What is Social Profit Sharing?

Argentina’s economy collapsed in 2001. This was one of a string of events that led to higher than average adoption of Bitcoin there, but there were more consequences than just the collapse of the local currency and its purchasing power.

When credit dried up, many companies were forced to default on their debt, resulting in factories shutting down. In response, some workers broke the locks on their workplaces, and simply went back to work, marketing their products or services themselves. For some businesses, this proved to be a profitable, leaderless business model, in spite of the fact that the structure of the financial system had forced the businesses to close their doors.

This is reminiscent of another even in history- the Worgl. This was a small village in Austria called Worgl that created its own currency during the height of the great depression that preceded the Second World War. By creating a local currency, the town was able to drive unemployment from a very high number to almost 0, until the Austrian Central Bank intervened and shut the experiment down for political reasons.

The lesson from events like these is that there are circumstances where central authorities may fail, and that in these situations it is sometimes possible for people to take matters into their own hands and devise financial solutions that solve problems where the centralized authorities fail.

A System For Coordinating a Large Group of People

When you look at Bitcoin as a currency, it’s easy to miss what is really going on, which is a radical political phenomena. It’s a massive collaboration, now involving hundreds of thousands if not millions of individuals working toward a common purpose, driven, for the most part, by self-interest. In a way, it’s the ultimate realization of Adam Smith’s radical (at the time) notion that self-interest can be a force for the general good.

Many have attempted similar systems of organization, but for the most part these attempts have been blocked by authorities that viewed them as a threat. Systems of leaderless organization have had some limited success, as in the worker takeovers of Argentina, but these movements are limited in how big they can grow due to limitations placed by the authorities- limitations that cryptography allows Bitcoin to transcend.

In this sense, Bitcoin represents a leap in social evolution. Studying genetics suggests that such evolutionary leaps are a part of the nature of life- for example, the eye, or the capacity to see, appeared more or less spontaneously several times in genetic history.

Obviously, in an evolutionary perspective, an organism with the ability to see would have quite an advantage over one that can’t.

Bitcoin appears to represent such a leap, on the social level. Really, the core innovation of Bitcoin is not a payment protocol- it’s a form of social organization.

Scalability- a Two Way Street

When people talk about scalability, they are usually thinking in one direction- growing bigger. But scalability can also mean the ability to transfer a method of organization to smaller scale.

Let’s look at the constituent components of Bitcoin. In essence, we have

1. cryptographically secured ownership and transfers, and

2. scarcity, and an economic incentive to propagate the network.

Merkle trees, private and public keys, SHA256, nonces, UTXO’s, the mempool, coinbase transactions, block rewards, transaction fees, mining pools- all of these are components designed to accomplish these two higher goals- the goals of any living organism; self-preservation and expansion.

What is unique about this organization is its openness- until the invention of Bitcoin, there was always a trade off between openness and security.

The two components of Bitcoin above enable an open and secure network. The purpose of this network is the transfer and preservation of value.

Ethereum is attempting to apply this method of organization to another purpose- the hosting and execution of decentralized programs.

The frenzy of excitement surrounding Ethereum over the last two years illustrates that, at least theoretically, there is a lot more potential to be uncovered. Social profit sharing is Jamaa’s main area of research.

How does Social Profit Sharing work?

Social profit sharing is a proposition to try to channel the self-propagating power of a distributed cryptocurrency network into the highest possible number of real world projects.

Let’s break it down into steps:

Step 1: A profit sharing contract is generated by an entrepreneur seeking to undertake a project.

Step 2: The entrepreneur seeks support from anyone who is willing to link their reputation to the project, starting most probably with friends, family, and neighbors.

Step 3: The contract specifies a number of shares.

Step 4: The shares are offered for sale on the marketplace, with price proportional to the fundraising goal.

Step 5: If the goal is reached, the entrepreneur pays funds into the contract. The bulk of the profits are split between the entrepreneur and the purchasers of shares, with a small fraction of profits going to the supporters.

Step 6: When the contract ends, either by timing out or by the entrepreneur exercising a buy-back right, the amount of profits generated and the time in which those profits were generated is tallied as a reputation value which is then applied to the entrepreneur and the supporters, either negatively or positively affecting their reputation.

This reputation has a number of benefits:

1. People with higher reputation have more ability to get their friends’ projects funded.
2. People with higher reputation are more likely to be able to get funding.
3. Higher reputation means that if someone supports another project, they will take a higher percentage of profits.
4. Eventually, if a native currency is ever introduced, reputation will act as a modifier increasing the probability of receiving block rewards, whether in a hybrid of Proof of Stake, Proof of Authority, or other.

The first challenge to this system, obviously, is that many will try to game the system, generally known as “Sybil attacks.” This is a method of attacking a reputation system by creating multiple sock puppet accounts to artificially inflate reputation values.

To some extent, this can be mitigated by establishing the reputation initially among a core of trusted individuals. Entering into contracts with 0 reputation accounts will yield no increases in reputation.

Since the system requires entering into deals that require sending increasing amounts of money to established users of the platform, building up reputation is a costly process, and preventing attacks is mainly a matter of balancing the cost of the attack so that it consistently exceeds any potential benefit.

Decentralized Audits

Sybil Attack Visualization

Of course, there is the possibility of malicious attacks that are not motivated by profit, but these can be caught by creating visualizations of the network to detect closed loops, and forcing these loops into an incentivized auditing process.

This is because a closed loop could be legitimate, non-Sybil behavior, but in many cases it may be malicious. By requiring a deposit, a source of income is generated for anyone who wishes to independently audit a contract. Meaning, if a user is able to detect Sybil-like behavior, and successfully prove that it is malicious, the attacker forfeits their deposit.

Since the reputation can support an effectively unlimited number of parameters, including the degree of interactivity with the entire network, it would be effectively impossible to game the system without contributing in a significant way to the network, making the network stronger in the process, and thereby legitimizing the earned reputation.

Strong Growth Impulse

This system has a strong tendency towards growth, for a number of reasons:

1. In order to increase their creditworthiness, those seeking credit have to recruit their social circle to sign up for the platform.
2. People tend to be more honorable when they know bad behavior will affect the standing of their broader social circle. See Lenddo.
3. The incentive of creditworthiness can eventually be coupled with the incentive or a block reward to further increase the likelihood of behavior that is beneficial to the platform.
4. Engagement is increased by distributing small amounts of funds to new users. By setting minimum withdrawal limits high enough to prevent immediate withdrawals, new users will have to invest in other projects in order to grow their funds to the point where they can withdraw, teaching them the system in the process.

This set of arrangements could theoretically amplify the already powerful network effect of distributed ledgers.