The Value of Cryptoeconomic Systems (repost)
Note: This is a repost of a piece from last year where I outlined some motivations for making cryptoeconomic systems the main focus of my systems science research.
I’ll be sharing some results from my deep systems analysis of Bitcoin later this year, and think this piece might help newer readers orient themselves towards why I think crypto is worth studying.
To illustrate the next seven principles of systems science I’m going to focus on how they manifest within cryptoeconomic systems.
Why focus on crypto?
Four reasons:
It’s the subject in which I’ve accumulated the most knowledge and expertise.
Cryptoeconomic systems, which serve as textbook examples of complex adaptive systems, are best understood through an interdisciplinary systems-based approach. Principles 6-12 apply primarily to such complex adaptive systems.
I believe crypto needs systems science to ensure the benefits it provides to society outweighs the harms.
Cryptoeconomic systems provide ideal testbeds for systems science research.
To set the stage for next week’s return to the principles, I’m going to describe four qualities of cryptoeconomic systems that I personally value and believe make them especially useful as objects of study for systems scientists.
Open public blockchains like Bitcoin and Ethereum, which constitute the most interesting class of cryptoeconomic systems, are permissionless, transparent, open-source, and programmable.
Cryptoeconomic systems
Cryptoeconomic systems such as Bitcoin or Ethereum are complex socio-economic systems.
They are decentralized networks in which “purpose-driven” tokens (“crypto-assets”) are used to incentivize individual actions towards a collective goal.
In the Bitcoin network, the bitcoin token’s purpose is to incentivize individuals to contribute to the maintenance of a global, decentralized, peer-to-peer digital cash system.
In the Ethereum network, the ether token’s purpose is to incentivize individuals to contribute to the maintenance of a globally accessible decentralized computing environment upon which anyone can deploy any imaginable computer program.
A brief overview of the unique properties of these cryptonetworks will help illustrate why they have captured the imagination of enthusiasts across the world and are worth studying for anyone interested in humanity’s future.
Permissionlessness
Participating in the modern global economy requires numerous permissions from various centralized authorities. Opening a bank account requires filling out paperwork, providing identification documents, and receiving the approval of bankers to gain access to their private systems.
In stark contrast to these traditional permissioned systems, public blockchain systems operate on a permissionless basis. Anyone can send bitcoin or create and access an application on Ethereum without needing to ask for permission. There is no central authority that can block you from accessing these networks.
Enabling individuals to send money and access basic financial services like savings and credit without depending on private infrastructure can help increase global economic freedom and facilitate greater human flourishing.
Cryptoeconomic systems operate in a highly decentralized manner, driven by incentive mechanisms that lead individuals to self-organize in ways that result in the emergence of complex, purposeful behavior on a global scale without a single central authority directing or coercing them.
Studying crypto can give systems scientists an opportunity to observe and analyze a novel form of self-regulating system that creates a variety of complex emergent behaviors. Ralph Merkle, a co-inventor of public key-cryptography, went so far as to call Bitcoin a “new form of life that lives and breathes on the Internet.”
Transparency
The state and activities of key entities in the global economy are often hidden from the public along with the legislators who are responsible for overseeing them. When the Federal Reserve bailed out banks in 2008, journalists had to sue The Fed to get details about which banks received help. Until Congress took action last year, the Fed refused to provide details about which private banks have access to their “master account database,” or even what criteria they use in order to approve banks.
By default, public blockchains offer unprecedented transparency. Their tokens provide a “rich, real-time data set reflecting all economic activities in their systems.” The complete transaction histories of the Ethereum and Bitcoin networks are available for anyone to inspect using blockchain explorers.
The complete, real-time transactional history available on blockchain networks represents an unprecedented dataset for the study of economic systems. Systems scientists can easily track the flow of value across networks, study the evolution of these systems over time, and model the complex interactions between participants.
These granular insights can support the development of new models and theories that enhance our ability to spread economic freedom and generate abundance. They can empower us to design systems in which those who wield significant power are more easily held accountable.
Open-Source
The technologies that power our global economy are largely proprietary and closed source. This means we often don’t know exactly how they work. This limits transparency, presents security challenges, and stifles innovation.
Don’t like the monetary policies of your country’s central bank? Or the general experience of banking with a traditional bank or credit union? There isn’t much you can do in terms of creating alternatives that provide the same functions as these systems.
Public blockchains run on open-source code, they are a form of digital public good. Anyone can see the rules that make them work. Anyone can copy and modify them to create their own systems. Don’t like Bitcoin or Ethereum? Take the code, change it, and build your own system with rules that suit you or your community!
The open-source nature of crypto has sparked a Cambrian explosion, leading to the creation of a vast and diverse array of new protocols, applications, and organizations, each boasting its own unique features, strengths, and weaknesses. Cryptoeconomic systems represent a rich area of study for systems scientists to understand the processes of adaption, specialization, and evolution within a broad ecosystem.
Programmability
The dollars you hold in your bank account or your Venmo balance are not programmable. They exist as bits of data in traditional centralized ledgers owned and controlled by private corporations who determine their behavior.
The cryptoassets that power public blockchains are internet-native tokens that can be programmed by anyone to behave in certain ways in response to pre-determined conditions.
With “smart contracts”, developers can write computer programs that automatically send value as soon as certain conditions are met. If something happens, such as a document being e-signed, then the value is sent without a human needing to manually transfer funds. Once the program is deployed to a blockchain, there is no need to trust a central authority to ensure it reliably performs its function. Instead, the trust is placed in autonomous code that anyone can inspect.
Artificially intelligent agents won’t be opening bank accounts at Wells Fargo or JP Morgan anytime in the foreseeable future. They are already being sent Bitcoin that they can control and spend. Whether or not this is “good” is debatable. The important point is that as AI systems become increasingly sophisticated and widespread, it is likely that their money of choice will be some form of cryptoasset.
The programmable nature of cryptoeconomic systems allows for high levels of complexity, dynamism, and innovation. Studying the behavior and interaction of human agents alongside autonomous computer programs within a globally accessible network can shift our understanding of what is possible with automated systems. We can experiment with entirely new forms of decision-making processes, organizational designs, and legal frameworks for society.
Given that our existing systems of political economy are failing us, experimentation is very important. Crypto has created a new laboratory for democratic governance that “interweaves civic and corporate governance traditions in a way previously impossible.” It is a blossoming space where “governance is continuous, participation is radically open, and execution is rapid.”
Increasing the rate and variety of experimentation in social system design can improve our chances of building healthier systems.
“With the technology that underlies crypto and blockchains at large, we can record and organize contributions of labor and capital much more granularly than we could prior. Such a technology enables us to program behaviors that manifest the virtues we want to see in the world, and then allow market values to guide society towards those virtues.” — Chris Burniske: A Blank Slate of State
Cryptoeconomic systems are neither the panacea glorified by starry-eyed enthusiasts nor the toxic venom dismissed by their critics. They are tools whose utility is dependent on the wisdom and intent of those who use them.
Their permissionless nature, transparency, open-source standards, and programmability make them ideal sandboxes for research and experimentation that can advance the state of systems science and increase its influence.