieved 8/6/20)
[38] Andreas Antonopolous and Gavin Wood, Mastering Ethereum, p. 326, O’Reilley Publishing, 2018.
[39] An initial coin offering (ICO) is a decentralized version of an initial public offering (IPO), which allows anyone with access to the internet to pseudonymously participate in the equity sale of a smart-contract-enabled company or asset. The coins may be programmed with autonomous power in the company.
[40] https://github.com/aragon/whitepaper (Retrieved 7/6/2020.)
[41] The idea of a path dependency is that a technology or a process may become entrenched and continue to be used even after more efficient or effective technologies emerge because of institutional inertia, or the short-term costs of switching to the alternative. An example is the QWERTY keyboard vs. the DVORAK set up. Standard computer keyboards use the QWERTY setup because the first commercially successful typewriters used them. The design is measurably slower for typing in English, because more words have characters off of the home row and more words are typed with one hand than DVORAK. It is argued this was designed intentionally, to eliminate key sticking in the original mechanical typewriters. Such issues are not a concern with electronic typewriters and computer keyboards, but the standard was stuck. Now QWERTY is so established that there is little chance of switching, because further innovations have incorporated the QWERTY style, such as keyboard shortcuts like CTRL-Z, X, C, & V for copy-pasting. In QWERTY these letters are all close together, but using them is more awkward in DVORAK. As technological development moves down its path, processes become more standardized depending on their history, leading to entrenchment and behavioral inertia. The larger the institution, the more likely it will display path dependencies beyond what is rationally expected, which constrains advancement.
Martin Stack & Myles Gartland, “Path Creation, Path Dependency, and Alternative Theories of the Firm”, Journal of Economic Issues, 37 (2): 487, (2003).
[42] It is enshrined in Article 2(4) of the UN Charter and has been recognized as customary international law.
[43] Edelman (Jan 21, 2018). 2018 Edelman Trust Barometer: Global Report, https://www.edelman.com/research/2018-edelman-trust-barometer (Retrieved June 1, 2020).
[44] Statista. https://www.statista.com/statistics/272014/global-social-networks-ranked-by-number-of-users/ (Retrieved 8/8/20)
[45] “[N]ine months after Microsoft bought Skype, the NSA boasted that a new capability had tripled the amount of Skype video calls being collected through Prism. Material collected through Prism is routinely shared with the FBI and CIA, with one NSA document describing the program as a ‘team sport’. […] In June [2013], the Guardian revealed that the NSA claimed to have ‘direct access’ through the Prism program to the systems of many major internet companies, including Microsoft, Skype, Apple, Google, Facebook and Yahoo.”
Glenn Greenwald, Spencer Ackerman, Laura Poitras, Ewen MacAskill, & Dominic Rushe, “How Microsoft handed the NSA access to encrypted messages”, The Guardian, London (11 July 2013) Retrieved 20 July 2013.
[46] Claudia Steinwender, “Real Effects of Information Frictions: When the States and the Kingdom Became United”, American Economic Review, 108 (3), pp 657–696, (2018).
[47] Apple Newsroom announcement, April 10, 2020, “Apple and Google partner on COVID-19 contact tracing technology” https://www.apple.com/newsroom/2020/04/apple-and-google-partner-on-covid-19-contact-tracing-technology/ (Retrieved 8/9/20). Since 2019 Apple and Google have held 99% share of the global smartphone mobile operating system market. https://www.statista.com/statistics/272698/global-market-share-held-by-mobile-operating-systems-since-2009/ (Retrieved 8/8/20).
[48] Charlotte Jee, “8 million people, 14 alerts: why some covid-19 apps are staying silent”, MIT Technology Review, July 10, 2020 https://www.technologyreview.com/2020/07/10/1005027/8-million-people-14-alerts-why-some-covid-19-apps-are-staying-silent/ (Retrieved 8/8/20)
[49] https://en.wikipedia.org/wiki/Government_by_algorithm (Retrieved 8/8/20).
[50] “We should have a global, decentralized system for collecting medical, movement, interaction and lifestyle data from everyone on the planet–and methods to analyze it in a secure, anonymous way. Statistical and AI analysis should be guided democratically by everyone contributing data […] without sacrificing privacy.“ –AI researcher Ben Goertzel in “Decentralized Tech Will Be Ready for Humanity’s Next Crisis”, Coindesk, Aug 8, 2020 https://www.coindesk.com/decentralized-tech-will-be-ready-for-humanitys-next-crisis (Retrieved 8/8/20)
