Blockchains will lead us to plutocracy
Blockchain technology started by reinventing money, and in a couple of short decades will replace money as we know it. This will happen whether we like the new system or not. It will be faster, cheaper, environmentally friendly, private, global, and it will scale.
Decentralised blockchain technology will not just destroy industries and reinvent others; it will destroy and reinvent political systems and the mere idea of a political system. In this post I will argue that, not only will this happen inevitably, but when it happens, it will not be messianic, but a worldwide catastrophe.
The Shift from Government Tax to Blockchain Tax
Blockchain systems are slowly replacing money. This is not something you see in everyday life yet. The critical point here is that this is one of the first times such a shift in the global mental model of economics can happen gradually and without a violent revolution. People slowly shift some of their habits to cryptocurrency. Youth shift their wealth and investments to cryptocurrrency and prefer it to S&P 500 or gold. Companies shift their salary payments to cryptocurrency, because it’s cheaper, faster, and global. You don’t need to wait weeks for a bank transfer from Greece to Tanzania to clear; nor do you have to pay exchange fees. Governments are already accepting tax payments in cryptocurrency. Soon, banks will replace their backends with blockchain-backed transfers to bypass clearing houses; and credit card processors will do the same. People with access to just smartphones but no access to banking will soon hold their coins on their mobile phones. The majority of the world’s financial transactions will be in cryptocurrency in less than twenty years.
If you’re not convinced that this is the future, this post is not meant to change your mind. This post is not to convince you that cryptocurrency will, for better or worse, be the new money. If you remain unconvinced, review how the invention of the Internet displaced publishers and online stores surpassing everyone’s predictions. Instead, it is to convince you that, once cryptocurrency replaces legacy money, blockchain technology will gradually replace governments.
“No online database will replace your daily newspaper.”
The current monetary, legal, and accounting system is not global. Each country has their own laws and regulations, and taxation differs from country to country. What this results to is that the law-abiding working class and middle class people living and working in well-meaning countries –rightfully– pay their taxes according to their local system. On the other hand, large corporations and the upper class do not abide by this system. Instead, expectedly, they navigate the law to find the best possible tax haven for their income and savings, hence –legally, or semi-legally– register their company in Ireland, save their money in Panama, or shield their wealth in Swiss banks.
As a European, I know that tax is a blessing and allows us to take care of our countries for all of us, including the needy. Nevertheless, blockchain technology makes it tremendously easy to evade taxation. The reason is that it is equivalent, better, or much better than cash in anonymity, making it essentially impossible for governments to track unless there are voluntary reports by participants. Additionally, it is much better than cash in terms of safety from theft if handled correctly.
One of the primary means of taxation today is by observing and auditing bank transfers and bank savings, and this ability is going away swiftly. Blockchain technology democratises and globalises money; but likewise democratises and globalises access to the tax evasion mechanisms that the world elite is currently exclusively enjoying. Using cryptocurrency, the majority of people will start evading taxation. First, it will begin with individuals concealing their personal wealth or small company wealth, but it won’t be long until companies pay bonuses and eventually salaries purely in cryptocurrency, bypassing any possible auditability. It won’t be long until working class and middle class people become tired of the tax evasion of the upper class and readily adopt the technical means available to them to do the same. I conjecture the shift will be so gradual and blockchains will be so widely incorporated in everyday life by the time legislators realise this, that it will be impossible to outright outlaw cryptocurrency payments altogether and it will be extremely difficult to enforce honest reporting. This is especially true if cryptocurrency has as far-reaching adoption as to be used by banks in their backend, by existing governments for tax collection, and by corporations for salary payments. The globalisation of accounting through blockchain technologies is only one way in which world politics is globalising through sovereign and autonomous decentralised technology, which is a broader ongoing trend.
However, tax evasion through the use of blockchain technology does not imply lack of taxation. Modern blockchain systems incorporate inherent taxation mechanisms themselves. They prefer not to call them tax, thanks to the libertarian upbringing of the field, rather calling them something milder such as treasury systems. It is likely that, through evolution, blockchains with an inherent taxation system are likely to survive as the fittest, because they will have the means to support themselves and in particular to aid their own software engineering by financing their developers. As such, I conjecture that financially self-sustaining blockchains will tend to survive, and those will be the ones that will incorporate some form of taxation. On the other hand, blockchains without a sound treasury system will lack the means to support ongoing software development, eventually becoming replaced by blockchains which feature one.
How do these treasury systems work? Every participant in the system pays a certain amount of money in the form of taxation, which is collected into a big pot, the treasury. The amount of money collected from the system can be obtained as follows. Modify the way rewards are paid out for each generated block and split them unequally among two parties: On the one hand, to pay the miner (or minter) generating the block, as is traditional in legacy blockchain systems such as Bitcoin. On the other hand, to pay the treasury pot. The money obtained through this process comes from two sources. Firstly, it includes the new money minted, so it’s a direct impact of the algorithmic macroeconomic policy of the blockchain system. Secondly, it includes fees incurred per transaction. Both of these means are a form of linear taxation, the first on the store-of-value function of money, the other on the medium-of-exchange function of money (as far as I know, the third function of money is impossible to tax).
The Inevitable Shift towards Blockchain-based Global Politics
We have established that blockchains will gradually inherit the taxation that is currently being paid into governments. This will make governments poorer and blockchain systems richer.
Currently, blockchain treasury systems are used for generally innocuous and uncontroversial purposes such as funding project software development. The way funds are channelled to the appropriate destination is through a process of decentralized governance. A prominent such system, and my personal favourite, is Decred’s Politeia, an on-chain governance system in which participants can vote for decisions online using their private keys. Another one is Dash.
However, if tax flows out of government treasuries and into blockchain treasuries, the amount of money available to blockchain treasury systems will explode and become incomparable to what we are seeing today. As the shift becomes more prevalent, some of the functions of government will have to shift to the responsibility of blockchain governance systems.
In fact, this development is desirable for a number of purposes. We now understand that for the first time in history, there are global political problems which cannot be solved by voters choosing what is best for their country. Such problems that the world has to face in unison include global warming and environmental catastrophe, nuclear disarmament, and the development of advanced artificial intelligence. A global fund in the form of a blockchain treasury system is well-suited to solve such problems, which cannot be addressed by countries in isolation.
A treasury system in a blockchain collects money through taxation and subsequently allows its participants to vote on what this money will be used for. Once treasury systems become a major financial world power, the game of winning grants from such voting processes will become the full-time job of blockchain political groups. In this sense, the treasury system will become an autonomous sovereign entity which replaces the legislative power of governments by allowing participants to vote for the channeling of public funding and allocating it to the most appropriate candidate of the blockchain executive branch. This blockchain executive branch will not have the form of current governments, but will have dedicated professional groups competing for the grants. If the economic majority of the blockchain users deems it to the best of their interest that global warming is reduced, nuclear disarmament is implemented, and infrastructure is built, then these executive groups will promise to do just that in order to win the vote. As the groups will be held accountable to their voters by a long-term cryptographic identity, forfeiting on their promises will make them unlikely to be re-elected, similar to a modern liberal democracy. Blockchains which do not have sufficient treasury systems to satisfy their votes will become replaced by those that do.
Once blockchain treasury systems start replacing global government functions, they will also start taking over local government functions, from education to health. Eventually, as legacy governments’ funding diminishes, the basic function of the government as a bordered land protected by a military power will fade. In the end, blockchain governments will take up all legacy government functions: legislative, executive and judicial power. Legislative power through treasury-based voting and taxation; executive power through the election of executive groups which implement governance policies; and judicial power through the use of smart contracts which punish or reward virtual public-key-based identities.
Despite what Bitcoin maximalists wish for, the space will have multiple blockchains, in a fragmented but interoperating environment, competing with one another. The world will evolve into a mash of different blockchain systems, each being their own government and tackling global and local world problems in not-so-friendly competition, without borders or land, and legacy governments, unwillingly in protest or in disbelief, will become obsolete, an Ozymandias of their glorious past. For the first time in history, world empires will not have militaries and borders, but peer-to-peer nodes and private keys; not military generals, but digital politicians competing over bits and zero-knowledge proofs. Imagine this — I wonder if you can.
In Egypt’s sandy silence, all alone,
Stands a gigantic Leg, which far off throws
The only shadow that the Desert knows: —
“I am great OZYMANDIAS,” saith the stone,
“The King of Kings; this mighty City shows
“The wonders of my hand.” — The City’s gone, —
Naught but the Leg remaining to disclose
The site of this forgotten Babylon.
Voting Power in Blockchain-based Global Politics
It may be wishful thinking to hope for world peace due to the replacement of worldwide militaries by decentralized autonomous organizations in the same way that drug violence may have been reduced due to dark markets. Geeks, rather than thugs, might be slowly controlling some drugs nowadays, but could the same happen to global governance? Whether you agree with this potential outcome, which undoubtedly many readers will place into the realm of science fiction, it is more crucial to evaluate it not positively, but normatively: If this evolution does take place, will this be a Good Thing?
Let’s, for a moment, consider how voting takes place in a blockchain treasury system. Today, we know three types of blockchain consensus mechanisms: Byzantine Fault Tolerant mechanisms or permissioned blockchains, Proof-of-Work-based blockchains, and Proof-of-Stake-based blockchains. For the purpose of the present argument, schemes such as Proof-of-Space can be categorized as expending or committing resources, so they stand somewhere on the Proof-of-Work and Proof-of-Stake spectrum.
I conjecture, agreeing with Antonopoulos here, that BFT-based blockchains will replace many business functionalities in industries behind walled gardens, but, in the end, the dominating blockchain systems of the world, those that handle the world’s money and become financial superpowers, will be decentralized. Therefore, it is instructive to only analyse Proof-of-Work and Proof-of-Stake-based systems.
In order to decide where the treasury money will be invested and which blockchain political group will be elected into a blockchain executive power, the decentralized blockchain system must take a decision by soliciting the participants’ opinion and then tally their votes. People first use their private keys to vote online, and then their votes are counted. How can this tallying then take place in order to take everyone’s vote into account and reach a societal preference conclusion? In a political system following the égalité ideal of the French Revolution and with equal suffrage, each human should have the right to one vote.
Can we achieve this ideal of one-person-one-vote in a decentralized blockchain system? No matter the optimistic but wishful thinking of the CryptoUBI crowd, there is no way to implement such a thing in a decentralized system today, and, based on my research, I conjecture this ideal is impossible in a decentralized system. The reason why this is so difficult is that it remains impossible to prove the humanity of a participant in a decentralized system that is Sybil-resilient, i.e., with protection against fake identities. How could one possibly approach a problem like that? There have been certain proposals to address this.
The first proposal, by Mike Hearn, is to base the system on a proof-of-passport in which a citizen proves, in zero knowledge, that they are the owner of a government-issued passport, in order to claim their vote. Using clever cryptography, we can ensure that the same person does not vote twice on the same proposal, by ensuring each passport gets one vote and taking advantage of the cryptographic keys already stored in today’s passports. The problem with such a scheme is that it gives the power to every government to bypass the system and arrange for all the votes to go in their favour. There’s nothing but their own laws preventing governments from issuing billions of fake passports in order to mount such an attack —an attack like this could easily be mounted by court order. Note that the offending government don’t have to literally print the passports, just issue the respective cryptographic keys on a computer. You may trust the European governments to uphold the principles of the system, but would you trust the United States government or Russia? Would the Americans and Russians trust Europe? This system is a permissioned system in which governments hold the keys and it’s up to governments to allow it to continue functioning. As established previously, it is unlikely that such permissioned systems will prevail during the adoption phase of blockchains during the next couple of decades and the blockchain community is — rightfully — extremely sensitive to such issues.
A second proposal, which I co-authored about four years ago with the okTurtles foundation, is the notion of a Group Currency. In this system, in order to upgrade a public key into the status of having the propoerty humanity and certified owned by a human, other already established humans must vouch for they new key’s humanity. I think these ideas of decentralized webs-of-trust have merits and are worth exploring further. The basic notion of having a smart contract which takes into account social voting in order to take decisions such as who is human or who is alive are promising, because they are also similar to the manner in which we deal with such issues in traditional law (if you lose literally all of your belongings in a boat accident, your family and friends can function as witnesses in the police case to reissue your passport). Nevertheless, I find it unlikely that a system based on these premises can achieve the fully fair ideal of one-person-one-vote without being possible to mount massive identity thefts. Remember that, here, unlike traditional governments, we cannot afford to have such issues, because there will be no traditional courts of law to deal with the situation if something goes astray — primarily because, if such a system were to become financially dominant, those courts would have no funding, while the identity thieves would have all the funding in the world.
A third proposal is a line of work in which webs of trust are used more extensively in order to create projective and weighted identities for people. A couple of years ago, I developed one such system called Trust is Risk with my colleague Orfeas Stefanos Thyfronitis Litos and we presented our work at the Financial Crypto 2017 venue. We invented this scheme in order to solve the identity and Sybil-resilience problem of OpenBazaar, a decentralized marketplace I co-founded in 2014, some concepts of which I also explored in my master thesis. These systems allow each person to draw their own conclusions about the humanity of others and to assign a weight to each of the other participants, indicating how much they trust them. Projective and weighted systems such as this are, however, impossible to work for allocating objective resources such as money, in which everybody must reach a consensus on where money was really allocated. After all, this is the core problem we’re trying to solve with blockchains in the first place. Furthermore, if there are weighted degrees of humanity, we’re immediately losing equal suffrage.
A decentralized Sybil-resilient system in which one person gets one vote is impossible, because there is no technical mechanism to prove one’s humanity.
We therefore conclude that one-person-one-vote is impossible. How will, then, these blockchain systems, if adopted, do their tallying and reach conclusions for the political elections of executive power they are about to hold? We have two broad ways in which tallying can take place in a Sybil-resilient manner today: consensus-based tallying and economic-based tallying.
In a consensus-based tallying system, the participants get to vote based on the resources they expend for the maintenance of the system’s consensus. Specifically, in proof-of-work, every computational cycle that is deemed successful by generating a block, gets one vote. This creates a system in which you get, in expectation, one vote per computational power unit owned. Such a voting system is already used in Bitcoin and Ethereum to pass decisions about the protocol among miners. This signalling can be used to decide whether a hard or soft fork proposal is desired by the majority and can be adopted without risking blockchain forks. In recent times, we have seen this electoral process used to take political blockchain decisions such as the battle of segwit during the first blockchain civil war of Bitcoin VS Bitcoin Cash, as well as battles about block sizes. Such a system of proportionality is not trivial to achieve. In these proof-of-work systems, it is the mining power that decides which proposals are passed. Hence, people with more computational power have a heavier weight.
Similarly, in a consensus-based tallying system in which proof-of-stake is used, every stake (coin or satoshi) in the system that is deemed successful by generating a block, gets one vote. Here the likelihood of obtaining a vote is proportional to one’s capital in the system. Alternatively, simply owning money can allow a participant to vote without generating a block, giving rise to economic-based tallying. This is similar to how UASF has been proposed for Bitcoin, using economic majority to apply pressure to pass proposals. Such implementations have many technically interesting democratic features that can be implemented such as liquidity, delegetability, private vote privacy, public vote transparency, and repealability. Regardless, you cannot escape the truth: The rich get more votes!
It may seem that the proof-of-work approach is a fairer way; after all, to allocate votes based on computational power is better than allocating votes just because someone is rich. However, in a paper we wrote this year with my co-authors Dimitris Karakostas, Aggelos Kiayias and Christos Nasikas, we show that, perhaps expectedly, if someone is rich, they can buy their way into computational power. In fact, the results are even worse: Not only can one get more computational power the more money one has, but having a bit of extra money gives one a lot of extra computational power. Suitably, we called the paper “Cryptocurrency Egalitarianism”, which both proof-of-work and proof-of-stake systems are nothing but. Therefore, even in proof-of-work systems, the best possible one can hope for is the one-coin-one-vote ideal, a situation which we call, in an instance of fully grim newspeak, perfectly egalitarian.
In the best possible of those worlds, we cannot escape the one-coin-one-vote limitation. The political system this leads to is extremely dystopian. People with money get more votes, and people with no money don’t get to vote. The conclusion is inescapable: Blockchains are inherently plutocratic and there’s nothing we can do about it. My colleague Dimitris Karakostas has been tweeting about these ideas since earlier this year. This pessimistic worldview makes me deeply concerned about the political worth of our work in the blockchain space. If the political system of the future we’re building is inherently plutocratic, why are we doing this?
The natural question then arises: If blockchains are so bad, then when are we building them, and why would anyone adopt them? Why are they as inevitable as fate? Can’t we all together agree to abandon this technology altogether? The answer is that blockchains are good for each of us, and they will be adopted due to the rationality of every participant. It is the collective that will be harmed when the point comes that adoption is ubiquitous and we won’t be able to roll it back, an instance of a tragedy of the commons.
For a twist of irony, remember that Plato lived in Athens, the birthplace of democracy, but his ideal political system, Plato’s Politeia was completely undemocratic, too. Perhaps, sadly, a fitting name for Decred’s endeavour.
