Systems of Participation
How Cryptocurrencies and Crypto-Economics will Impact the Status Quo: Intentional Money.
With the explosion of cryptocurrencies we are also seeing the advent of new methods of engagement — new ways that people can participate in ecosystems. Here we develop a simple framework for visualizing how these Systems of Participation both fit with, and differ from, the models we are used to. At the core of how you participate is how a system is governed (or controlled), so we will focus here on how governance is structured and evolving.
In previous posts [1,2,3,4,5] we explored the growing potential to build efficient decentralized systems which can compete with today’s highly centralized structures. This is due not only to blockchains changing how trust and transactions can be provisioned and managed, but many other technologies that give users more direct control and flexibility. For those discussions we used a very simple visualization with an X-axis that runs from highly decentralized systems to more centralized ones; a spectrum we have called the Systems of Control.
When looking at a system from top to bottom there is often a mix of control structures at play. These control structures are often at odds with each other, which can lead to tension within the system. One of the promises of crypto-economic backed ecosystems, where governance is encoded in software, is that it is possible to build a more aligned top-to-bottom governance structure.
This is pictured below. We add a Y-axis that outlines different aspects, or different layers, of governance. For a given system we plot, relative to other similar systems, where the control points are. If a system lines up vertically, it is aligned and should be a healthy and compelling environment. If the system is all over the place, there are ample opportunities for it to be stressed or even break.
The bounding box around a given system is what we will call Systems of Participation. It defines the bounds within which actors operate, and the various levels of control that they have.
Of course, simply being more aligned is not the full story. It is quite possible for a system to be unattractive even though it is highly aligned (for example, a anarchistic system to the far left on our diagram, or a highly aligned monopoly / autocracy on the right). It is also quite possible to have a great system like the light green one outlined below — the tensions between layers may be used to advantage as opposed to disadvantage, and the potential conflicts managed through other structures.
However, when a well aligned structure is set in the middle of the spectrum, the chances for user empowerment, meritocratic behavior and proceeds, and ultimate success would appear to be higher.
This is highly subjective. It is a framework for thinking and mapping systems, and while this allows us to think differently, it will apply to every situation. As we proceed from here, we encourage the reader to think about the structure more than the specific mappings — those will certainly encode some of our biases.
To make this structure concrete, let’s use three simple layers on the Y-axis.
In the Government layer there are a wide range of democracies that are possible on the left, and autocracies fit to the right. For Business structures we can vary from meritocracies through the range of firms developed under competitive capitalism through to state owned monopolies (One might argue that meritocracies can also be democracies). In the Product layer we have products where everything is under the user’s control, and users are empowered to take apart and reassemble anything they want, to products that are designed (and/or legally restrained) to be used as built. The EFF has many articles showing how products that should have more open user controls are being locked down and pushed to the right.
Let’s add a few companies into the framework. I am going to use Twitter, Tesla, and Wikipedia as examples. The blue box in the bottom layer is the USA, which is where all of these entities operate. In the US, as in many countries, large firms are organized in a very centralized control structure. The horizontal gap between the US Democracy and both Tesla and Twitter reflects the tension between highly centralized firms operating in a fairly decentralized nation.
Let’s begin with Tesla, the maker of electric cars and solar infrastructure. Tesla is a public company in the US and is thus part of that capital market structure. However, Tesla’s product is also highly centralized, and thus fairly well aligned with the corporate environment; beyond choosing a color and one of a few energy packages, the user has almost no control over how their Tesla is made or serviced. They are not able, for example, to update the cars software by themselves; it is a locked down product. In this case, the quality of a Tesla car and the perception of quality of the Tesla company are tightly linked, as users would expect.
Twitter, on the other hand, develops a product that is at odds with the US corporate environment. Twitter relies on user generated content (UGC) from a highly decentralized group of people. It imposes centralized control over this decentralized data through its organization — while Twitter attempts to stay as open as possible, some content simply needs to be taken down. Because Twitter is a well known firm, users expect the quality associated with a centrally controlled entity, but experience the quality of a decentralized group. This governance gap is what causes Twitter (and Facebook and many others) large problems. Twitter, in theory, should not judge any content on it’s platform… but in reality it has to judge it all and take down the worst. When Twitter does take action it is often accused of political bias or favoritism or of applying opaque policies. One could imagine a fully decentralized Twitter, where anarchy would reign, or a highly centralized Twitter, which would look much more like a news site controlled by the Government. These may be more aligned configurations, but would not be as valuable as Twitter currently is. One can also imagine a Twitter that has defined codes of conduct that are monitored and enforced by its user base (instead of the centralized entity), and that it operated as a not-for-profit to remove the tensions caused by its profit motive. That Twitter may well be a better product (for users) than the existing one, and would be a great candidate for a cryptocurrency economic structure.
Wikipedia is pretty well aligned. It is a not-for-profit, and it’s corporate governance is quite aligned with general democratic principles. The product is user generated and editors are well known and have earned respect — reflective of the trust that is generated in an operational democracy. Thus, while individual Wikipedia articles may generate many different opinions, the overall enterprise has evolved to a governance structure which works very well; users expectations match how the entity operates.
Can we envision designing more aligned structures, such as Wikipedia for other areas, including commercial ventures? Is it possible to have governance and incentive structures that line up, across the stack? This is part of the promise of crypto economics and cryptocurrencies.
Let’s try to map out the space in more detail and with a few more layers. The diagram below is purposefully a bit messy but highlights some of the variables we would like to consider:
To help build out the model we have added more layers of governance, including the currency that underlies the system. Obviously the components on the right of our diagram are mature, wide spread and fairly static. This is the governance and control stack that we are all (at least in Western Democracies) familiar with. Our economies run with Fiat Currencies, supported by the general belief that our countries produce value. The government sets some rules for the operation of firms (such as public company rules), and on top of this infrastructure companies are built — such as Twitter and Tesla, but also traditional taxi companies or newer ride-share companies. The governance of the currency is done by (hopefully somewhat independent) arms of the government in order to control money supply, inflation, exchange rates, and a host of other economic metrics.
A national economy runs on top of fiat currencies because there is supply and demand for products and services, and people implicitly agree that they can use the currency to exchange this value. A country, in our language, is an ‘Ecosystem based on geographic boundaries.’ Everyone who works in, pays taxes in, or otherwise contributes to the GDP of the country is an active participant in the Ecosystem. Democratic countries, such as Norway and Canada, also allow citizens to participate in the governance decisions, typically through elected representatives. If a country is strong and growing, it’s currency generally rises with respect to other currencies.
For cryptocurrencies consensus is encoded in proof-of-x protocols; currently proof-of-work and proof-of-stake are the most used and discussed, but others may emerge both to the left and the right of these. On top of these we have currencies such as Bitcoin and Ethereum, and emerging ones such as Tezos. I have mapped Ethereum slightly to the left of bitcoin as it has a more powerful programming (smart contract) model, and so can, in theory, implement more democratic structures. Tezos, with the promise that the governance body can do more updates without forking, may end up even further to the left. Others may map these currencies in another order; that is fine — it is the overall structure we are capturing here.
A key insight when thinking about cryptocurrencies, and the Ecosystems built on top of them, is that they are not conceptually different than fiat currencies for nations. Instead of an Ecosystem defined by geographic boundaries, it is easy to imagine an Ecosystem defined by another metric which users (citizens) can choose to join and contribute to. This could be the Ecosystem of Open Source Software Contributors, or the Ecosystem of Human Knowledge Maintainers (Wikipedia), or the Ecosystem of New York City, or on and on. In this definition an Ecosystem comprises a set of like-minded individuals who believe the system (country, community, organization) has implicit value, is willing to use a currency (or token or coin) to transact that value.
Currencies can extend beyond first-order economic ones. Reputation, for example, is a currency with a more indirect impact. You use your reputation for gain in the world, but it is not as directly traded for goods and services as dollars are. Anonymity can be viewed as a highly indirect currency — the opposite extreme from the very tangible asset of Gold. Extending our view of currency this way allows us to better map products where reputation is important.
Based on this discussion, let’s try to clean up our stack a bit, while capturing these elements.
In this stack we have five layers:
- Consensus: at the bottom layer is the question ‘do you trust the basics of the system?’ On one extreme there is no proof of consensus, and on the other extreme the majority believe that their government is centrally controlling the economy. In the middle are new ‘proof of x’ systems being driven by crypto economics. This middle ground is essential as it was vacant, with respect to provable implementations, until recently.
- Currency: a currency is how you keep score. Of course systems can use multiple currencies and most do. As we outlined, currencies do not have to be purely economic — reputation is an important currency.
- Governance: all the layers encode governance choices, but this is the layer that we usually most associate with the word. Is the ecosystem built around a geo-defined democratic government, or an online crypto-economic group?
- Community: How are users, citizens, partners, and other participants empowered in the system? Is it every person for themselves (anarchy) or a tightly controlled system (oligarchy or monopoly)?
- Product: And finally, how does the product match the rest of the stack. Do users control the product within a meritocratic Ecosystem, or is it locked down and unchangeable, within a closed Firm.
It is important to also note that as we move to the left in this diagram, we move from structurally embedded systems to ones defined in software or in process. This matches the general characteristic that centralized systems are fairly static and tied up in overheads, whereas decentralized systems are more flexible and can evolve more quickly.
In the now well-known phraseology, ‘software is eating governance.’ With cryptocurrencies both the incentives and governance can be encoded in software, thus becoming transparent and mutable, instead of being embedded in the structure of centralized entities (Federal Reserves, Central Banks, public company regulations).
As a simple example, the monetary supply of Bitcoin is built into its crypto stack. Once all the Bitcoins are mined, no more will be created. This may be seen as good or bad, but either way it is well defined, well understood, and not subject to a small set of centralized actors changing their view on it. The Bitcoin community has decided that this structure has enough value for them, that Bitcoin supply and demand is robust enough for them, and that they believe in it. Thus Bitcoin has a price relative to fiat currencies and can be traded back and forth. Bitcoin defines an Ecosystem of participants who understand and believe in its fundamental value.
Ethereum is an Ecosystem of people that believe that a ‘trusted world-wide computer that is not under the control of any centralized actors’ will be a valuable and enabling technology. By using smart contracts, governance can be encoded, graft and bad-actors limited, and users empowered.
Because crypto stacks evolve more quickly than fiat currency stacks, we should expect more experiments and more failures. And, there have been a fair number of failed crypto-currencies already. Those learnings are being used in the next generation already — a cycle time in the order of months or years, as opposed to a learning cycle of decades or centuries for fiat currencies.
Of course, within crypto-stacks there can be wide differentiation in how governance and evolution are configured. When the Bitcoin Ecosystem disagreed on how it should evolve, Bitcoin was forked (a new currency and Ecosystem were spawned). In a fiat currency analogy, if a geo-group split off from one country to form a new country, they would likely adopt their own currency as well. Ecosystems do split, and because currencies are fundamental to measuring value, and represent participants beliefs in the underlying system, a currency split will often make sense.
However other cryptocurrencies encourage less forking and believe that participants should be able to update, rather than fork, more easily. Tezos is an example of such a design which is earlier in its development and yet to be proven.
Although we have outlined these layers of governance in some detail, what is more important is a relative comparison between similar offerings.
Above we see Twitter versus Medium versus Steemit. Medium has more insight and control over authors due to their stronger identity requirements and longer format. Steemit, being a designed governance model from top to bottom is better aligned. They specifically designed their governance stack to align with their product. Facebook, Reddit, Youtube, and other UGC companies can also be mapped in here.
People sometimes wonder where Steemit’s value comes from how. Hopefully this helps elucidate that. Steemit is a system, not unlike a Firm built on top of a Democracy, where there is supply and demand for the product. That generates inherent value. By better aligning the governance stack for UGC, Steemit has less built-in (structural) friction. Steemit is a decentralized governance model combined with a decentralized product offering, sitting on top of a decentralized currency.
Will Steemit succeed? It is too early to know for sure, and simply designing an aligned system may not be enough to get a critical mass of users to try it. Nevertheless, it starts to show how a designed system can be built. How to build these Systems of Participation has driven the recent focus on mechanism design, an approach to reasoning about an ecosystem to better drive alignment up and down the governance / incentive stack.
Finally, we can use this framework to look at how cryptocurrencies may provide a more meritocratic system based on how focused (specific) they can be.
In this version of the diagram we focus on the span of a currency. A fiat currency, like the US dollar, typically spans a very wide range of applications across almost the entirety of our spectrum. This means that the US dollar is ‘diffuse’ — it is difficult to tie incentives and governance specifically to the US dollar. Any given individual, firm or industry has a limited impact on the value of the US dollar. This has led companies to introduce more aligned incentives such as loyalty programs — a loyalty program is a sub-currency that does a more focused job of tying a users commitment and usage of a specific product to the value they get from that system. These loyalty programs can only provide limited alignment as they don’t reach down into the lower governance levels.
A Firm’s equity is also a currency and does a great job at aligning shareholder and management incentives, but this is a short subset of the full governance stack. It often does very little for employees, partners, users or customers, who transact with the Firm through the underlying US dollar. It is possible to imagine a case where equity is also used to transact the companies business and is used to pay all employees — that has not occurred for many valid reasons, including employees wanting a stable fiat currency, not a high beta equity, as the majority of their compensation. That stability is something that cryptocurrencies will have to address… or knowingly ignore. If a person is involved in multiple ecosystems built on cryptocurrencies, along with fiat currency initiatives, some stability will be gained through diversification — that may be how the gig economy evolves.
With cryptocurrencies you can design a much more focused top to bottom alignment than is currently available in fiats. Ethereum may be used for almost anything, but is most useful for the more decentralized spectrum of products and applications — so a more narrow use than the US dollar is likely to emerge, although the application space may still be quite wide. Ethereum (and Bitcoin) are still fairly disperse.
A vertical cryptocurrency (tokens and coins) like Steem (the currency behind Steemit) or BAT or a hundred others, can build a tightly aligned, and tightly focused, top to bottom incentive stack. Participants in the Steemit ecosystem are motivated to maintain or grow the currency value by building a better product and supporting all other aspects of the ecosystem. For a user of Steemit the ability to impact the value of the system is much more obvious than how they can impact the value of the US dollar, or even Ethereum. Not only that, should they choose to, it is obvious how to contribute at any layer in the system; from the currency right up to the product. This provides for more attribution, and therefore more meritocracy. We term this focused, democratized approach Intentional Money. Beyond other currency attributes, such as being a medium of exchange, cryptocurrencies can be designed as “mediums of intent.”
As the above discussion highlights, there are positives and negatives to all of these designs. While cryptocurrencies will allow some highly structured top-to-bottom aligned ecosystems, they may not be stable enough to satisfy many users demands. We should expect to see a rich mix of the above structures.
Summary
We have introduced a framework, Systems of Participation, to highlight why crypto currencies are not that different from the fiat systems we are all familiar with, but how they can address different types of governance stacks, and how they may bring more focus to certain areas of interest… beyond geo-political ones. Obviously they are designed for more decentralized use cases, but that does not restrict them to that domain. Just as a fiat currency can underlie a fully decentralized ecosystem, so to a cryptocurrency could support an autocracy. However, what cryptocurrencies do enable is governance encoded in software versus infrastructure and economic and ecosystem design at a faster pace than we have seen in the past.
For all participants in a venture, including investors, understanding the Systems of Participation and how aligned they are from the currency all the way to the product is important. Successful ventures will map out different ‘shapes’ and therefore different overall value propositions.
Like all frameworks, this one works well in some cases, and not as well in others. It is not intended to be overly specific, but rather to give a visualization and spur thinking. In particular we have postulated that:
- Where an ecosystem sits on the centralized-decentralized axis tells us a lot about its intended governance and use cases.
- A more vertically aligned governance stack will lead to less structural tensions between participants at each layer.
- A more focused (slimmer) stack ties all participants in an ecosystem more tightly together. It allows for attribution across layers and therefore meritocratic behavior.
By comparing competitors and new entrants in this way, one can tease out how entities are differentiated. Many token and coin proposals are looking to create tall narrow stacks; it is yet to be seen if these designs, or the underlying theory, is robust enough yet. Regardless, it is evolving quickly, and we should expect to see some long term sustainable ecosystems emerge.
Addendum
It is interesting to map other companies into this model, and stress it’s boundaries. In particular, if we map Twitter more accurately, or add Facebook, we also need to deal with the fact that they have two customers — the users and the advertisers. To include those, we can expand our product governance spectrum to include ‘opaque’ components (items that users experience but have zero control over — like ads) and ‘embedded’ (going even further than opaque, embedded elements hide themselves in products causing confusion and misunderstanding with users — like native ads).
Using this product mapping, we would now draw UGC companies as below. Now the product layer System of Participation is bifurcated. On one side we have the 100% centrally controlled placement of advertising, including native ads, where the users not only don’t have control, they can’t tell what is an ad, what is content, what is real, what is fake. On the other side we have user generated content, where a user feels that they are very much in control; they are the ones writing the content.
The reasons for the difference in shape between Twitter and Facebook are that Facebook has stronger identity, uses more native advertising, and has more (and more confusing) blast radii (who sees what).
This diagram also highlights the split between where the work gets done, and who gets paid for it. In generating UGC, the user is doing work. In the case of Facebook the user gets a free service, but it is Facebook and the Advertisers (the centralized entities) that benefit in direct US dollars. In the case of Steemit, the people doing the work are also those being directly paid in Steem.
As more and more Ecosystems get built, and as more people spend time in those environments (versus working for Firms), we will have to move to direct pay models. This is another reason why cryptocurrencies will become more important.
