Jazz is dead. You can hear echoes of it down the streets of New York and measures of swinging samples on popular discography, but do not be fooled: jazz has died. Although it began with a gusto and flair that rocked the tried and true world of classical music, jazz quickly backed itself into a corner with its personal label as a musical revolution for young people and marginalized communities — a label that would follow the genre to its grave. During prohibition, when the drinks were flowing in back door bars and rebellion was raging, jazz blared, but when the rebellion settled down and the world moved on, jazz followed its loyal devotees to their nursing homes. Now we hear remnants of the revolution in quiet Japanese bars and, as we look around the strange audience, we must wonder, “What happened?”
We bring this up because the beginnings of Jazz are similar to the beginnings of blockchain and (more specifically) Bitcoin. Much like the former musical revolution, blockchain burst into life out of seemingly nothing, showing up out of the blue on troll sites like Reddit and 4Chan before Wall Street even knew what to do with it. By the time the analysts and traders caught on, blockchain had already been branded by the internet trolls and basement dwellers as theirs. But it wasn’t theirs. It wasn’t supposed to be anybody’s. Satoshi intended to create a decentralized monetary system for the people; a system that nobody could overpower or control. Unfortunately, that dream couldn’t be further from the truth. After Bitcoin’s initial frenzy of internet popularity ended, and it became more and more advanced, an ever decreasing number of people could understand what was going on with its esoteric code and software. And this effect only compounded with time. Now, it’s left to a select few genius coders and mathematicians to decipher and elect new code into Bitcoin’s software. The revolutionary decentralized system, left unwatched and ungoverned, stumbled into a centralized power, controlled (for all intents and purposes) by a group of people that could sit comfortably in a booth at a quiet Japanese jazz bar. So we, the casual observers, must look at the decentralized cypherpunk revolution and back at that tiny centralized corner of crypto, and ask ourselves, “What went wrong?”
While most have turned the blame onto the system itself, we argue that it is merely a product of the people designed to govern it, us. We foolishly believed that the power of the decentralized community would be enough, and let something supposed to stand the test of time leave our control. Governance, or lack thereof, was our killer, and good governance is what will shape the next generation of blockchain.
If we are to define the optimal blockchain governance, we must understand what governance means, what is good governance, and who the players are within governance structures. It is our hope that by breaking down the abstract concepts of governance and how economics helps shape that definition, we can build a better solution.
What is Governance?
In its strictest definition, “governance signifies the exercise of political, economic and administrative authority to manage a group’s affairs comprising the complex range of mechanisms, processes, relationships and institutions through which citizens and groups articulate their interests, exercise rights and obligations and mediate differences. Governance is not the sole prerogative of the leader but its functions could be assumed by or delegated to specified institutions and organizations in the private sector and the civil society. Such organisms operate in a legal or policy framework defined by the leader but having autonomous existence and exercise political, economic and administrative authority.”
Put simply, governance is the process and institutions through which decisions are made and authority in a group is exercised. It can be as complex as a nation state, or as simple as the family dynamics at play within your home.
What is Good Governance?
There are four main values for a good governance structure.
- Participatory: All members have a voice in the decision making process
- Transparency: The procedures and methods of decision making should be available to all members
- Sustainability: Changes are balancing in their effects over members
- Equity and Equality: Everyone receives the same outputs for the same inputs, and there is an active effort to provide equal inputs
It comes down to two things: inclusivity, and accountability.
Inclusivity factors in having an equitable, participatory, and equal structure, where each member has equal directive in the flow of governance.
Accountability is what allows us to verify and input our voice on what we believe should happen. This has both an internal and external component, which crucially allows us to have transparent and sustainable processes. The sustainable aspect will be the central focus for most of the paper, especially how to align all participants into a long term net positive system.
Who Are the Participants in Governance?
For our purposes, we will focus on the three core groups, the participatory members (think citizens of a country, or members of a family), the government itself, and all external forces (non-human/other countries/ the environment).
For any government we must make sure it is:
- Service oriented
- Responsive to hopes and aspirations
- Facilitative and enabling
- Regulatory rather than controlling
- Dealing with temporal issues
Our participatory members, on the other hand, have:
- Equal expression of opinion
- Ability to audit the process of decision making
A governance body’s greatest weapon is the ability to tax its participants. This tax can come in many forms, and is used to not only redistribute wealth, but as a way to maintain sustainable use of all a group’s resources. When applied correctly, it provides a perfect economic balance between regulation and growth, and avoids unnecessary controlling forces. In the example of a family, tax can be thought of as weekly chores, spending time with extended family, or even actual payments (perhaps a swear jar).
Unfortunately, there are inefficiencies within tax, particularly tax evasion/tax avoidance. This violates fiscal equity, as now not everyone is contributing their fair share. Above that, we now have to introduce enforced compliance, since we can no longer rely on voluntary contributions. The enforcement adds another layer of cost, which greatly diminishes the value of tax incentives, affects redistribution programs, creates artificial biases in macroeconomic tax indicators, and increases the tax burden for everyone else. If someone within a family fails to perform their duties, we can easily see how this leads to the issues mentioned.
Methods to Combat Tax Avoidance
The most obvious methods involve cross checking information submitted, auditing the tax trail to ensure proper adherence to procedure, and enforcement of penalties. At scale, these become increasingly expensive to maintain, especially as the tax structure becomes complex. This is why it is important to have tax systems that are more efficient, effective, equitable and fairly comprehensible.
The last method is a reliance on indirect taxes. These are far more abstract, and much more difficult to calculate economic values for. In a family dynamic, indirect taxes would be a buildup of a dirty dishes in a sink, making it impossible to eat, where the “tax” is a product of not following the rules. In a world view, the most prolific example is the effect we have had on the environment, and what that will mean for future generations.
Fortunately for us, blockchain actually makes the direct methods much more easy to implement, allowing us to accurately model the indirect effects into the taxing structure and reduce the cost of tax inefficiencies.
The basic first step of a developing governance is to evaluate its resources and formulate a strategy for economic stability. All key players, resources, and growth strategies must be coordinated, especially private sector development standards within the ecosystem. Establishing relationships between private and public entities nurtures mutual growth instead of opportunistic dealings.
For any governance model, we should constantly be reevaluating the efficacy of our financial management reforms, including structured planning, creating a unified budget, integrating budgeting and accounting, and encouraging financial accountability.
How Does This All Relate to Blockchain?
If you haven’t already, I encourage you to read Fred Ehrsam’s piece on Blockchain Governance. There were many parallels that were drawn between a nation-state government and a blockchain protocol, while also providing concrete reasons why the connection is so important to think about. The following section will be an extension of that, as well as a comparison to our previous definitions of governance.
Governance to Blockchain
Using our simple definition, governance within blockchain refers most broadly to the consensus of state, but because the blockchain’s job is to survive ad infinitum, we must consider all resources that have long term effects on the state, as well as the taxing-incentive structure that maintains sustainable value for all key participants.
When first designing Bitcoin, Satoshi imagined a world where the miners were users, users were miners, and users actively contributed to development. This quickly unraveled into separate classes of members, with other protocols following relatively similar guidelines.
- Users: Those who transact or store the currency, active participants in a group
- Miners: Voters on the state of the system
- Developers: Rule makers, and in some cases, the first round of voters for new proposals
- 3rd Party Contributors (like ASIC Creators or Infura): More generally, these can be seen as the private institutions that are hired to augment the government, or fix gaps that the government is ill-equipped to handle itself
- Betters: Market makers on the value of the ecosystem, it is arguably in their best interest to have longevity, even for short sellers, since they want to be payed out
Bitcoin and Ethereum.
Whenever we think of governance in blockchain, it is fair to say that Bitcoin is very much akin to the United State’s own system. Unfortunately, just like in the country, there are several inherent problems Bitcoin faces.
Participatory: While you could argue that everyone has a right to express their opinion on the protocol, it is certainly not true that everyone’s opinion has equal weight, or that there are systematic ways to handle opinions. The codebase is maintained by less than 5 active core developers, from which any change has to be accepted by an extremely small cohort of miners.
Transparent: Putting aside the simple fact that a tiny fraction of people are capable of assessing whether a code change is valuable, it is still difficult to find what the code change is, with people currently having to rely on esoteric BIP request email chains.
Sustainable: The most damaging issue is misalignment of all participants on long term value. As Fred pointed out, developers, other than the core early adopters, have little to no incentive to create new initiatives, since they have no stake within the system. Miners prefer short term gains over long term growth, and have been unwilling to adopt updates for fear of losing profits. And little thought has been given to external forces, from 3rd party wallets, to the environment and government.
Equity and Equality: Due to the incentivization model, miner’s stake and influence on the protocol compounds as they participate, making it more centralized, and creating monopolistic barriers to enter. ASIC creators have become the bottleneck of the industry, as the reliance on a next release puts those without access at a disadvantage, with no other alternative than to succumb to their wishes.
The same can be said for Ethereum, although it is in an even more precarious state of benevolent dictatorship, where there is an over-reliance and trust in a leader to decide the fate of the system.
Bitcoin and Ethereum’s key fault was creating too rigid of a governance structure, and not accounting for all its resources and participants. Things such as economies of scale, freeloading, loss aversion, and tax evasion have severely hindered the longevity of the platforms, and have created gross misalignments of value.
So, What Makes a Good Blockchain Governance?
Whenever we pictured what good governance looked like, there was one point that constantly drove our decisions, uncertainty. Uncertainty of environment, society, behavior, regulation, and technology for a system that should theoretically last forever. Because of this, our main concern is for a simplified and robust system that relies on information that is fully participatory, objectively provable, and transparent, such as participant happiness, or measures of natural resource. What we present in the following sections are backed by weak math proof, with the promise of more formal iterations to follow.
We will touch on a more prescriptive outlook to Neoclassical Economics, with a reference to ‘strong sustainability’ as opposed to the more rigid ‘weak sustainability’ models. We will also examine Futarchy, quadratic voting, taxes, and genuine savings as a base for intergenerational sustainability.
As we go into the nuances of the prototype, keep in mind that what is discussed is with the intention of being the governance layer for a blockchain, in the sense that by using it, we are hoping to create a more sustainable system that will last generations, is amenable to changes, and takes into consideration any unforeseeable events that may occur. It will be the basis for proposals on the system, ranging from changing miner rewards, code updates, to reworking the governance itself. Again, an important thing to remember when developing a formal economic model is to use caution when creating a single, optimal path. Environment, market sentiment, ethics, and information is constantly changing and it is in our best interest to still weigh in ethical implications, uncertainty in consequences of depleting the natural environment, and the role of natural environment in maintaining sustainable development. No formal model can ever perfectly predict the future, and it is much more valuable to be malleable in our approach than all-encompassing.
A primer into sustainability, and the thoughts around different approaches
To understand sustainability in economics, we have to go back to the 1960s when a new wave of environmental concerns emerged in popular, political and social-scientific consciousness. In the beginning, economists took a very formalized, mathematical approach, called “Neoclassic,” or “Marginalist” economics, where the value of something is not in the cost to make it, but of how much someone is willing to pay for it. This creates a microeconomic model, as it is fundamentally a theory of resource scarcity in a static economy. By applying this to environmental economics, it created a rigid structure where economic agents exist, their choices are made in fully integrated markets, and they have full and relevant knowledge of their decision problems.
Once the 1980s hit we saw a shift into sustainable economics, which was a combination of long term economic, environmental, and social sustainability. Economists were still relying on neoclassic models where optimal growth could be sustained by allowing non-declining welfare in perpetuity. As we now have better understanding of non-renewable resources, as well as resources that have negative growth, this assumption has been disproven.
It was the Hartwick rule, and subsequent improvements upon it by Pearce, Atkinson and Hamilton, that led to the modern implementation of utilitarian economics of sustainability, where we calculate net investment of produced, natural, and human capital as genuine savings. In essence this was a way to link what was produced to what we have consumed that cannot be renewed. As long as genuine savings was above zero, we are creating an efficient and comparatively better resource than what was already there. This is allowed due to the assumption that one unit of a natural resource is of equal value to one unit of produced capital.
Arguments have been made on this assumption, which is where the distinction needs to be made between “weak sustainability” and “strong sustainability” and why for our purposes we have chosen a strong sustainability model. While we will be building on an implementation of the Hartwick Rule, we will use relaxed discount rates to reflect strong sustainability.
Within weak sustainability, economists operate under the condition that all resources are equally interchangeable, and that while there are risks, each can be optimally modeled. Although this makes it much easier to calculate and predict environmental degradation, it fails to account for unknowns, and more importantly it is a rigidly utilitarian approach to ethical issues. Such rigidity is only possible if we as humans are able to perfectly value the maximal utility of the world or system.
Strong sustainability, on the other hand, follows the line of thinking that there are no easy substitutes for natural capital. We are still allowed to apply a capital approach to sustainability, but the overall cost-benefit calculus of environmental economics must be pared back, because the shadow price of critical natural capital is, by definition, infinite. The main pushback of strong sustainability is that it is reliant on a less formalized precautionary approach, which in turn leads to unnecessary cost in the eyes of utilitarian economists, as we now are accounting for unknowns that are not provably calculable. For our purposes however, we are more concerned with longevity and intergenerationality of the system, and while there may be potentially net positive proposals (compared to market interest rate) that will fail due to our discount rate, it is more valuable to ensure survival over absolute growth.
For our base model, we will be using Ralph Merkle’s Futarchy system, but as we will soon work out, there are issues that need to be addressed.
Futarchy, in summary, is a way to abstract voting complexity away from the average participant within governance. Instead of having to vote for intricate problems, people are asked, on a scale from 0 to 1, how they felt the last year went (referred to as Annual Collective Welfare or ACW). We then create a put and call on the aggregate predicted decaying sum of opinions for the next ~20 years. Whenever there is a new proposal, betters will shift the market to where they feel member opinion will go to with the new proposal (i.e. a proposal that has net positive on the system will push the scale closer to 1).
This has the hopes of solving 5 key problems:
- Low incentive for members to vote: Statistically a vote has no effect on the result (low per person net positive value)
- Voters must spend significant time and effort to fully understand what they are voting for: By forcing people to vote, they will do so pseudorandomly, or based on incomplete information, leading to suboptimal voting decisions
- Vote “influencers” (lobbyists, PACs, political parties) provide systemic misinformation which may lead voters to vote net negatively
- What you are voting for (even if it is well intentioned) may not be what turns out happening
- Voting gives everyone equal say, which goes back to problem (2) of voters who have incomplete or incorrect information voting, leading to mediocre decisions at best
First, what it does solve.
This makes it drastically easier for members to participate, as even if they have incomplete information, their happiness will be relatively equal to the true state of the system. For example, a group does not need to truly understand the benefits of free healthcare for it to improve their life over the next 20 years, which is what the market is in turn betting on occurring. Because it is much easier, it alleviates issue (1) and (2) as a person’s opinion is much more in tune with what will happen, and objective measure of collective happiness simplifies what a proposal has to accomplish. Issue (4) is solved by the fact that proposals can be rolled back as quickly as they are entered, and that market forces will take into consideration the probability of proposals being accomplished, just as we already do with merger/acquisition requests.
Now, what it does not solve, and corresponding solutions.
The most obvious problem is that tyranny of the majority is still a comparatively large issue, where if a minority group is passionate about a certain topic, but most of the group is indifferent or slightly net negative, it might not be passed. We believe that by using quadratic voting, we can better align weight of opinions to match value gained.
Our implementation of quadratic voting.
- Create a tax system for submitting your opinion: We will set 0.5 on a scale of 0 to 1 as a baseline. By submitting 0.5, you pay (1) unit.
- Any opinion aside from 0.5 has a cost that grows quadratically, modeled by (x-0.5)²+1. This means that a vote of 0 or 1 will cost (1.25) units, while 0.6 will only cost (1.01) units.
- At the end of the voting period, all the funds are redistributed back to the voters equally.
This results in a marginal cost increase of 2x-1, a linear growth that can more evenly match user perception of value. We are now incentivizing people to be indifferent when possible, and to only stray when they feel particularly strong about a topic.
The second issue is that vote influencing can still happen, and while you can argue that due to the happiness put/call being a projection over ~20 years, short-term perceptions of happiness would be caught out by long-term net negatives, there are certain attack vectors where this would not be the case. Particularly with complex proposals where there is great asymmetry in understanding of what it does. As noted by Merkle, a discount rate is inherently flawed, and there are certain things that we cannot predict, even a week from now, while other things in the future can be seen as near certainties. For this, we propose a more non-uniform approach to discounting, while also expanding the base decay time to be over ~50 years, where certain events that are perceived to be more or less certain can have their weight reflected by that. This is where we are taking more a prescriptive approach, giving less of an opportunity to “game” the system since we are weighing in uncertain and unforeseen risk. While for now we will directly relate this to our ACW calculation, we will switch this to our more general NAS formula.
Now that we have implemented a tax system and a non-uniform decay period we can prove mathematically that it is no longer possible to game members against their best interests. Let’s take the example a friend brought up: the wealthy voting against universal healthcare.
Say there are 10 members in a group, 9 of them make (100) units a year, and 1 makes (1,000) units a year. They currently all pay out 20% of their income to a universal healthcare solution, meaning (20) and (200) units a year respectively. Because of this, each receives (38) units for healthcare. Every year, the members vote on their perception of last year, putting in (10) units, and if each is indifferent, receives (10) back (the cost is fairly irrelevant, just the scale of cost is important).
Clearly, the rich is paying much more than she is receiving, and would like for this to change. She submits a proposal to get rid of this, and votes 1 for the proposal, paying in (12.5) units. In this setting, the other 9, as rational members, still want to maintain their universal healthcare. Each member only needs to submit a vote of less than 0.4444, which in turn leads to a per person cost of ~(10.03) units (a cumulative extra cost of ~(0.27) units), canceling out the proposal and at the end receiving the benefits of the return tax from the rich person’s vote.
What if the rich person decided to “pay off” the other members to vote for the bill? Let’s just assume any average happiness value above 0.5 will do the trick, it doesn’t matter how far above the cutoff it goes, just that in the end the proposal is passed. Because of both the tax, and the inclusion of weighting happiness across ~50 years (the base decay rate would be sufficient since there are no uncertainties in our test), the rich person would have to pay out the exact present value of what each member would receive from the universal healthcare at the opportunity cost rate + the tax uptick (slightly negligible). Anything less and the betting markets would calculate a decrease in member happiness, which in turn would lead to the proposal not being passed. Paying out the right number of people to pass the proposal works out to be more expensive than the present value of the (162) units our rich person stands to lose every year (162 units since she will receive 38 units as well from the healthcare).
Another problem is lack of incentive for net positive proposals to be submitted, as well as currently the ability to make money submitting “bad” proposals, or ones with net negative effects, since submitters of bad proposals can take advantage of the betting market. The solution is fairly speculative, and can be changed quite easily given the nature of Futarchy. For the two issues, we introduce the idea of a reward system for submitting net positive proposals, where the submitter receives 1% of the positive value tax due to her proposal.
Say, in a 1,000 person group, a user submits a proposal that causes a net gain of 3% per user on average. This would result in each user submitting 0.53, and paying out (0.0009) units more on average. The submitter would receive 1% of this extra amount from each user, resulting in getting (0.009) units for their hard work. As user count scales, this number increases linearly, and as net gain increases, the reward increases quadratically.
The last issue with Futarchy is twofold, with both centralizing around the issue of sustainability and whether happiness, even expressed over ~50 years is an accurate portrayal of sustainable development. For the rest of the paper, whenever we reference sustainable development, we will be referring to the idea of sustaining the world’s (or system’s) capacity to meet human needs and provide human welfare.
Currently, the only true negative side effect of net negative proposals being accepted is the idea that at some point, if enough negative proposals are pushed through, we will see a collapse of the system itself, meaning nobody, not even the short sellers, could cash in. While this could theoretically be enough if we had perfect understanding of all negative effects, in truth, such an assumption could result in an over-reliance on descriptive pricing, and fail to consider unknown risks.
Futarchy makes the assumption that even with a simple question like how did the last year go, that humans can accurately arrive at a collective position of how the system stands. It is usually the case, however, that a person’s perception of how things are is not a realistic reflection of what has happened, something that becomes increasingly apparent as we try to gauge into the future. We as humans may be collectively happy for the next 50 years, but could be doing irreparable damage to natural resources or future welfare that we have no knowledge of. This is why we must introduce a more standardized calculation of sustainability, one that focuses on intergenerational value. Again, our aim is to avoid indirect taxes, and get as close as possible to mirroring the real world while still being capable of changing the formula.
Adjusted Net Savings
Our implementation of the Hartwick Rule will be based off of the Adjusted Net Savings Calculator used by the World Bank to assess how sustainable countries are acting every year. The formula can be found below.
- Gross national saving. Calculated as the difference between GNI and public and private consumption.
- Consumption of fixed capital was subtracted. This represents the replacement value of capital used up in the process of production.
- Current spending on education was added. As a lower-bound first approximation, the calculation thus included current operating expenditures in education, including wages and salaries and excluding capital investments in buildings and equipment.
- Rent from the depletion of natural resources was subtracted. Rent was measured as the market value of extracted material minus the average extraction cost.
- Damages from Carbon Dioxide emissions were subtracted. This calculation effectively expands the notion of a national “asset” yet further to include its unpolluted air.
By using this, countries could see if their consumption of natural capital was equally matching production of other resources. Our job will be to now take this, and define what “resources” and “products” will comprise a blockchain system. While it would be nice to just rely on products in our calculation, such as using our ACW, we need to take into account that there are costs with running the system, and if one person is gaining value but it costs millions of dollars, this is not a sustainable protocol.
- All fixed, depreciating capital used to maintain state of the system. Mining machines, buildings, and other assets that have long life spans. This closely resembles D in the formula.
- Rent from depletion of natural capital in a blockchain system will represent two things, the first being the difference between mining/transaction rewards and the operational cost of receiving that reward. We can include electricity and costs of maintaining the network between nodes. The second rent calculation will be storage rent of placing new information onto the blockchain multiplied by the amount of new information placed in the year.
- In the future we may include more long-tail resources related to running a protocol, such as environmental effects, or human capital. For our simplified version, Rent and Depreciation will be enough.
- The biggest change we are making to the formula is in the calculation of Gross National Saving, as well as Gross National Income. If we think about what we are aiming to maintain in blockchain system, there are two things. The first is overall happiness (ACW), or Consumer Capital. The issue is that currently this has no monetary value, which we can fix by using the quadratic taxing formula we defined earlier (this will now be known as Annual Collective Welfare Tax or ACWT). GNI will now be a summation of all participant’s tax submissions subtracted by the 1% we give to proposal submitters (Net Annual Collective Welfare Tax or NACWT). Consumption will become the Average Happiness Indicator (1 Unit * number of participants: AHI).
- The second is a system where no one entity has control over any aspect of state. There are a few ways we can mirror sufficient decentralization. We could calculate the probability of a random node winning a reward (to show decentralization in state progression) multiplied by total number of non-pooled nodes competing, or it could be a focus on the number of proposals submitted by different people (which would also be a representation of a system where education is encouraged). Whatever this is based on, it will be auxiliary indicator of an uncompromisable blockchain. This part will need the most discussion on, especially around what it means to be decentralized, and what level of decentralization is necessary (do we need equal participation or just assurance that nobody can take control).
Using these resources and products, we can now create our own version of the formula:
From this, we can now calculate a per yearly NAS that is reflective of the current state of the system. Any proposal will have either a negative or positive affect, with markets reacting accordingly if we prescribe to the efficient-market hypothesis. Betters will be able to create long-form bets predicting into the infinite future (for our purposes ~50 years) of what will happen with a given proposal, assuring us that any proposal above the current NAS will have long term benefit, and thus should be accepted.
You’ll notice that we do not include Market Capitalization, or any invariant of financial worth of the system, into our formula. This has been chosen deliberately both from a social economics and sustainability perspective. There has been a provably low correlation between GDP (and individual income) and happiness , and since it is our job to make sure we are actively ensuring participant happiness over financial growth, it is in our best interests to use ACW as a measure of success over market capitalization.
After we take an NAS calculation at year 0, we then must project all future NAS’ ~50 years into the future using our exponential weight decay formula to compute a present value, taking into consideration any varying rates due to unknowns. Once we have this, we can now see whether the particular proposal has sufficient sustainability to be accepted.
Imagine a blockchain system much like Ethereum, but instead of the current governance model we have this new formula for accepting proposals. We are looking to implement Proof of Stake, and we submit a proposal outlining the code change as well as projections into changes of resources and products.
Currently, our measures are as follows:
- ACWT = 10,169,000 (~1.017 ETH (0.63 Average CW) * 10,000,000 users)
- NACWT = 10,167,310 (10,169,000 ETH-(169,000 ETH * 0.01)
- AHI = 10,000,000 (1 ETH * 10,000,000 users) ETH
- DS = 200,000 (~5 ETH reward per node/yr * 40,000 active nodes) ETH
- R(electricity) = 120,000 (~3 ETH cost per node/yr * 40,000 active nodes) ETH
- R(storage) = 125,000 (~0.005 ETH cost/byte stored * 25,000,000 bytes stored) ETH
- D = 40,000 (~1 ETH cost per node/yr * 40,000 active nodes) ETH
Using this, we can see we have an NAS of 0.0081, slightly above our cutoff of 0, which shows we are positively sustainable for this year. But, we need to take into account that we need to project all following NAS’ for the next ~50 years, and as we continue to use Proof of Work, we see a consolidation of nodes, leading to decreases in user happiness as well. Electricity per node goes down, as does depreciation due to economies of scale. After calculating all future savings, we arrive at a present value of -0.05 (fictional value for the purposes of this example), meaning that our current system is unsustainable.
Now we will introduce our new measures from the PoS implementation:
- ACWT = 10,327,240 (~1.033 ETH (0.68 Average CW) * 10,000,000 users)
- NACWT = 10,323,968 (10,327,240 ETH-(327,240 ETH * 0.01)
- AHI = 10,000,000 (1 ETH * 10,000,000 users) ETH
- DS = 200,000 (~5 ETH reward per node/yr * 40,000 active nodes)
- R(electricity) = 80,000 (~2 ETH cost per node/yr * 40,000 active nodes)
- R(storage) = 125,000 (~0.005 ETH cost/byte stored * 25,000,000 bytes stored)
- D = 20,000 (~0.5 ETH cost per node/yr * 40,000 active nodes)
Proof of Stake gives us immediate NAS net positive results, as we now have a value of 0.029. More importantly however, is that Proof of Stake allows for a much slower consolidation of power (as they accumulate more rewards, they can use it to get even more rewards), since in PoW you have to factor in that as you get more rewards, you can build faster machines putting you at an even further advantage over your competitors. Due to this, happiness remains above 0.50 for longer, leading to a present value projection of 0.12 (again, fictional value for the purposes of this example). This projection is higher than our previous value of -0.05 and puts us into sustainable territory. Because of this, the proposal will be accepted and implemented.
One argument you may have is that this requires many subjective projections into how proposals will affect our ecosystem. While this is true, as we have discovered in the trading of public companies, we are fairly accurate at predicting futures, and as betters want to optimize their earnings, we will develop fairly sophisticated models for each point, especially since we focused on making them as objectively provable and transparent as possible. There have already been many calculations into electricity usage costs, and while happiness is a subjective frame of mind, we can find optimizations with comparing what it means to be happy.
Another possible negative is that there may be other factors that we have not taken into consideration, and most likely that is true. The benefit of this model is that you can vote on another model altogether with a proposal. A model changing proposal would only be accepted if people calculate that it will lead to a more sustainable protocol, mitigating the chance of someone submitting one try to make short term gains. The market would react with a projection of NAS’ leading to lower overall values since it will not be as efficient as the current model. A better model, however, will move to higher sustainability since it will raise future NAS, leading to it being accepted as the new formula for calculating acceptance of proposals.
The practice of calculating sustainability, especially indefinite sustainability, is more of an art than science, and we are making no claims to be an all-encompassing path to solving that problem. What we are doing however, is laying the groundworks for a new frame of thinking, a robust way for us to objectively pick our own future.
What is most valuable is that for the first time, we are valuing Subjective Well Being as our source of choice. We are not concerned with transaction fees, scalability, market value, or ease of use, because those are not the objective end goal. Those are the stimuli for our well-being. If we have a poor servicing protocol that raises our happiness, in our minds that is enough to ensure sustainability. Because as long as people draw value from what you are building, then that is enough. That is the cypherpunk way. That is Satoshi’s dream.
I want to give special thanks Claire Fishman, for her strength and insights became the catalyst to write this.
Thanks to all those in the Economics and Crypto/Blockchain community as well for their passion and dedication in creating the next evolution of humanity.