Components of Coordination
When a group of people seek to collectively perform a complex task, they require a coordination mechanism. This article breaks down two components of coordination, standardization and trust production. Blockchains address these key components, setting the stage for a new model of human organization.
Maintaining a shared ledger is a complex task and it is now clear that blockchains are a useful tool to coordinate this activity. They allow us to reach consensus about who transferred what (and when), thereby allowing us to reach consensus about ownership, now or at any point in history.
Validating a trusted ledger of ownership is one example of a complex task that requires coordination, it is certainly not the only one. There is a broader context around coordination in crypto economies.
Corporations, the education system, and governments are all essentially large scale coordination mechanisms. They organize human activity around a shared set of desired outcomes.
In all of these settings, standards help us coordinate.
Standards
The use of standards dates back millenia. For example, emperors and kings were obsessively concerned with standardizing measurement. For good reason: lack of standardization was a friction to economic activity, which means it was a friction to tax revenue. Standardized measurement of weights, lengths, time, and, importantly, money, facilitated innovation and trade on top of these shared standards.
Over time, standards expanded beyond measurement systems to encompass all kinds of things that required coordination. One can think of standards as evolving either top-down (government decree) or bottom-up (voluntary market participant adoption). In both cases, we face challenges related to competing standards, but top-down standards tend to be more difficult to bring into congruence.
Consider the state of electrical outlet standards:
Jurisdictions establish building codes in an effort to ensure public safety, so we get jurisdiction-specific standards. They are uniform within jurisdictions but not necessarily across jurisdictions. To bridge the competing standards we require an adapter.
Contrast this with a common power outlet within the computer industry: the USB port. The USB standard was not induced by government decree, it was developed by a market participant. Specifically, a team at Intel led by Ajay Bhatt.
Adoption was slow at first, but gained steam as more hardware manufacturers decided to integrate this shared standard to facilitate interoperability. Today, USB ports are widely adopted all around the world, often found right alongside the jurisdictional outlets. Market-based standards often become global standards rather than jurisdictional standards.
Long ago, human activity predominantly occurred locally, within jurisdiction rather than across jurisdictions, so competing jurisdictional standards weren’t much of a problem. However, over time, technological advances have increasingly allowed human activity to transcend political borders. This leads to an interoperability problem.
Conflicting standards have real effects. In the American Civil War, the Confederacy suffered from a “break of gauge” problem in their railroad network. Soldiers and goods had to be transloaded between lines, adding cost and slowing their movement. In response, the movement of goods has increasingly been “containerized” in recent decades. Containers are a standardized adapter to facilitate quick transloading across transportation modalities that don’t interoperate.
Society has developed numerous adapters like shipping containers and universal electrical sockets to reconcile competing standards. There is an analogy here to the measurement of value, which has historically been a top-down jurisdictional standard.
Nation states dictate legal tender, which is the standard by which debts are measured and extinguished. The diversity of jurisdictional standards around money makes electrical outlets pale by comparison: There are 15 standards for electrical outlets versus approximately 180 fiat currencies serving as legal tender.
You may be thinking: “But the number of fiat currencies is tiny compared to the number of cryptocurrencies, of which there are thousands.” There’s an important distinction. The vast majority of cryptoassets adhere to just a few base layer standards, and those standards are quickly becoming interoperable using software adapters like KEEP, Axelar, and numerous other solutions. Over time, these solutions will fade into the background of the tech stack, effectively creating one giant interoperable network for value.
Crypto networks establish a shared set of standards upon which everyone can build, and these shared standards have unlocked a Cambrian explosion of innovation and economic activity. For example, Ethereum’s ERC-20 standard set the stage for the development of the fungible token economy, now valued in the hundreds of billions, and the ERC-721 standard served as the original wellspring for all the nonfungible token (NFT) activity we’re seeing flourish today. Market participants adopt these shared standards to facilitate global interoperability. These standards serve as building blocks for coordination.
In contrast, fiat currencies, which are jurisdictional standards, commonly require adapters that extract rents. Financial intermediaries serve as adapters that coordinate economic activity across political boundaries. Eliminating the need for rent-extracting intermediaries to coordinate standards is a big deal, but intermediaries do much more than bridge standards, they also act as trust production mechanisms, which I explore in the next section.
Trust Production
Trust is a critical component for economic activity. Arrow (1972) states: “Virtually every commercial transaction has within itself an element of trust.”
The corollary is that lack of trust severely impairs economic activity, which has been shown in settings ranging from the market for used cars to regional financial market development. But where does trust come from and how is it generated?
A sociologist named Lynn Zucker investigated that very question by examining sources of trust over many decades. She finds that transactions prior to 1840 were largely based on trust engendered by cultural similarities and recurrent interactions. People in the same community dealt with each other repeatedly, and these repeated transactions were the trust producing mechanism. These mechanisms worked pretty well because people didn’t move around that much. Economic activity was primarily local, not global.
In the early 1800’s, there was a technology shock: the steam engine, which had two important effects on the economy. Railroads went from almost non-existent to hundreds of thousands of miles of track, which dropped the cost of moving goods. And people started coming in droves to the New World from Europe and elsewhere on steam powered ships, which substantially dropped the cost of moving labor.
The extant trust production methods like repeat transactions with familiar counterparties didn’t work very well anymore. People could now transact over long distances, and heterogeneous market participants didn’t necessarily share the same culture and values. Society needed new methods to produce trust.
The answer was institutions, both corporate and governmental. Financial markets, the banking system, the insurance industry, and securities and corporate regulations, all grew in prominence during this era. These institutions were really good at producing trust. Trust became a saleable good and trust production became a big business.
It led to massive scale for financial services and regulatory bodies that could inject trust into the contracting environment. It’s hard to overstate the importance of institutional trust production for the growth of the world’s economies over the past two centuries, but the institutions have extracted substantial rents in the process.
In 1989, Zucker wrote: “The trust producing firm or bureau comes to assume a high status in society, again beyond its explicit role, so that society will act to protect it against failure.” Twenty years later, this statement was further validated in the global financial crisis. But the experiences with AIG and other actors that were bailed out led to erosion in the trust that the general public places in institutions.
Meanwhile, another technological shock on par with the steam engine has been unfolding for the past two decades: the digital revolution. Once again, it has shifted our ability to transact at distance and altered the mobility of labor. Our institutional trust production machines weren’t constructed for this new paradigm. The global nature of economic activity puts strains on nearly all methods of trust production we use today, in part because the institutional trust production mechanisms operate within jurisdictional standards that don’t interoperate seamlessly.
New sources and forms of trust emerge in economies during periods of transformation as a matter of necessity. As they emerge, the relevance of incumbent sources of trust are disrupted. We are currently in the midst of a transformation.
New digitally-native trust producing mechanisms are rising up to meet these new demands and cryptoeconomic systems are the centerpiece. Crypto networks create a perfectly competitive global market for producing trust, bringing the price of trust down to the marginal cost of production.
Trust producing mechanisms diffuse slowly because they need to be socially validated over time. We are currently in the early stages of the social diffusion process. Bitcoin was the first widely deployed blockchain and has captured attention recently, however, it’s more accurately viewed as a canary in the coal mine, because the need for trust production extends far beyond digital commodities.
Smart contracting platforms like Ethereum and Solana address the two most important components of coordination: global market-based standards upon which further innovation can build, and a source of digitally native trust production. They create a peer-to-peer contracting environment and streamline human coordination. This new coordination mechanism can be applied to any number of shared objectives that require completion of complex tasks by multiple people.
If you subscribe to the view that most forms of human organization ranging from corporations to governments are simply coordination mechanisms to achieve a shared objective, then you can see that we’re on the precipice of a sea change.
I explore the implications for how we will utilize human capital within crypto economies in a follow up article on the future of work.
A special thanks to Dan McKeon, Bob Wardrop, and Derek Edws for their feedback and insights during the construction of this piece.
Disclosure: Collab+Currency is an active investor in the crypto economy.
You can find more thoughts from our team on Twitter: @Collab_Currency
