Trust-less governance is the killer app of blockchain technology
(based on a true story of exposing a $150M ICO scam and getting frustrated seeing smart people talk nonsense about bitcoin energy consumption)
There will be no mystery or suspense in this article. The title says it all: the killer app of blockchain tech, the one everyone is waiting for, is trust- less governance. This applies to open, public, permission-less blockchain applications. (If it’s private/gated/permissioned, there is still a trusted party needed to grans access or verifies users.) Let me explain.
You can trust us
The last major change in the governance model happened in the 18th century when the Industrial Revolution started and the United States of America was created. Previously, feudal society governance was simple: there was a sovereign who governed and there were subjects who did as they were told. The Industrial Revolution introduced co-ownership of capital and the idea of shareholders. The United States introduced a concept of self-governance of people. Both concepts required trusted intermediaries/agents to function. Corporations had directors and managers and parliamentary republics had representatives (deputes, members of parliament etc.). This entire model is based on the assumption that agents can be trusted and they will work for the best interest of the people who chose them.
Another aspect of this approach is the need to reach consensus when making a decision. Not everyone wants the same for the country or a company. Often, the ideas are in clear opposition and mutually exclusive (leave/remain, lower/raise taxes). In most cases, there would be some sort of vote with the wining idea implemented and the losing idea rejected. This “winner takes all” attitude meant that the supporters of the winning idea were happy, but the ones backing the rejected idea are very unhappy. Potentially, 50% of the people could be very unhappy.
This is why a process of debate was introduced. People would present ideas, propose actions and decisions, explain why they are good and discuss with those who had opposing views. The key element in this system is media. They were a trusted agent for selecting valuable information and broadcasting it to the masses. There was a fact-checking process involved and experts were invited to voice their opinions. Journalism was meant to be objective in order to facilitate discussion and to also keep governing agents in check (this is the idea behind freedom of speech).
You can’t trust anyone
Enter the internet and social media. Everyone can publish anything now. No need to have approval from a media company editor. This led to exposing more and more information about these trusted agents like governments, corporate executives or even traditional media that previously remained hidden. People learned that agents don’t always operate in a trustworthy manner. And the realization that you can’t trust the old trust-reliant structures, including the media, killed the idea of a political debate being a consensus mechanism. No one cares about a consensus anymore, no one cares what’s the right thing to do. Selling and getting are the only things that matter. As long as I get enough followers I will get what I want because the winner takes all. This is what Trump and Brexiters realized and executed so efficiently, while their political opponents naively thought it’s about the debate, facts or doing what’s right. Remainers and Democrats believed that proposing a better option for everyone would be enough to win and have their ideas implemented.
Unfortunately, on the internet, smart and stupid people talking about complicated stuff can sound very similar to an ignorant person. Someone who is smart with a good, honest agenda can look very similar, if not identical, to someone smart with a hidden, bad agenda. Sometimes it’s even impossible to tell if someone is smart or dumb, good or bad. Imagine assigning two attributes to every leader you can think of: intelligence and goodness. So you have smart, good people (Elon Musk, Bernie Sanders, Batman, but the one from Chris Nolan movies), you have smart bad people (Putin, Darth Vader), good dumb people (Forest Gump) and bad dumb people (Kim Jong-un, the Korean guy building an nuke). Now ask yourself which category Trump and Hillary belong to and you’ll see my point. So, how do people invest their trust now? They look for someone who confirms their opinions, which makes them feel good, with no regard to the uncomfortable facts or reality.
If a tree falls in a forest and no one is around to hear it, does it make a sound?
This is where we are right now: old agents lost people’s trust, new agents are chosen based on opinions and public debate is dead because no one rally cares about facts anymore. I experienced this first hand recently during my ICO research. I found an ICO that looks like one of the biggest scams out there, $150M, and called them out on it [here’s the story if you’re interested. I posted my article, together with questions and issues I had with the ICO on Medium and Twitter. I was expecting a huge reaction, a serious reply from the company behind the ICO, an outrage of scammed or soon-to-be-scammed investors. Nothing like this happened. The company gave me 2 ridiculous, vague answers and that was it. They completely ignored me. So did the investors. I can see lots of (paid?) people retweeting and liking their stupid answers to my serious questions. The websites that are doing ICO reviews didn’t contact me back or follow up on my emails reporting possible scams.
I noticed a similar situation (the debate part, not the scam part) following discussions about energy used by the bitcoin network. People who don’t like bitcoin use it as an argument against bitcoin, to show it is bad. People who love bitcoin dismiss facts about energy consumption and the incredible wastefulness of the network using ridiculous comparisons (‘bitcoin mining still uses less electricity than gold mining’ or ‘think of all the energy needed to print and distribute paper money ‘) or claim it is a good thing because it stimulates investment in the energy industry (by the same logic hurricanes stimulate investments in the construction industry, so let’s have more of these!).
Both camps (pro/con bitcoin) don’t care about facts and ignore or ridicule everyone who proposes an alternative point of view. Even very smart people, influencers known in the bitcoin space, that have very interesting insights on decentralization, economy and the cryptocurrency revolution fail to acknowledge the elephant in the room. Instead, they tweet a silly comparison to dismiss the issue. Then it gets retweeted 1k times and liked 3.3k times and it becomes a fact! Next thing you know there will be an article on Wikipedia about how beneficial high energy consumption really is.
Ultimately, none of these conversations matter, because talk is cheap and reality always wins. I am right about the ICO scam, despite the fact that a hundred, if not thousands of, people disagree with me. And they will lose their money, not me. Bitcoin also doesn’t care about mine or anyone else’s opinions. It does what it was designed to do.
Internet-native scarcity
This leads us back to governance. If you think about it, code is nothing but self-executing governance. You don’t need anyone to run the code nor any trusted agents to follow (or not) the rules. What is revolutionary about blockchain tech it the fact that it is an internet-native scarcity. (Willy Woo called it) Why does this matter? Because the real, analogue world is a world of scarcity. Not in a poverty, depravation kind of way (at least not by default) but because physical objects can only be in one place at a time. Creating another, identical object requires resources like time and energy.
This used to be the biggest difference between the real world (the territory) and a digital representation of the world (the map). The digital world could not interact properly with analogue because of this. Just think about digital media, music or movies: it requires real world, scarce resources like time and talent to create it, but once digitised they can be copied infinitely.
By having a scarce digital resource with real world value, like bitcoin for example, it is clear that this scarcity creates a socio-economic system around it. The map becomes the territory. Bitcoin — essentially pure governance embedded in code running on the internet — influences the real world, the lives of millions of people through their investment decisions and the allocation of real life resources, like electricity. And it doesn’t need any trusted parties, agents working for it.
Bitcoin’s governance is open source and common knowledge in the crypto space at this point. Everyone knows how mining works, who gets paid for what, and how bitcoins are created and distributed. Interestingly, not a lot of people acknowledge that the bitcoin governance model promotes centralization. Centralized mining operations are just cheaper to run so big, centralized mining operations have an obvious cost advantage over small miners. At the same time, bitcoin wants to be as decentralized as possible. These two aspects are in exact opposition as long as miners control the entire money supply (all bitcoins ever created went to miners first) and effectively own the bitcoin network.
Bitcoin is a wonderful case study of a pure, raw, savage capitalistic governance model. It starts out innocent, with a free, open, perfectly competitive market. There’s just one rule: ‘the fastest miner takes all new bitcoins created in a block’. Bitcoin doesn’t care what kind of electricity miners use, if they pay taxes, etc. The miner who can minimize or, even better, externalize all costs (stolen electricity and hardware, no taxes, slave labour) has an immediate advantage over other miners. Their profits are highest so they can reinvest the most into more hardware to earn even more. The strongest (cheapest) win and force the weaker (more expensive) out of the market.
Another aspect of this governance model is wastefulness of resources. Only one winning node gets the block reward. All of the other nodes that ‘lost the race’ this time around wasted their computing power and energy. This creates a situation where there’s a constant hardware arms race between miners who put on line more and more processing power. This is a zero sum game. More computers on the bitcoin network doesn’t equal faster transactions or more coins for miners (you can argue it is getting more secure though). The difficulty of the calculations just increases, forcing smaller, slower, and more expensive miners out of the market. Leading to, yes again, centralization. The same thing happened and is happening with every other unregulated market where winners take all and unit cost is everything.
These are facts, not my opinions. An opinion would be saying it is good or bad, right or wrong. My opinion is that it’s complicated. I’m not a fan of this hard-core capitalistic approach leading to centralization and externalizing all possible costs. But maybe it was necessary to launch bitcoin in the first place, together with the whole cryptocurrency revolution. And yes, I do think it is a revolutionary concept of similar importance to the Industrial and American revolutions. But, that is just my opinion (not a fact).
So why is it such a revolutionary concept? Because now it is possible to create scarce digital assets and entire socio-economic systems that are self-governed by rules set in code. First, you don’t need trusted agents anymore (imagine a self-executing constitution that doesn’t need a government or manager-less corporations).
Secondly, you can have as many system as you want. Some will be complimentary, some will be competing with each other. But it will no longer be a case of an either/or political choice like with public/private healthcare. Both choices will be able to exist simultaneously, just like ETH and ETC. People will be able to opt-in or out of different systems by buying and selling coins/tokens. I can imagine a token based health insurance system, where owning tokens grants discounts on insurance premiums and the value of the token is linked to the value of entire market. Or a universal basic income system, where mining rewards are distributed to everyone who has a wallet.
Next, these systems will be global, cross-border, and organized to solve a specific problem or around a specific community, not necessarily around and by a national state. Finally, no public debate will be needed. Reality will win (as always) and validate the systems. Those with sound economics, good governance and smart people will (hopefully) thrive and the systems that don’t work will improve or vanish.
But what does this mean?
- Governance is the single most important aspect of every blockchain project, every ICO. Not a lot of people and teams understand the importance of it or put enough attention there. If you are looking for token/coin investment opportunities; then focus on projects with good governance. For example, I love how Sweetbridge and Cardano approach governance.
- There’s no point in trying to change people or systems (including finance or bitcoin). “In order to change an existing paradigm you do not struggle to try and change the problematic model. You create a new model and make the old one obsolete.”
- When the ICO dust settles, reality will decide which ideas work, which don’t and if any of my opinions presented here are valid.
- Meanwhile, the only rational thing to do now is to work on (co-)creating better alternatives and working/supporting people you agree with.
Please feel free to post your comments or questions here, get in touch on twitter or Linked In (https://www.linkedin.com/in/michalbacia/ ).
