Unstoppable Mechanisms

Escape into Cyberspace

Having spent years interacting with founders and managers at large tech companies, I cannot escape the sense that implicit in much of the tech sector’s relationship to government and its perception of the world beyond software generally, is an almost-conscious belief that software, more than a new firmament of communication and commerce, is the foundation of an alternate political order biding its time until the death of its host.

The cryptocurrency community, in particular, has made this nervous whisper its battle cry. Not so deeply buried in its Telegram chats surge dreams of seceding from existing financial and political hierarchies. Aspirations of building alternative forms of governance pervade the community: a distributed banking system, decentralized autonomous organizations, and governmentless membership-based states. Within this community the contradiction of decentralizing power through software is most self-evident too: dreams of leveling the existing top-down financial hierarchy are mixed with get-rich-quick schemes and crypto-nobility fantasies. Advocates for decentralization learn just enough about the existing theory of monetary policy and inflation to confidently denounce it. With a missionary’s zeal, they prepare for a financial cataclysm that they find themselves beginning to hope for.

Advocates for decentralization learn just enough about the existing theory of monetary policy and inflation to confidently denounce it. With a missionary’s zeal, they prepare for a financial cataclysm that they find themselves beginning to hope for.

Blockchains will become an increasingly prevalent engine of human commerce, governance, and identity. However, decentralization itself will not ensure democratization of the power that these inventions redistribute.

   

The Power of Blockchains

Governments are, in essence, sets of rules enforced over a population that permit and forbid actions among and between their constituents. Although many governments enforce rules that either explicitly or in practice are written by a subset of the people they govern, the aim of democracy is to spread the influence over how these rules are determined as widely as possible.

In the world of software, large platforms controlled by for-profit corporations set the rules on computer servers that they control and then offer others access to. Because the corporations need to generate revenue, the websites they operate and host are proprietary, meaning they alone have the power to invite, and thus charge, others to access the pages and services their scripts create. Control of the code (as intellectual property) and of the only computers allowed to deploy it mean that these companies have sole authority to set rules of how that code is used and changed, ranging from design choices to content moderation policies and censorship.

What is novel about blockchains is that they enable the creation and operation of programs whose state is maintained and updated by a disparate ecosystem of computers distributed throughout a network that pool their power together. As the line between who sets society’s rules and who writes the internet’s code becomes blurrier and blurrier, crypto-evangelists see themselves as fighting for the equivalent of democratic control of the means of web-hosting and operation.

The important innovation that blockchains made possible, using several clever tricks of cryptography and distributed computing, was the creation of distributed virtual computers. These machines are “decentralized” in the sense that they are collectively operated across many servers owned by anonymous groups of individuals who do not know each other, and who cannot unilaterally halt or change the virtual machine’s operation.

The important innovation that blockchains made possible, using several clever tricks of cryptography and distributed computing, was the creation of distributed virtual computers. These machines are “decentralized” in the sense that they are collectively operated across many servers owned by anonymous groups of individuals who do not know each other, and who cannot unilaterally halt or change the virtual machine’s operation. The sets of rules that govern contribution and collaboration with these virtual machines are called “protocols.” These virtual machines are still capable of hosting applications, but the services they offer can only be changed if a majority of the servers that constitute them agree to proposed edits. In this way, the services they offer are governed by a collective of individuals who have chosen to contribute their resources and power to the operation of virtual machines that they do not individually control. The most famous blockchain protocols are, of course, Bitcoin, a decentralized ledger of transactions, and Ethereum, a general purpose decentralized machine that can execute other programs (sometimes called “smart contracts”).

Any mechanism that charges for access to the network, censors or blocks individual participants, or gives insiders and special interests an advantage must be baked into the distributed virtual machine at its creation. In practice, many blockchain developers seek to design blockchain applications whose rules will be perceived as just and fair, in part because doing so attracts constituents to join their collective virtual machines. The ideal is often, as Vitalik Buterin, the founder of Ethereum, puts it, “credibly neutral” mechanism design, meaning protocols that represent a static commitment to a set of rules that are transparent, difficult to change except through democratic pressure, where everyone plays by the same rules, and no one is singled out for advantage or disadvantage.

Processes for creating and enforcing laws and rights in the pre-crypto world function as a sort of protocol as well. Many institutions in America are designed with elements of credible neutrality in mind, notably the notion of private property itself and the US Constitution. One large chunk of any government’s power comes from its ability to control what individuals are permitted to make contracts about. What services can they offer to each other? What can they pay each other for, or buy from each other? Blockchains offer a proof-of-concept for a world where contracts are self-enforcing and governments are stripped of the right to determine what can and cannot be sold. While we may welcome this in places where we consider governments overly restrictive, democracies too will be affected. And what democratic institutions cannot control, they cannot ensure will remain democratic.

   

Subverter of Laws, but Agent of Power

When thinking about the way society might change as blockchain applications gain wide adoption, it’s helpful to first dispense with the cultural baggage of avowed cryptocurrency promoters. It’s not uncommon for a new technology to result in the opposite of the future that motivated its early adopters. The internet itself was at first heralded with utopian optimism, which now, in many places, has been retracted.

One example, in the case of blockchains, might be the idea that drawing on decentralized resources necessarily decentralizes power. It is easy to find instances of scenarios where blockchain applications in fact centralize power, even while doing tremendous good.

One of the leading applications of blockchains, both in the form of Bitcoin and via a category of so-called “stable coins” that maintain a fixed peg to (usually) the U.S. dollar, is as a protection against devaluing currency in countries experiencing rapid inflation. In these countries, the existing system of paper money is usually somewhere between risky and worthless, with central banks that are incapable of approving new spending or printing more money without directly devaluing their currency by a corresponding amount. In the worst case, such countries undergo periods of hyperinflation where the local currency more than halves in value each year, totally wiping out millions of people’s savings and livelihoods.

These countries are generally low-resourced, racked by generations of colonialism, foreign financial exploitation, and in-fighting. However, by coming to depend on cryptocurrencies, these nations’ people lose a vital aspect of their sovereignty — their financial independence. Where in the past their central banks might have shaped local monetary policy so as to stimulate local industry, production, and economic vibrancy, their people have now come to depend directly on what, in some cases, is essentially a pass-through vehicle for US dollars, extending the US Federal Reserve’s global reach.

While many blockchain protocols aspire to distribute influence democratically, most projects in the space are, at least to some extent, business plans, as opposed to totally selfless creative work. Because of the get-rich-quick environment surrounding blockchain technology, the potential for centralized benefit for a system’s creators and early backers is often integrated into the protocol design intentionally. An essential problem that many companies building blockchain applications have is that they must simultaneously build a protocol that is decentralized, transparent, and accessible to all, while financially rewarding themselves, the creators, and the investors and developers who believed in them early on. That is, even though they must build in such a way that no centralized actor can interfere with the system once it’s deployed, they intend to get rich and must add an element to the design that facilitates this. Notably, they cannot offer equity like a traditional startup, both because there should be no private stream of future revenue if the application is truly decentralized, and because doing so would be an SEC securities offering, with all of its requisite paperwork, and now their get-rich-quick scheme has turned into a get-rich-not-so-quick scheme.

A tried-and-true way to do this is to create a token that acts as a sort of license to use the decentralized application, which must be included with each transaction, and thus increases in value as the value of using the network goes up. Another is to make a token that has some governance value in the network, tying the number of coins owned or staked to voting power in the actions that a system takes or the changes that are adopted. The more money you have, the more sway over the network’s rules you have. In this way, control of decentralized applications isn’t especially different from control of a contemporary corporation, where voting power is proportional to stock ownership: in both you are assigned governance power equal to your financial heft within an ecosystem. Although there are crypto projects that have attempted to move in a more democratic direction, systems of governance that implement “one person, one vote” remain the exception in the world of decentralized applications.

   

Blind Bounties

The worst-case risk posed by poorly designed decentralized applications is deeper and more dangerous than the threat of extending and entrenching existing inequities. The isolation and independence from the will of any individual person or coordinated groups that makes these applications possible also presents a profound risk to human values. Once built and designed towards some goal, decentralized applications blindly create financial incentives for humanity that humans respond to, towards goals designed into a protocol at the outset. These invisible ethereal machines cannot be turned off once set into motion. Blockchains threaten democracy because they allow the creation of mechanisms designed to achieve objectives that no democratic process can interfere in, and provide financial incentives and coordination to achieve these objectives. The same technical qualities that put them outside of the reach of bad governments and authoritarians make them unaccountable to even the most benevolent and democratic societies.

There are already practical examples of this tension between the incentives that decentralized applications offer to individual actors and the common good of humanity. The “mining” that powers the decentralized maintenance of the Bitcoin ledger is actually extremely power intensive computation, performed in massive computing centers, requiring huge amounts of electricity. Each of these computers is competing to be the server that processes the next entry in the Bitcoin ledger in return for a financial reward. Although the exact number is unknown, The Economist estimates that these transactions could consume as many as 450 Terawatt-hours annually, more than all of France, despite processing a miniscule fraction of the world’s transactions.

It’s easy to think of this as being an instance of a new technology or fad that has a hidden and disturbing environmental cost, not unlike the large upfront carbon footprint of electric vehicle batteries, mobile phones that require manganese mines that devastate the environment, or Canada Goose jackets that cause immense pain to farmed animals. In each of these latter instances, unrestricted markets have created an incentive to perform some harm against the environment or other species for financial gain. The only response is regulation, and in some cases targeted taxation, of what products are manufactured, and if the public harm is overseas, regulation of what is consumed.

However, the problem in the case of Bitcoin is much more fundamental: the price of Bitcoin, and the rewards for mining it, mean that a decentralized bounty exists for consuming vast amounts of electricity that no individual government can shut down. A poacher illegally hunts for ivory because a rich foreigner with loose ethics will pay them. A bitcoin miner consumes massive amounts of carbon because the Bitcoin protocol itself will pay them. In this way, we can see that decentralized applications, when designed poorly or adopted beyond the scale they were intended for, can incentivize well-meaning humans to take actions that are misaligned with society’s wishes as a whole.

   

Blind Machines

To see what could go wrong in the future, it’s important to understand how complex the programs that these decentralized applications operate could become. One still nascent area of crypto innovation is the world of decentralized autonomous organizations, or DAOs. DAOs are blockchain-based organizations that, designed to achieve a specific purpose, operate by a set of smart contracts that their members interact with. DAOs might operate a platform or facilitate a certain type of exchange (providing bank loans, for example), using groups of smart contracts to conduct the complex operations of their organization, almost like an automated corporation.

Looking forward, we can imagine decentralized autonomous organizations building decentralized applications that no one in particular leads or takes responsibility for, but that exist and persist all the same.

Imagine if Facebook had not been built with Web 2.0 centralized software, but instead inside of the world of decentralized applications (dApps) and DAOs. Since there would be no need for private revenue, our social media dApp, thankfully, would have no ads. However, to stimulate its creation, its creators offer a financial reward in the form of a token required to access the platform to anyone who improved the codebase such that the number of users increased. Although the example is hazy, it should be easy to see why this simple proxy measure, built-in to incentivize improvement and adoption, eventually becomes misaligned with what the rest of humanity really wants from the application. The headless organization might persist, incentivizing changes to make itself more addictive, without any financial incentive to extract a monetary benefit for itself, but also without any human accountability to mitigate its harms. By turns, the same features that make these mechanisms divorced from the capitalist system of financial incentive-making simultaneously shield them from our legal system of justice.

One company in the blockchain industry is attempting to build a fully decentralized hedge fund that would reward individuals who contribute information that the fund could then use to beat the market while trading. The idea is to allow individuals to propose trades to a computer that continuously executes them if they are proven to make money in a marketplace, be it crypto or traditional financial markets. The system subsequently compensates those who had submitted profitable trades with stake in ownership of the fund.

It’s interesting to play forward what might eventually happen if this setup were to succeed. Such a hedge fund would essentially function as a corporation without human decision-makers or supervisors. As the corporation grows, its increasing financial influence might come into some sort of tension with the welfare of society as a whole, as corporations often eventually do, requiring regulation or legal changes to its business practices.

What if the state, and the rest of society, tried to intervene? Of course, this automated corporation’s property rights on traditional assets would today be granted and maintained by the state, and governments could strip such a headless corporation of its legal ownership if its growth was causing problems for the rest of society. However, over time blockchains might undermine democratic oversight of property rights themselves, as ownership of crypto-assets cannot be stripped from individuals by the collective except in unusual circumstances. We also might try to restrict its ability to transact, executing the trades on which it makes its money and accumulates influence, but this too is increasingly being decentralized through smart contracts. Most aggressively, we could place legal restrictions on mining, or operating, the blockchain that executes the automated trading algorithm. However, most blockchain protocols offer larger incentives the fewer people there are mining them, so the nature of markets might mean that banning mining of a particular protocol only pushes its mining beyond the reach of the law.

Where the state loses power over private action, whatever we mean by “democracy” will lose power too, unless we can embed that meaning in the way that these protocols work.

In this way, the transition from corporations to their decentralized autonomous equivalent removes the key point of leverage that governments, and thus democratic institutions, have to influence and constrain the activities of private actors: the enforcement of contracts themselves. Insofar as blockchains provide an ability to transact without a trusted third party that mediates what is legitimate and what is illegitimate, they will make the state obsolete as an enforcer of who owns what and what types of trade are allowed. Where the state loses power over private action, whatever we mean by “democracy” will lose power too, unless we can embed that meaning in the way that these protocols work.

   

Distributed Sovereignty

Blockchains offer an unprecedented chance to distribute and coordinate the power of information technology. If society can safely transition from software and corporations constrained by law and the threat of force to decentralized organizations and services, entirely new types and sizes of democratic institutions may be built, distributing power to operate critical internet services directly to those who use them. Achieving this will require a culture of democratic commitment among those who design the governance of blockchain applications, as well as the foresight to ensure that blockchain applications are ready to serve marginalized people whose continued political representation is most tenuous during times of political change. If this world is successfully navigated to, blockchains will make the promise of government by the consent of the governed realized more fundamentally than it ever has before.