Crypto outlaws

What’s the weight of a smart contract? Is it backed by a national legal authority, liquidity network or personal collateral? What if economic relations in crypto space were backed up by “bit-nations,” vast groups of networked users who, when a contract is violated, cease to recognize the violator as a trusted partner?

This would directly impact the liquidity of the violator’s tokens and create a class of “crypto-outlaws,” violators banished from the cyber-space where no one is willing to accept their tokens.

Following bitcoin, a vast number of decentralised trust solutions for economic interactions have emerged. From smart contract platforms (more governable and flexible) to decentralised applications and everything in between. While Bitcoin was an all-in-one solution that started it all, Ethereum, Tezos and the rest of the bunch allowed the development of a range of applications. Forward-looking applications allowed us all to reconsider the uses of decentralised technologies and think beyond currencies as the main implementation. Most of these brave new applications are (decentralised) programmed organisations that have certain economic interaction models that govern peer interaction. Like Bitcoin, these organisations are interfaced with crypto tokens whose value lies in the “service” they offer and in their liquidity. Interestingly, liquidity is becoming more and more important since it is not based only on the demand for the specific service offered by the token, but also on other organisations recognizing its value by offering to accept it as a medium of interaction.

Value of a network

Since these tokens are used in general economic interaction one could see them as “social contracts”, a money-like-medium whose value is based on adoption (how many economic agents accept it). The bigger the network, the wider the liquidity and the higher the value of the token. This is most clear in Bitcoin and FIAT currencies whose value is based on the network’s acceptance of them as units of value and not because of having a specific function or backing. But then we have units like Apple computer stock, whose value is based on the consumer-base acquiring Apple products and thereby producing value for the stock. The difference with application tokens is that the token holders self-capture the value they create as part of the network, while the product users (consumers) never touch the value which they produce. FIAT money holders essentially capture the economic upside of the issuing country but are not able benefit from it, whereas bitcoin holders are.

Capturing network value

The way in which value is derived from a network can be seen as the “will” of the famous “invisible hand” since it affects directly the emergence of networks and organisations that produce it. Capturing this value is currently devised through the aforementioned company share. Interestingly, shares are not good for anything except speculation and they have no other value than generalized monetary value. I.e., they have no use value which means there is no reason to acquire shares other than pure monetary speculation. Crypto tokens on the other hand, can (and likely will) carry both “use” value and “networked” value, as well as functioning as a medium of interaction (use right for a service, etc). This means that token holders can choose how they utilize their tokens. I.e., there are no shareholders, workers or consumers but only one group in which some are using tokens for their use value (as access to service etc), others hoard for speculation and the rest use them for medium of exchange or collateral.

The Landscape for Trust

Bitcoin could be described as “one size fits all” because it combines technology (blockchain) and application (currency) together in one token, while others that followed, like Ethereum, are platforms for myriads of applications and corresponding tokens, so that Ehereum is also valued based on hese applications. Allowing the design and customisation of applications has become the central quest for the next generation of blockchains, since it is these applications that expand our conception of value and the economy that emerges from the capability to “self-issue value”. Some application projects have dedicated themselves to designing complex service systems while some are thinking in more general terms about what kind of economic relations and models becomes possible when p2p contracts are reimagined. The unifying element in both is that they try to produce new ways in which people interact with each other via smart contracts.

Weight of contract

The obvious question when talking about value and economic organisations is can they be trusted and what are consequences of breaking given rules. Why would we trust these relations more than the traditional interactions? One easy option is to use collaterals as stakes in smart contracts, which in the case of malicious action are used to cover losses. For instance, when I rent your car I have to have X amount of collateral placed in escrow to cover possible damage. This type of collateral principal can supercede traditional institutional punishment in some cases since the threat of (lawful) punishment is about production of a prehensive social environment not about evaluating possible losses and setting rules based on that. Collateral can work more as an insurance that preempts malicious action (if you steal my money your money is given to me). This way smart contracts can allow offering vulnerable relations in a way where both parties match each other’s offers in a way which satisfies both. The necessity of placing stakes can work especially well for situations where there are agents who are not affected by law or common ethics. E.g., a flakey car salesman would be difficult to track down in the case of fraud, but if there are assets in escrow there is no need for tracking.

Liquidity outlaws

Then again, the infamous DAO hacker took the money by hacking the system, not by breaking a contract. There was no traditional legal system to punish the hacker nor was there collateral to cover the losses. Yet the (Ethereum) network took initiative and forked the blockchain itself so that the hacker was left out of the party. Is the hacker then a crypto outlaw when the network won’t recognize his assets in exchange of anything? Is this the punishment that the new crypto establishment imposes on contract breakers: deny liquidity? This reveals one of the most interesting things of networked value: liquidity. Without a network that accepts tokens, there is really no value in them. Just as if criminally produced money could be detected and rejected by local shops it would make criminal money less if not zero value. In the wide crypto world these local shops might be vast bitnations who decide to offer or deny liquidity.

Just as we realise that decentralised programmed organisations enable new forms of value production and it is the token that is able to capture and distribute the value (in self-determined ways), we realize that it’s the emerging liquidity network of “bitnations” or “organisations of heterogenous agents” where the endgame happens.

Thanks to Andrew Dunscomb, Tere Vadén, Erik Bordeleau and Pekko Koskinen