Bitcoin has demonstrated how to build a sustainable, resilient system with in-built inefficiency and decentralization
To survive in the 21st Century, organizations and individuals alike should seek to emulate it
Over the past few months I have encountered various discussions and analyses on what is required to make a system, product, organization or organism last a long time — not just 5 or 10 years but 100+ years:
- In Money, blockchains, and social scalability, Nick Szabo argues that the most valuable trait of bitcoin and other blockchain projects is its in-built inefficiency: massive energy consumption by custom-built computers solving cryptographic puzzles for which the “sole output of the computation is just a proof that the computer did a costly computation”, and the need for every full node around the world to maintain the entire blockchain. In Szabo’s words, “the secret to Bitcoin’s success is that its prolific resource consumption and poor computational scalability is buying something even more valuable: social scalability.”
- The Energy Gang podcast spent time dissecting how US Energy Secretary Rick Perry conflated grid reliability with grid resiliency — today we have grid reliability (at least, everywhere but Puerto Rico), but it remains fragile and needs increased resiliency with distributed, local generation and localized storage capacity.
- Dan Barber’s The Third Plate makes reference to the Mennonite philosophy that you start raising a child one hundred years before he or she is born — that the environment, systems and traditions in which a child’s parents and grandparents were raised help to define the environment in which the child itself is ultimately raised. In order to achieve his quest of building a better food system, Barber looks for examples in which humans and human technology compliment and enhance natural ecosystems in a virtuous cycle rather than using technology to force an ecosystem to bend to mankind’s will.
- In Alex Danco’s Snippets newsletter he describes the way the human immune system has been designed to tackle problems that it has never encountered before by making a huge number of “random” antibodies. Most of these are wasted, but when one detects a new threat the immune system “scales up a huge, often unnecessarily over-reactive defense, and chases away the germ threat. And then, forever onward, the body has infrastructure available to deal with that kind of threat. So if that same germ ever shows up again, boom. The immune response is swift and massive.”
The extent to which inefficiencies and in-built redundancies are crucial parts of what makes these systems sustainable is notable, and serves as a rejection of the prevailing management theories of the last century which today permeate our economy.
The Capitalist Quest for Efficiency
Our obsessive quest for efficiency, a core tenet of the post-Industrial Revolution economy, has led to the establishment of the management profession, driven industry wide consolidations in the pursuit of economies of scale, and created mankind’s capacity to produce “stuff” in incredible quantities.
The market economy seeks to allocate scarce resources efficiently in order to maximize the return on scarce capital — land, labor and knowledge — and there is no question that the result of the free market has been an increase in material output and productivity. This can demonstrably be measured on an absolute and per capita basis, as Yuval Harari makes clear in Sapiens:
In the year 1500, there were about 500 million Homo Sapiens in the entire world. Today, there are 7 billion. The total value of goods and services produced by humankind in the year 1500 is estimated at $250 billion, in today’s dollars. Nowadays the value of a year of human production is close to $60 trillion. In 1500, humanity consumed about 13 trillion calories of energy per day. Today, we consume 1,500 trillion calories a day. (Take a second look at those figures — human population has increased fourteen-fold, production 240-fold, and energy consumption 115-fold.).
The increase in production has been a huge boon for the human species in aggregate, but has it resulted in a sustainable system? If we can produce goods and services more efficiently why are we still working so much? When looked at from a multi-century timeline, the evidence is overwhelmingly negative.
I won’t spend time elaborating on the damage our current economy is doing to our environment, but let’s just all acknowledge that there is very little about our economy that could be defined as sustainable.
The pursuit of efficiency as a means to developing a sustainable system is a quixotic goal. Developed after observing efforts to improve the efficiency of road networks, Braess’s paradox showed that an alteration to improve traffic flow can actually have the reverse effect and impede traffic through it — the increased capacity is more than utilized by the increased consumption of this road network. Similarly, our quest for efficiency has increased production tremendously but all this production has simply increased the number of humans and the amount of consumption per human.
What a life with in-built inefficiencies looks like
As I’ve alluded to previously, I think we already live in a world that can more than meet our needs, and the key to living a life rich in meaning is to live a life of moderation.
For individuals, I think a life with in-built inefficiency and redundancy is a relatively straight-forward affair, and primarily involves living well below one’s means and reducing consumption of cheap and “efficient” goods and services.
This is perhaps best exemplified by Mr. Money Mustache, the Internet’s most well-known proponent of achieving “financial freedom through badassity”. MMM has inspired a movement of savers, fixer-uppers and doers who eschew the largess of “keeping up with the Joneses” in favor of early retirement through saving a disproportionate amount of take home income and living a “frugal” yet enviable lifestyle — commuting by bicycle, living in a moderate-sized house, traveling locally, engaging with DIY projects and spending leisure time on free/affordable outdoor activities.
This lifestyle brings obvious financial benefits, but additionally brings important environmental and mental benefits (via increased margin of safety for living) that make it a sustainable lifestyle for 7 billion humans.
What an organization with in-built inefficiencies looks like
The growth of “Mustachianism” gives me hope that my generation will be able to live a life with much more freedom than my parents — to switch jobs and start businesses, to spend time building skills and pursuing passions, and freedom to invest in their physical and mental well-being. But if we want to make a real dent in the universe and build a more sustainable world, we need to alter the legacy organizational structures and systems that have led us to focus on efficiency, rather than resiliency.
I think decentralization is the single most effective way to build a resilient, sustainable system. Replacing an centralized source of authority and power with a decentralized web of localized nodes is inefficient almost by definition, but what is lost in streamlined decision making is gained in localized autonomy — whether organizationally or geographically — and increased transparency. These traits reduce the chances that a single point of failure can disrupt the organization or system while simultaneously allowing for product and process “evolution”, with experimentation at the local level which can scale if successful.
Decentralization is the single most effective way to build a resilient, sustainable system
Interestingly, the market economy itself is a decentralized system with in-built inefficiencies (see CEO complaints about the “burden” of being a public company) and we witness its resiliency and ongoing product and process evolution on a daily basis. It is the operators within that system who strive for efficiency as a way to please the investors who allocate capital. The flawed assumption by these investors is that there is still a scarce amount of capital to allocate and that only efficient companies can succeed in the long run. Rather than simply extrapolating a company’s cash flows in perpetuity to determine a “terminal value” perhaps they should develop a metric to measure decentralization and resiliency, hair-cutting the terminal value of those companies with a centralized org chart and explicit focus on efficiency. (Side note: only 60 companies from the Fortune 500 list in 1955 remain on the list today. Cash flows projected “in perpetuity” is a ridiculous assumption, even if it doesn’t materially alter the discounted Net Present Value of the cash flows for the Company in question).
The value of decentralization has been shown most clearly this year in the explosive growth of the Bitcoin and cryptoasset class, as investors speculate that the utility of decentralized currencies and digital commodities could be worth immense amounts of value, but there is similar value to be unlocked through decentralization in systems and organizations as diverse as the agricultural system, the electrical grid, businesses and governments, and within the human body.
The Paris Climate Accords are another great example of the power of decentralized decision making: getting the Accords signed was an extremely inefficient process and whether or not it achieves its goals remain to be seen, but the result is an agreement that allows individual nations to work towards a collective goal with individual autonomy. We have already witnessed a stress scenario to test the resiliency of this organizational structure in the form of the departure of the US, and yet the Paris Agreement remains the standard to which all other countries are holding themselves accountable.
Efficiency isn’t the enemy
The ultimate value that arises from decentralization and in-built inefficiency is a margin of safety that can protect against Black Swans or unpredictable events.
In a world of scarce resources it made sense to prioritize efficiency because the costs of being inefficient outweighed the benefits. Today, however, our market economy has evolved to a point where the benefits of in-building inefficiency and resiliency into our systems far outweigh the costs.
Much like the human immune system that “scales up a huge, often unnecessarily over-reactive defense” to protect the body in the event of a long-tail risk, the 21st Century individual, organization and macro economy can afford to build itself in a resilient manner to ensure sustainability. Bitcoin may be the first asset to in-build this trait, but it really is just the beginning of a new paradigm that everyone should be emulating.