Innovative Incentives in the Cannabis Supply Chain
Can decentralized snitching assist regulators?
Eighteen and a half percent. All but 2.5 million out of 13.5 million pounds of cannabis produced in 2016 left California. Seed-to-sale tracking solutions are incomplete and this is a giant elephant in the room as more jurisdictions regulate and legalize cannabis distribution. Here I propose novel implementations in mechanism design for the regulated cannabis supply chain to assist the industry with decentralized compliance, cooperation and other game-theory based solutions. It’s hard to go up against the laws of supply and demand. Why don’t we use them instead?
A simplification of the topic of incentives is the carrot-or-the-stick metaphor. As a mechanism designer, the carrot represents an incentive to attract or encourage the behaviour you want to promote by offering rewards. The stick represents a deterrent that discourages behaviour by threatening punishment. These are the tools used by mechanism designers to influence behaviour of participants in a system towards a desired goal.
Today: Legal Punishments as Deterrents
The way that cannabis is controlled today is by using legal punishments as a deterrent to discourage illegal activity. The system is the best that we’ve been able to come up with so far as a society, but there is definitely room for improvement that we want to solve with this kind of mechanism design.
It’s expensive to wage a war on drugs: you need police, court systems, and a whole bunch of manual labor. Who pays for this? You, the taxpayer. It is a form of external regulation by a centralized entity, meaning there is large amounts of polarization between market factions, discouraging consensus and collaboration. Also, there are tough emergences like institutional racism that we do not want.
If you’re following along, this is a stick solution.
Future: Enforcement Bounties as Rewards 🥕
What blockchain technology allows us to do is to provide rewards in a decentralized and automated way. Savvy blockchain connoisseurs will recognize the use of rewards in the way that blockchains fundamentally work; see the Bitcoin block reward to miners for their work in securing the network.
Theoretically, if there exists a totally transparent legal supply chain, then why should we limit the enforcement of compliance to just the police? Regular patients would be able to understand discrepancies between the state of the supply chain and what they are able to buy at their local dispensary. Supply chain intermediaries can self-report discrepancies in their own compliance interests.
Key Question: If there existed a cryptocurrency bounty, held in secure escrow by an blockchain smart contract, that a decentralized network of supply chain intermediaries could claim, in an anonymous and automated fashion, what is the likelihood that this would incentive enforcement?
Decentralized Enforcement
I hate to use the term “decentralized snitching”, but the metaphor is too fitting to pass. Try and separate toxic snitch-culture from the actual mechanism design of the process of snitching. Think about it:
An enforcer (traditionally, law enforcement) offers an incentive (traditionally, some kind of legal reward/deal) to a participant (traditionally, a criminal who has been caught). Hopefully it’s easier to understand how we can decentralize this entire process if we outline the process in this way.
The incentive can be financial in nature, held in secure escrow by an Ethereum smart contract. The participant can be anyone who wants to claim the bounty, posted publicly. The claiming should be anonymous for the participant, and funds paid out in cryptocurrency. What is interesting is when you ask yourself: who should the enforcer be?
In this case, the enforcer is any entity which has an incentive in offering rewards for the legal enforcement of the cannabis supply chain. This can be law enforcement, but this could also be the cannabis industry itself!
Self-Regulation
Theoretically, if the cannabis industry funded these bounties, then this would be a form of self-regulation. The sacrifice of a portion of revenue by honest, compliant actors means that shady actors would have a greater likelihood of being caught if participating in illegal activity.
This mechanism design, to my knowledge, is an innovative idea for cannabis supply chain compliance. It is our first carrot-based solution. 🥕
Risk Profiles
A recreational market relies on retail dispensaries who have less to lose and more to gain from illegal activity. At worst, the operator loses a license and a small personal investment. Compare this to an industrial grower, who in theory has more to lose and less to gain from illegal activity. This imbalance in risk profile means that a lot of illegal activity happens at the edges of the distribution network, where a decentralized network of patients is able to make the most impact. This is why a Decentralized Enforcement mechanism design could work.
Now that we’ve proposed the decentralization of compliance enforcement and self-regulation, we cannot simply stop here. Please, take the red pill, and I will show you how deep this rabbit hole goes.
Regulation = List Curation
The blockchain is such a powerful paradigm shift in thinking that one other major innovation is clearly suited to the task of self-regulation. It would be a crime, so to speak, to not mention it.
If we think about what regulation accomplishes, it is the curation of lists. In the current model, Curators (traditionally, the government) perform an act of curation (carefully screen and validate) a general set (the agents who want to participate in the cannabis industry) into a subset (the agents who get licensed in the cannabis industry) for some Incentive (traditionally, accomplish mandate dictated by laws and to maintain a healthy, orderly society).
If you’ve been following along the field of cryptoeconomics during the last year, you’ve probably heard of something called a TCR or Token Curated Registry. Read a quick overview here. Essentially, it is a way to incentivize the curation of a list by a network of token holders by tying financial value to the judicious curation of the list. The theory goes that the better the list is curated, the more valuable the list is, so the more incentives there are for external parties to join.
To finalize the metaphor:
- The Curators are now the TCR token holders
- The general set is curated into a subset (the TCR is the list of licensed industry participants)
- The incentive to do this is the forecasted increase in value of the token attached to the TCR 🥕
Self-Regulation Proposal #2
Anyone can participate in the curation process. This means that law enforcement, marijuana advocates and other cannabis-industry participants can participate in the curation of the TCR of authorized members of the supply chain. In the context of the cannabis industry, these are lists of suppliers, lists of distributors, lists of licensed dispensaries, etc. In return, they are rewarded by tokens.
Inspiration
Am I just a crazy person who is mashing together ideas that could never possibly work in an industry I don’t fully understand? Perhaps. But I’m not the first person to use TCRs as a way for self-regulation. Indeed, the blockchain industry itself has a huge problem with curating legitimate token projects amongst a sea of fraudulent and cowboy fundraisers. So a TCR is being proposed as a possible solution for self-regulation. I’m sure this won’t be the last we’ve seen of this use case.
Also, law enforcement and legal systems are understood to be within the scope of mechanism design. See Jeff Coleman’s talk on Mechanism Design at ETHWaterloo.
Final Thoughts
Network Effects: This is when adding more participants to a network increases the overall value of the network. The mechanisms described here demonstrate network effects: more network actors = larger bounties = more decentralized enforcement = more efficient regulation, which leads to more network actors.
Decentralization and Debate Polarization: In my native province of Ontario, Canada, there is a large amount of polarization in the debate for the model of cannabis distribution: centralized, top-down and government-controlled. In the province of Alberta, I hear they are allowing for licensed retailers, among other important differences. Generally, there probably won’t be a one-size fits all solution, and the public health experts should lead the discussion here. But I think open-source and decentralization movements could form an interesting coalition and offer alternatives to establishing consensus about a fiercely debated topic.
Edit Aug. 26, 2018: Newly elected premier Doug Ford is paving the way for retail distribution.
Internalizing Externalities: Institutional and systemic racism is a real thing and should be eliminated. By using blockchain as a way to program incentives, we can use blockchain to internalize externalities. In other words, the industry could set aside funds for legal expenses and victims of racism, thereby “internalizing” — taking responsibility — for an ugly externality (racism as an emergent behaviour in the larger system).
Thanks for reading! You have powers of curation so Clap and Share this article and put them to use. If you’re interested in the future of legalized cannabis, follow here as there are more interesting things to come.
