Four Books To Better Understand How Cryptocurrency Works
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When we look at new technologies, our natural tendency is to project them onto the same paradigm we understand right now.
When media companies looked at the internet, they initially assumed that it would just be another way for people to read the same content.
And, indeed, the first media sites online looked much like their print counterparts. Yahoo!’s homepage in the 90’s was not unlike the front page of a newspaper: it had banner ads across the top, a few featured stories and links to other stories.
However, the Media companies who won the internet look very different from those that preceded it: Google, Facebook and Twitter have scrolling feeds, not static pages. They have feed ads instead of banner ads and everyone’s “home page” is personalized to them.
These differences reverberate down into their business model and organizational structure. They have no editorial staff and generate no content.
Few saw this coming.
Fred Pohl captured what good prediction should do with his line about science fiction: “A good science fiction story should be able to predict not the automobile but the traffic jam.”
Good prediction is the same. It should see not only the first order effects (the automobile) but predict the second and third order effects (traffic jams) which come later.
I have been thinking about what the traffic jam effects of cryptocurrency will be.
Cryptocurrency predictions seem particularly difficult to make because the technology lies at the intersection of fields as diverse as politics, economics, cryptography and computer science.
Individuals with a background in one field may understand some of the initial the economic implications but are blind to others.
Here are the four books I’ve read so far that have most helped me understand what some of the traffic jam effects of cryptocurrency may be.
The Dictator’s Handbook
by Bruce Bueno de Mesquita and Alastair Smith
“Pursuing the perfect world for everyone is a waste of time and an excuse for not doing the hard work of making the world better for many.”
Cleverly written as a handbook for dictators, this book outlines Selectorate Theory, which shows how power in governments and organizations actually works.
Focusing on politics, Selectorate Theory breaks down the political landscape into three-tiered categories of those who have the power to ‘select‘ the final outcome of a given election.
- The Interchangables — everyone who can, nominally, influence the outcome.
- The Influentials — the group that actually chooses the leader.
- The Essentials — the subset of the real selectorate, whose decisions are truly influential.
Ostensibly, everyone that can vote in an election has power. In truth, they are mostly interchangeable. Historically it has been the essentials, a small group of individuals who work behind the scenes, who determine which candidates show up on the ballet.
Selectorate Theory argues that democracy is a better form of government than dictatorships, not because presidents are intrinsically better people than dictators, but simply because presidents have less agency and power than dictators. They are responsible to more people and so have to act in better faith.
What matters isn’t who the leader is, but the structure of the system they are operating within.
Specifically, a larger selectorate means more distributed power which leads to a better outcome.
According to selectorate theory, justice and fairness in a group or society has little to do with the sense of justice and fairness in its leaders, but rather the degree to which power is distributed and decentralized.
Words like decentralization, disintermediation and distributed are all mainstays in cryptocurrency predictions. Cryptocurrency has the potential to enlarge the Selectorate, extending real agency and influence to groups which have historically been marginalized or excluded.
Seeing Like a State
by James C. Scott
In Seeing Like a State, Scott argues that society is run by central planners who assume that only what they can measure has value and everything that can not be measured is useless.
In Scott’s words, they want to make the world legible. The idea of legibility arose with the modern nation-state in the 17th and 18th centuries.
For the first time in history, the modern nation-state had the data, capacity, and authority for large-scale social engineering.
If you were living in France a thousand years ago and someone galloped over to your town from Paris and said, “I want you to reorganize your village,” you would tell them to shove off. They didn’t have the authority to do it.
By the 18th century, France and most European countries had become far more centralized. If a central planner from Paris came to the mayor of your village and said, “we are going to cut off your funding if you don’t reorganize your city in the way I want,” you pretty much have to do it.
The basic recipe for these legibility-focused, central planners (and the failure case) is:
- A central planner with authority and power looks at a complex reality.
- They don’t understand how it works because it’s illegible, hard to understand from the outside looking in, even though it is effective.
- Rather than looking for other factors that might have caused illegibility, they attribute that failure to being “irrational.”
- They come up with an idealized, platonic notion of what it should look like in theory and claim that their version is superior and rational.
- They use their power to impose that idealized map on the actual territory
- They fail miserably and blame it on someone else — usually the system they were trying to fix.
Cities like Brazilia are the best example. They were designed to be ideal cities on paper, but in practice are horrible to live in.
Nation-states are where this phenomenon started but it’s pretty ubiquitous at this point. If you’ve ever worked in a large corporation, you’ve seen it happen. A new consultant comes in and looks at some complex activity, say how a department is organized. It doesn’t make rational sense to them. They redesign an idealized version of what it should look like. They force everyone to work in the way they’ve designed. Everyone’s productivity plummets and the consultant blames it on someone else.
One of cryptocurrency’s main selling points is that it offers a way to coordinate activities without the central planner, often called a trusted third party in cryptocurrency parlance. If it succeeds, cryptocurrency could preserve many of the benefits of large-scale organizations without suffering the downsides of central planning.
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The Sovereign Individual
by James Dale Davidson and Lord Wiliam Rees-Mogg
The Sovereign Individual, a 1997 book allegedly read by Satoshi Nakamoto himself, forecast that it would be a new technology of money, not communication, that would deeply alter the structure of society in a way many originally hoped the internet would.
“The Information Age implies another revolution in the character of money,” argued authors Davidson and Rees-Mogg.
“This new form of money will reset the odds, reducing the capacity of the world’s nation-states to determine who becomes a Sovereign Individual.”
This “cybercash” should be “unique, anonymous and verifiable” and able to “accommodate the largest transactions” as well as “be divisible into the tiniest fraction of value.”
It would, they predicted, “be tradable at a keystroke in a multi trillion-dollar wholesale market without borders.”
Bitcoin, the first “cybercash,” appeared in 2008. Almost perfectly true to prediction it was unique, verifiable and able to accommodate the largest and smallest transaction.
Based on these cryptocurrency predictions alone, it’s clear that Davidson and Mogg had some penetrating insights into how technology would evolve.
The rest of the book lays out their predictions for what a post-cryptocurrency future might look like. The main thrust is that it will become more difficult for nation-states to control their citizenry through taxation and fiat currencies, resulting in the rise of Sovereign Individuals, something akin feudal lords for the digital age.
The Master Switch: The Rise and Fall of Information Empires
By Tim Wu
“It is an under-acknowledged truism that, just as you are what you eat, how and what you think depends on what information you are exposed to.”
When this book was originally published in 2010, in the age of a more open Internet, it was a warning not to forget that every major information industry, from the telephone to radio to television, has begun with a dream of an open, decentralizing force. Yet each one has eventually been taken captive by some ruthless monopoly or cartel, often colluding with the government.
Looking back at it today, it’s an accurate prediction of how the Internet has played out. The open Internet developed into a few walled gardens, which have radically changed the way humans consume information.
The hope of many cryptocurrency pioneers is that they can finally break through this cycle and establish an open internet.
The Master Switch is both a warning as to how difficult that task may be, and a guidebook for how to avoid the pitfalls which have caused others to fail before. It suggests that the disintermediation panacea many early cryptocurrency adopters believe to be inevitable may eventually end with simply a new group of overlords.
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Originally published at Taylor Pearson.
