Political Differentiation In Protocols

Avoiding A Capitalist Dystopia

Humans have never been able to agree on politics. Fundamental questions such as the value of a human life, taxation and duty to society. This is the debate between the left and the right that has been raging in some form or another for as long as humans have been around.

I believe this debate will soon enter the realm of cryptocurrencies and become one of the only real differentiators between crypto-economic systems. In the open source world technology is interchangeable, but human belief systems are not quite as flexible.

We’ve never been able to agree on moral and ethical questions. Photo from Unsplash.com

Side note: You could argue that different use-cases will be also be a differentiator. This is probably true to an extent, but I think there are actually much fewer use-cases that require separate systems than many seem to think. This counter-argument is discussed in the last section.

Open Source

Open source is the standard in cryptocurrencies. It allows any code-savvy person to go and see exactly how these systems work on a code-level, thus increasing trust in the system. It also allows for a much faster innovation cycle as technologists can build on the entire body of work that has come before them. Everyone doesn’t need to reinvent the wheel.

Everything being open source also has another, less talked about, implication: large networks like Ethereum can sit back and let others innovate. When others have gone through the trial and error of experimenting with technological improvements, they can just implement them, taking almost no risk and acquiring all the upside due to superior existing adoption.

Side Note: It is possible that entrepreneurs begin to keep their code proprietary, which would change industry dynamics considerably. In fact, I’m sure we’ll see a few projects go this route. However, I think the risk of this happening across the industry is relatively low.

This is an interesting dynamic as it may mean that it’s more important to be big than to be technologically advanced. Traditionally defensibility has largely come from a combination of distribution and data. In the blockchain world all the data is public, which may mean that defensibility in cryptocurrencies is more about distribution than anything else. Of course the core team still needs to execute, but I think most top tier development teams can be trusted to copy effectively.

This would seem to be in direct contradiction with my Thin Protocols thesis. I actually don’t think it is. The scope of the thesis has just been expanded beyond technology and the timeline extended significantly. The underlying technology may undergo a consolidation, but there’s one area where we will again have a large amount of variation over time: Politics.

Side note: This constant cycle of diversification and consolidation, of bundling and unbundling, happens in every industry over time. Technologies, in this case protocols, will go from Thin to Fat to Thin again in a never ending cycle of expansion and contraction. Where you are in the cycle depends on the level of granularity you’re inspecting a technology from. It may be expanding on one level, but contracting on another.

The Emergence Of Crypto-Politics

Crypto-economic networks are not just currencies or applications. They function more like entire economies. The people building these systems have to think like governments and consider things like inflation, monetary supply and participation incentives.

Currently this thinking is mainly focused on ensuring that the systems work and can be effectively bootstrapped. The governance of these networks is a constant topic of discussion, but no one has any clear answers and most projects put “figure out governance” near the end of their public roadmap, essentially ignoring the fact that we’ve spent thousands of years trying to figure this out and utopia still eludes us.

This is concerning, because it seems like most projects are defaulting to extremely capitalistic forms of governance until a better solution is found. Right now the large mining companies and large holders are indeed in control. The problem here is thinking that an objectively perfect solution will ever be found.

In addition there is the question of decentralisation. More precisely, how decentralised do these networks need to be and how decentralised is even possible? Most projects have a roadmap to something resembling full decentralisation, with the governance model remaining an open question. Until then, we are left with what are essentially dictatorships.

A dictatorship in an early stage project is not inherently a bad idea as it gives the core team freedom to move quickly in the early days. The assumption is that they will move to another governance system in the future. However, it does mean that the dictator chooses the politics of the system and currently everyone is choosing full-on, balls to the wall, capitalism.

Side note: I think that the almost unilateral preference for capitalism is caused primarily because people in this industry are very stuck on the idea of anonymity. This is problematic, because anonymity almost immediately leads to what can only be described as a soulless meritocracy, where only the wealthy survive. If we can’t identify individual people, the next best thing is to give power to tokens, which means that the people with more tokens have more power. This will be especially true in proof-of-stake systems.

This is going to change. Eventually entrepreneurs will realise that there is a huge opportunity in introducing a different political philosophy. Initially dictators will have different opinions and these differing opinions will be reflected in the politics of their crypto-economic networks. Eventually, these differing opinions will define how networks are governed and we’ll see a whole cornucopia of different mechanisms.

One way to think about this is as a merger of corporation and government. Corporations are expected to make decisions to maximise profits to shareholders and then governments tax these profits for re-allocation for the collective. In blockchain-land these two systems can be merged. Both the profit incentives and the re-allocation mechanism can be implemented in the same underlying system.

Implications Of Political Variation

Let’s assume the assumptions I’ve made here are true. What would that mean for investors, entrepreneurs and users of cryptocurrencies?

Investors

For long-term investors, diversifying across technologies might be ill-advised. Over time I would expect the market leader to incorporate all or most ideas that have been validated by the rest of the market. Diversifying across political ideologies and trying to pick the one likely to become the biggest in each category, may instead be a great strategy.

Furthermore, investors can make conscious decisions not to back ideologies they disagree with, making it less likely they will rise to dominance. Some will aim for maximal returns, but hopefully some investors choose to exercise their power and invest in what they feel is right ideologically. If you had to pick a government to invest in, would you invest in the one you see as most likely to win or the one you’d want to live under?

Entrepreneurs

Taking a clear stance on governance and political direction may turn out to be a great move for entrepreneurs. If this thesis holds true and only the size of a network in a given political category matters, planting your flag somewhere first could be a big factor in the success of a network. It may seem distasteful to think this way, but entrepreneurs need to start approaching their crypto-economic networks more like governments.

Until full decentralisation, something I consider to be just as impossible as any utopia, there will always be power dynamics. Deciding what kind of power dynamics you want in your society should be top of mind for anyone working on these systems. With this mindset also come questions of longevity and how the functioning and further development of the system will be financed. Foundations holding some amount of their own token will only take them so far. Entrepreneurs should be thinking about mechanisms to finance their networks operations and ecosystem development in perpetuity.

Users

This is an interesting development for users of crypto-economic systems. This is probably the first time in history that people who don’t come from privilege get to freely choose the society they inhabit. Granted the society is in the digital realm and mainly contains just the economic aspects of society, but they can choose all the same.

Over time I expect users, the masses, to have the loudest voice. They can collectively ruin or create business opportunity, wresting some amount of control from the hands of the wealthy. I find this to be an incredibly exciting time to have access to the internet of money.

Counter-Argument Reconciliation

Of course there are counter-arguments to this thesis. The most valid argument I’ve come up with so far is that it is much harder to continue upgrading old infrastructure than it seems. If a clearly superior system to Ethereum was found, it could be difficult for Ethereum to actually change it’s underlying technology due to the vast amount of interconnections and dependencies it would already have with other systems. Maybe someone smarter than me can make a final judgement on this proposition.

Let’s assume this is the case. New, better technologies would overtake Ethereum due to the friction created by size. As long as these systems remain open source, anyone can always remain on par with them from a technology perspective and the way to compete is by political differentiation.

Another counter-argument proposes there are so many use-cases, which all demand different technologies, thus creating additional differentiation beyond politics. While this counter-argument is compatible with the conceptual idea of political differentiation being a factor, it would decrease it’s importance somewhat.

In past technology cycles, rarely has there been a large amount of competing technologies. Historically, only a few emerge as the winners in each cycle. Usually they cover most use-cases well enough to consolidate network effects. I could see payments and computation utilising slightly different underlying technologies in the near-term, but I can’t think of any other use-cases that could not be created with a combination of these two conceptual technologies. Additionally, most people I know almost exclusively use ETH for transacting, so pending an answer to the scaling problem, I can’t say for sure whether these two use-cases even require separate systems.

To summarise, I propose that political differentiation in protocols is coming. Even if it turns out that dominant players, for some currently unforeseeable reason, can not consistently copy innovative smaller competitors, political differentiation would still be a big factor, just across a larger amount of now Thin Protocols.


Big thanks to Chris Burniske, Joshua Nussbaum & Jesse Walden for providing feedback during the writing of this post.

I’d love to hear what you think about political differentiation in protocols. Tweet at me here.