Crypto is not an alternative to Capitalism

Blockchain is a technology, but for many, it’s also a promise of escaping the current financial system rigged by the ruling class and generational wealth. Cryptocurrencies can replace dreaded banks, and DAOs can supplant corporations. Once they do, everything will be good and fair.

On a fundamental level, you can think of DAOs as internet-native constitutions. Like regular constitutions, DAOs embed a fundamental set of rules and principles that establish an organization and determine its governance structure. But unlike regular constitutions, DAOs can execute some activities fully autonomously. For example, a DAO with its own internal capital can automatically buy and sell cryptocurrencies based on specific programmatic conditions.

https://1729.com/daos

One example of a fully decentralized institution is Uniswap:

Uniswap doesn’t actually exist in any technological (servers, accounts, log-ins, etc.) or legal (LLC, S-corp) form that we’re used to.* Rather, Uniswap is a decentralized protocol, and the governing body of that protocol is a decentralized autonomous organization (DAO) on the Ethereum blockchain

DAOs are appealing to the anarchists out there, looking for their perfect slice of non-capitalist utopia. But DAOs are built on top of the Ethereum network to execute smart contracts making it work. The more Ethereum you have, the more influence you can have over the organizations. They are literally running on money.

There are solutions to that inequality – for example, you can limit the number of voting rights a person can have or regulate smart contracts in a way to provide equity according to a more fair set of rules.

Proof of Stake

One valid criticism of Bitcoin and other cryptocurrencies is the significant environmental impact. New York Times explains that Bitcoin uses as much electricity as Finland or Washington State.

That is because the proof-of-work system is basically exchanging electricity to “mine” new Bitcoin or Ethereum. The brilliant minds behind Ethereum want to change that: Instead of working and burning electricity, they want you to just put up your existing Ethereum to mine a new one without using any energy.

In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens or other such reward mechanisms.

US News

Proof of stake solves the problem of the environmental impact because it is using the more efficient system: You get more power according to how many resources you have.

That is the essence of Capitalism.

I don’t consider it a bad thing. Capitalism is very effective at solving problems of people who have capital and inefficiencies of alternatives are wildly documented. I grew up in communist Poland and still remember meat shortages.

Blockchain technology promised to reinvent everything from the first principles and it arrived at a conclusion that capitalism is the most efficient way to allocate resources. Anyone from communist Poland could tell you that.

Organic Governmental Disruption

I rarely meet a person happy about their government. Complaining about legislation seems like a universal bonding experience comparable to football. What if we could improve this situation?

Voluntary Governments makes a case for utilizing blockchain and DAOs to run governments. The main benefit would be a fast pace of iteration, the ability to test different policies quickly, and the dream of curbing the identity politics cesspool. This essay is a review of that post in which I make a case for allowing the government to be disrupted instead of actively working to replace it.

In the original piece, the author argues that if only we were able to A/B test fast enough, we would be able to run our cities and countries with the efficiency of startups.

Why can’t nation states be disrupted or rapidly improved? Because the mechanisms in place don’t allow sufficient A/B testing

The author points out, that the current American 2-party system allows for change, but not improvement. It’s running in circles, and you are only allowed a “narrative flip” every 4 years.

Test option A. Don’t like it? Test option B. Don’t like it? Back to A, and hope it got better since the last time we tried it.

So what’s the alternative then?

Imagine the first digital political party. Supporters contribute money on the Ethereum blockchain, and as long as their donation is more than ten dollars, they receive a voting token. If you join any other parties, you lose your token. Voting controls all decisions of the political party, and the money supports those decisions. Majority vote controls presidential candidate and VP. Majority vote hires campaign manager and sets salary. Majority vote decides campaign trail. Majority vote chooses best logo design. Think that’s the worst way to set up a political party? Okay, you should build one too. Write your own rules into your party’s code. Let’s see who gets elected.

What I love about this proposal is that’s not designed to be disruptive. It’s using the existing system (introducing a new party) with its own rules. That party can, of course, codify those rules into the new default system, if they have enough support, but that’s not required for the plan to work.

The proposed solution is essentially bootstrapping Direct Democracy onto a Representative Democracy system.

But I think the future of governance is different than just more of the past. Once things are digital, we are dealing with exponentials.

The 6 Ds of exponentials

Peter Diamandis, in the book “Bold” has outlined the six forces underlying exponential growth of organizations, technologies, and products:

  • Processes get digitized,
  • Initial small growth is deceptive, so the entire thing is dismissed,
  • Monetary barriers get demonetized, allowing zero marginal cost economy,
  • Physical processes get dematerialized
  • The market forces start being disruptive to the status quo,
  • Once everything is digitized, demonetized and dematerialized, then all the barriers are removed, and things are truly democratized

DAOs and cryptocurrencies are digitizing, dematerializing, and demonetizing both governance, and finance. If we are to believe Peter and follow the exponential framework, disruption and democratization is the only logical outcome.

Demonetizing finance sounds like a contradiction, but keep in mind that transferring money, banking, and transactions have their own cost. Removing even that small friction can lead to a zero-marginal-cost revolution in finance.

Are we trying to disrupt the government?

The word Disruption has recently become a running joke in tech circles and for good reason. True disruption happens when the market spontaneously shifts into a reality where the old rules don’t apply anymore.

But this is not a planned process, despite what pitch decks claim. The disruption does not come from “I don’t like these rules so let’s throw them out and put something else”. Disruption is an organic, bottom-up process. Everything just changes, because few trends work in tandem and create a self-reinforcing societal shift.

Wilting of the nation states

Just like the author of “Voluntary Governments”, I am convinced that governments will be disrupted, but the end result won’t be something we can easily predict. I’ll try though – this is only one of possible directions:

  1. Blockchain, DAOs, and cryptocurrencies will be used in pieces of the current paper procedures. Let’s say a country starts keeping real estate deeds on the blockchain.
  2. Parts of administration will slowly start using smart contracts, reducing the ambiguity of “wet code” (aka people interpreting the law, like judges, officials, inspectors, etc),
  3. Due to increased transparency and visibility into administration, whole new business models will be enabled at the fringes of governments’ responsibilities,
  4. Those businesses will take more and more of “governments job”, reducing our reliance on the actual government
  5. What’s left for the government to do? I don’t know. We’ll see the first experiments in the Startup Cities

I don’t really want to disrupt the Government

Author admits, that the slow innovation of government can be a feature:

Some might argue that the amount of time it takes to evolve the government is a feature, not a bug. I would even agree with that, to a certain extent. The Lindy Effect is on the government’s side here, and ensuring that changes take months or years means that we only make changes that are safe

There are multiple reasons to be conservative with your government:

  1. Governance has a disproportionate power to create unwanted results (think war), so introducing untested technologies, approaches, and structures is very risky.
  2. Economy and governance are second-order chaotic systems: They react to predictions about possible reactions, in a self-reinforcing loop. Live experiments on such a system can have unintended consequences. Testing it beforehand is virtually impossible since possible side effects turn up many years down the road.
  3. Government is also the ultimate safety valve for everything else. We can grumble about bank bailouts, but to a certain extent, we all pick up the tab so that a policy failure does not spin out of control. If we start experimenting with our backup plan, what if it goes wrong?

I cannot let you do that: A case for expiry date

Evolution is an unmatched iterator. It created literally a whole world (maybe a universe, we don’t know) of highly-adapted species, perfectly matched to their ecological niches. It also created its own safety valve: Apoptosis. Cells are programmed with a “death protocol” to stop runaway mutations.

I would argue that any autonomous governance system should have a built-in “sunset”, ideally in form of expiry date. Isaac Asimov, Stanley Kubrick, and countless other Sci-Fi authors ran mental experiments and reported that even the smartest well-intentioned sets of rules can (and will) go wrong, given sufficient time.

There is nothing I fear more than Runaway Autonomous Bureuocracy, so I’m careful about DAOs.

Medieval Iceland had an expiry system for the law: Lawspeakers. Every 3 years, where the general assembly gathered, Lawspeaker has recited the entire law from memory. If he forgot about an obscure rule – it clearly wasn’t important enough to pass by default. Relying on memory may not be the best way to introduce stability, but I really love this version of legal auto-destruction.

We now have a technology to bake the expiry date into smart contracts. This would introduce long-term uncertainty about future rules, but it would prevent runaway perversion. The expiry date may not be enough though. The second cause of mortality in the USA is cancer – a failure of the Apoptosis check & balance system. We may need a human oversight after all, precisely because it cannot be coded.

The best outcome may be a weaker government

I don’t believe the biggest value of blockchain-powered governance is running a trustless system. I think the core value is making interactions between policy and outcome explicit. If you remove the meat code from between policy and implementation, then you have more clarity about interventions and their outcomes. You can remove the interfering variables from the equations and run real experiments.

Then maybe governance CAN be just first-order chaos. I don’t think we need blockchain to deal with the top-level organization of the government. I think it’s much more valuable in the messy middle, protecting good intentions from turning perverse.

I think we can trust people to try to do a good thing. If only we knew what exactly that is.