The Break of Reality and Computational Economics

The boundaries between realities have become increasingly vague

With the advent of decentralized control system such as Bitcoin which can essentially serve as a reliable record whose historical data everyone else can verify against at any given time in the future, we must give serious thought to economies on the internet. In other words, what are the implications of web natural settlement system such as Bitcoin? More ambitiously, what might Bitcoin imply about the future evolution of the internet?

This is Bitcoin, not the golden "B" coin

In the future, we will probably live increasingly more in virtual connected realities, but for now, we are still gradually making that transition, and most of the concepts we have taken for granted today has been the result of a continuous evolution of internet starting two decades ago. In the meantime, we still know quite little about what roles public blockchain tokens can play in the economies of virtual connected realities. Yet we should and we must. Virtual connected realities seem to be the brave new worlds of our time.

The emergence of a neutral web natural system of account, exchange and store of value that has its legitimacy wholly in the transparent mechanics in open source code is a first in the history of mankind. It is fundamentally mistaken to assume that it will replace existing currency regimes, for their legitimacy are rooted in fundamentally different things. Nor should we think whatever concepts we assign to it now is whatever it will be in the future. As the saying goes, necessity is the mother of invention. We may never know where it could be applied to until new necessities arose that found a solution in it. However, that is not to say we could not seek inspiration from Bitcoin and public blockchain via computational economics, the study and application of economic processes in a large scale network using computational tools to incentivize certain behaviors of the individual agents and ultimately nudge the system towards a positive stable state.

Can't get enough of this, this is a map of the internet, with ever more economic processes happening.

So what is Computational Economics?

While computational economics may cover a wide range of topics, here we are referring it to the computational study of economic processes, such as any national economies, or the economy of a decentralized consensus system such as Bitcoin, as dynamic systems of interacting agents. This model of economic system is an adaptation of complex adaptive system. Each agent acts according to a set of rules.

Here is the kicker that differs computational economics from traditional economics: Agents do not have to optimize and reach a stable state of equilibrium as their ultimate drive. Instead they have bounded rationality and try constantly adapt to changing market forces. In turn their adaptive behaviors also cause market forces to be changed.

Nature has the best examples!

To understand computational economics, let's think about ants. Ant colony was often hailed as the emergence of collective intelligence as the colony can do things that no single ant can do! Like floating on flooded water. :D

On the other hand, the behavior of a single ant is rather simple. For instance, they are blind, so they follow the pheromone trail of another fellow ant for pathfinding. That generally works quite well until this happens.

Nature's bug: One ant following another in a circle to utter exhaustion and death

If Mother Nature is a programmer, she would probably either have the "WTF" moment or the "COOL!" moment and went on to fix the bug. However, this "bug" doesn't cause the species to die out, so the individual ant's bounded constraints, while sometimes may lead to death loop, it works for the ant colony. If we could study the formulation of the incentive structures for ants, we would have known with clarity the causal factors in the evolution of ants.

The insight here is that if society is akin to ant colony, then people are the ants. They generally follow a specific set of rules that define how they learn and how their behaviors are formed. Now, similar to ants, if we were able to study the evolutionary process of the incentive structure of human society, then we would learn a great deal about the reasons why the current economic system was dominant, and what economic systems could provide better incentives in the future. We might never be able to observe this evolution with high granularity when it comes to the physical world, but with public blockchain token systems, we are able to observe the evolution of internet based human societies with increasing complexity in very high granularity and fast speed of evolution compared to that of the physical reality.

Online communities are different from physical society

What are those rules built on? Nature and experience. One of our most ingrained nature is self-interest, another one is we are very susceptible to social influence. These are all too familiar to us in the physical reality. But what about in the virtual realities such as forums, open source developer groups and public blockchain communities? Existence on these platforms have much less dimensions than in the physical reality. Online communities have been usually focused on one specific subject, task or interest. They usually have their own economic system that is based on reputation.

Self reliant online communities

As the capacities of the internet grows, it seems the meaning of community also expands. (Do you consider Uber drivers as a community?) The emergence and maturing of data(generalized: decentralized computing) system such as Bitcoin whose member doesn't rely on a trusted party to validate data seems to have the potential to introduce a new form of communities that attempt to introduce economic collaborations that mirror those of physical realities. whose primary incentives include creating economic value together and capturing a portion of that value.

Now there are highly successful commercialization leveraging the internet, such as social media, video streaming, mobile apps, etc. However, either they are supported or organized by companies in the physical reality or they are very limited in functions and the speed of development. It is not that online communities do not create value. Open source communities should account for close to $900 billion dollars of GDP in the US alone. Yet the value the open source communities have been able to capture have been less than 1% of that amount. Open source communities have proven to be highly innovative, but its ability to extend and evolve is greatly hindered by its inability to capture the economic value they have created.

In simpler terms, the key limiting factor for exponential growth for a more innovative paradigm of cooperation is there was no way for an online open source community to fund itself without forming a physically incorporated company or acquiring financial support from one. Both of which present significant difficulties for many open source contributors due to location, security and initial costs.

Internet communities that are able to utilize web natural technologies such as public blockchain to exchange value will be increasingly able to capture economic value from their contributions and possibly lead to new models of web natural cooperative production and allow more people to participate in economic activities purely in virtual reality networks. As of now, web natural value transaction system such as public blockchain tokens are fundamentally enabled by the use of computational economics, specifically computational game theory, which introduces an incentive system that allows the network to be securely maintained and steadily expanded.

A common view of computational economics is this: we start with a world that has an initial state; the agents in the world will act according to their rules, the state of the world and the actions of other agents(read: external environment); the state of the world will be evolving as a result of all the agents interacting with each other and attempting to adapt to the evolving world.

This is a very new perspective to think about the world for most of us.