Cryptoeconomics as a limitation on governance

Governance and Coordination
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Hi, I’m new, thanks to @eleventh:) I’m sorry if I’m not putting this in the right place…

I’ve just shared a draft of a new paper in progress, “Cryptoeconomics as a Limitation on Governance.” Seems like something this community might be interested in. Very much eager for feedback!

Abstract:

Governance practices in distributed-ledger systems have grown increasingly diverse and diffuse, while retaining a commitment to cryptoeconomics—the use of economic incentives to guide user behavior, in tandem with cryptographic technology. In the space of a few years, cryptoeconomics has introduced advances in techniques for self-governance. But reliance on cryptoeconomics also introduces limitations on governance possibilities. Drawing on earlier critiques of how economic logics can erode democracy, this paper identifies specific limitations that cryptoeconomic governance faces. It contends that, to overcome these limitations, designers should envelop cryptoeconomics within a logic of “cryptopolitics” capable of seeing beyond economic metrics for human flourishing and the common good.

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Beautifully written. Interesting interpretation of “cryptopolitics”. Have you seen the book by that title by Linda Monsees on the politics of cryptographers, or “Cryptopolitics: an update” by Jaya Brekke? They provide different interpretations again, than “cryptoeconomics + democracy”. I’m still unsure what “democracy” means to blockchainers post-meme.

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Thank you @kelsienabben! Eek, no, I didn’t know the Monsees book or Brekke’s essay (which is great, and I’m a huge fan of hers). It might be cleaner, really, for me to just use “politics” and forego the aspiration to participate in developing that term. Do you have any thoughts about which is the better option?

update: I actually just decided the costs of “cryptopolitics” outweigh the benefits, and cut it, along with adding a credit to you:)

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Ha, I am humbled. I’ve thought about this a bit. A couple of things:

  1. Pointing out that cryptoeconomic systems still have politics seems to be valid feedback to blockchainers (see Resilience of the Commons: observing “resilience” in the governance of decentralised technology communities, https://twitter.com/notscottmoore/status/1400854063223394305?s=20). Governance is unavoidable and is political.

  2. Your argument is that economic logics limit democracy. I’m interested in the crypto-conception of democracy, “liquid” democracy (which is delegative voting), and how that is outworking to enable the agenda of self-governance or limit it. I would call this its own political philosophy of “crypto-democracy”.

A non-exhaustive search on “crypto-democracy”:

Allen, Darcy WE, Chris Berg, Aaron M. Lane, and Jason Potts. “The economics of crypto-democracy.” Available at SSRN 2973050 (2017). (an economic logics in favour of it)

Srivastava, Gautam, Ashutosh Dhar Dwivedi, and Rajani Singh. “Crypto-democracy: A Decentralized Voting Scheme using Blockchain Technology.” ICETE (2) . 2018. (decentralised voting = democracy??)

Berg, Chris. “Delegation and unbundling in a Crypto-Democracy.” Available at SSRN 3001585 (2017).

Srivastava, Gautam, Ashutosh Dhar Dwivedi, and Rajani Singh. “Phantom protocol as the new crypto-democracy.” In IFIP International Conference on Computer Information Systems and Industrial Management , pp. 499-509. Springer, Cham, 2018.

Gambs, Sébastien, Samuel Ranellucci, and Alain Tapp. “The crypto-democracy and the trustworthy (position paper).” In Data Privacy Management, Autonomous Spontaneous Security, and Security Assurance , pp. 58-76. Springer, Cham, 2014.

Hope that helps!

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Good stuff, thank you! I’ve got to explore this stuff more. It seems like it’s more in the realm of mechanism design than democracy as a political concept, but these could be useful when I talk about what cryptoeconomics can teach politics. That first one in particular. Really appreciate it!

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Nathan, welcome to the Forum! It’s a real treat to read unpublished work here. I’m from a slightly different background than most of the researchers here at SCRF, I was a journalist in a past life, and your article (and the SCRF Summit stack’s governance talks generally) has been my first exposure to the world of DAOs and the study of online governance. The idea of a ‘confidence machine’ seems incredibly powerful, but your observations about the limits of cryptoeconomics on these organizations seem intuitively correct: incentive-based organizations can only do so much. A sense of mission and shared purpose certainly seem like they’ve been a major component of the most successful crypto projects thus far. What do you think of projects like Axis Infinity and ideas like Playing-to-Earn? Would any form of collective government be possible in a metaverse dedicated to something like working and earning a profit? (As an aside, I was very amused to hear how many panelists cut their teeth organizing guilds and armadas in cooperative video games.)

(NB Nathan’s latest piece in Hacker Moon: “Online Communities are still catching up to my Mother’s garden club” is a great companion piece to this one.)

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Thanks for your reply! Yes, I think some sort of democratic layer is essential to regulate spheres like work and profit-making against abuses—just as in the non-crypto world.

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Thanks for posting your paper @ntnsndr. This was very much in line with my personal interests around crypto/governance, especially in terms of how relying on economic incentives can limit the possibilities of how humans come together to collaborate. I’m a big believer that better understanding the psychological aspects of communal participation would shed light on the reasons that the most active people in communities are as active as they are. I’m personally bullish on the idea that a significant number of people do they work they do because they care, not just because they get paid.

One thing I want to explore in general is the links between this kind of thinking and topics such as existential psychology/psychotherapy (brief written overview, brief video, lecture/podcast on the topic through Weekend University - if anyone wants more recs on this topic, let me know), how to get more people thinking from a place of compersion, how to get people out of zero-sum mindsets, etc.

This also makes me think of two podcast I listened to in recent months, both from Lex Fridman. One was with Daniel Schmachtenberger titled Steering Civilization Away from Self-Destruction. He touches on compersion, binding vs cleaving forces, etc. that I think are very important for us to focus on for more sustainable futures. The other episode was a more recent one with Joscha Bach titled Nature of Reality, Dreams, and Consciousness, particularly the section on love and the importance of non-financial transactions. I hope to see more of this when it how people are thinking about incentives and governance in blockchain ecosystems.

Coming back to your paper more directly, I wanted to point a few things that stuck out and one minor suggestion.

“The partial shift from trust to confidence transfers governance burdens from people to technical systems, inviting that renaissance in designs for systems of governance.”

This makes me wonder the role that Dexiting (to borrow @Rich’s term, aka exiting to DAOs) for regulatory reasons vs reasons of distributing power/decision making will play in how non-transactional incentives are experimented with.

The things not visible to the market, that is, become unthinkable and impossible.

This makes me think of the public good discussions (which I know was discussed in one of Vitalik articles you cited). Part of what excites me about DAOs and about SCRF is the exploration of how to make some things that ‘are not visible to the market’ more clearly incentivized, whether in an opt-in fashion or something that is more baked into the protocol operations or policies.

De Filippi & Loveluck (2016) pointed out an “invisible politics” at work in the early Bitcoin community.

I think there have been some major examples of this kind of politicking when it comes to governance votes in recent months, especially in groups with delegated governance.

Maria P. Gomez Gelvez, an advisor to Orca Protocol and former Aragon employee, believes that “a DAO is closer to a country than to a corporation”

Somewhat tangential, but one thing I’ve been thinking about more lately is how to make these communities less cultish. Whether DAOs are more akin to a corp or a gov’t, that might touch on the idea of the scope and level of connection of people in those communities. But neither of those structures inherently protect from a community becoming more akin to a cult than the initially intended structure.

For cryptoeconomic systems, as in many economic markets, the primary means of accountability and redress against plutocracy is user exit—leaving one network and moving to a more agreeable one.

There need to be other mechanisms that get put in place with time. I don’t personally think that just encouraging folks to exit if they don’t like what’s going on is the most effective way to build healthy communities. People should always have the option to exit, but there should also be more mechanisms for hard conversations. I appreciated the quote you pulled,

Ferraro et al. (2005) find across numerous studies that “self-interested behavior is learned behavior, and people learn it by studying economics and business."

to stress how much of our reliance on economic thinking might be a result of us praising economic thinking in the first place. I’m guessing this will evolve to something akin to ‘behavioral cryptoeconomics’ being a thing and again, I think your paper does a great job highlighting some of the limitations of pure economic thinking in that sense.

The one place I have a suggestion of something to keep in mind is in regards to the fossil-fuel usage. The electricity usage of proof of work systems is indeed clear and indisputable. One area that needs more thorough investigation (or maybe I just missed the research) on the actual nature of the energy sources (coal vs hydro vs whatever). This was the one section where my immediate reaction was, don’t rush to paint it with a purely critical brush because there’s more complexity to the question. The carbon footprint of the banking industry as a whole, of AI/ML and other techs that are also providing limited value relative to their vision, etc. are all not as clear as can be in order to truly judge how problematic the usage is relative to the use of the tech overall. Might be worth acknowledging the complexity, granted, I could see how that might be a distraction from the point you’re making which is that the energy usage in these systems is an externality.

Anyway. I hope at least something in here is useful. I enjoyed the paper and am excited for there to be more conversations along these lines! Thanks for writing this and for posting on SCRF Nathan!

Citations

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Thanks so much for this generous response! So much here, and in many ways goes deeper than my draft does, particularly in psychological terms.

I think you’re absolutely right in the need to concede that cryptoecon introduces the possibility of making many, many more things of interest visible to the market. This is an important objection that I need to account for much better than I currently do.

And I should also make that part about exit more sophisticated. Compared to the average Facebook group, for instance, DAOs enable much more of what I call “effective voice” as opposed to exit reliance.

It’s interesting how many readers have reacted to the part about energy externalities. Honestly, this issue should be separate from the dynamics you name; even if Bitcoin is actually cheap compared to the banking sector, or actually used lots of green energy, its footprint would remain an externality. That said, one of the stated motivations for Ethereum v2 is reducing energy consumption; I wonder if in that case carbon is an externality, or whether the market in some ways has internalized it through people’s perceptions and values.

Personally I have yet to be persuaded by arguments that crypto is a net gain, energy-wise. The comparisons to the banking sector seem particularly disingenuous, since conventional banking provides massively more utility for massively more people than crypto currently does, and crypto’s footprint would be very different if it provided that same level of throughput and utility. I can imagine a situation where crypto enables disintermediation and reduces the need for staffing and energy expenditure on the financial sector, but I could also see a scenario where crypto drastically expands the financial sector and massively increases its redundancy, with zillions of alt-coins and multiple layers of decentralized computing. Here, the question is: How can governance levers help steer the ecosystem in the good ways more than the bad ways? Will cryptoeconomics alone be enough to steer the cryptoeconomic ship?

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At the same time, that makes me wonder how many more things we can make visible if we explore more than just economic incentives. I’m excited to see what that can look like as there’s more experimentation. I know there are a variety of projects looking at adding reputation in one form or another and I’m excited to see what ideas people come up whether through research or experimentation.

Exactly! I appreciate the way you talk about effective voice in that paper and the specific suggestions that you make. To outline for others, that paper touches on a variety of options communities can consider. This is quoting from the paper:
Mechanisms for authority and accountability

  • Make a community’s rules binding on administrators.
  • Provide participatory processes for the selection and removal of those in authority.​

Mechanisms for collective action

  • Provide binding mechanisms for aggregating user demands. ​
  • Let communities self-organize internal blocs. ​
  • Layer multiple mechanisms that allow for diverse forms of input.

Mechanisms for community change

It would be interesting to see an exploration of different protocols/ecosystems to see how many actually use options like these. I want to personally reach out to a bunch of DAOs so will keep this in mind when I do. It would also be interesting to think about the incentive mechanisms used in/around those options and which of these options can start in the community vs if all of these need to be intentional policies and part of culture from the get go.

In terms of energy, I agree that the fact that the energy consumption is an externality is separate from the other dynamics. I wouldn’t personally go so far as to say it’s a net gain energy wise. I am, however, interested in the research and innovation that arises around that to try and minimize the impact, but it seems some level of externality there is inevitable. We’ll see with time if it seems like a justified one or not. It’s interesting to think why people are reacting the way they are there, maybe it’s a bit of a sore spot given how much criticism it gets and the fact that not everyone doing that criticizing is being thorough in their thinking/approach (not saying that’s the case in your paper, I more mean in the media).

I personally don’t think so. I think culture and community play a critical role. Truly realizing decentralized futures will take a lot of personal change and if we can find ways to support each other in learning and growing, I am hopeful that we can create the environments where we can figure out what does work. Which reminds of the quote from Confucius that was mentioned in the podcast that Michael Zargham was on,

“To put the world in order, we must first put the nation in order; to put the nation in order, we must first put the family in order; to put the family in order; we must first cultivate our personal life; we must first set our hearts right.”

Not sure how much cryptoecon alone will help us with that part.

Citation

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2021-09-08T22:00:00Z

Hello Nathan,

I just joined the forum and excited to share my thoughts.

Your piece of work is a quality educational boost that triggers new opportunities in action research in cryptoeconomics as much as organizational design. Thank you very much for sharing it.

With the potential of Cryptoeconomics as new rhizome in politcs to revitilize it, I read your content with inspiring drive. It is an invitation to be part of the change by getting involved with critical thinking. To contribute and enhance your direction as best as I can, I will be wearing the lenses of a UX Researcher and Service Designer: a granular and bird view. The soil of my pathway is in the spine of your intent: raise awareness about potential limititations as opportunities to investigate what are the problems that cryptoeconomics can solve at scale for humanity. Below, they are my attempts to expand horizons and amplify your work.

Zoom in and Zoom out through the lense of the community

A particular solid section is ‘The cryptoeconimic explosion’ where you outline the governance examples as result of your unstructured interviews and the application of attitudinal research. The learning that you offer is deep, accessible and easy-to-read. However, I wonder if you had the chance to gain data from the community, based on their expectations and needs towards the given governance mechanism. For example, in the 1Hive context, what are the feelings and motivation in the rewards system that foster or stifle collective interests? This might shape further the argument of self-determination as limitation. Another example, design a possible series of quantitative questions to investigate about trust and confidence in the reward system. A mixed method research methods in DAOs might bring forward the awareness of how and if this can be a service to a better governance.
Disclaimer: Yes, I am working on this and I would be happy to collaborate with you further. Here it is and example on my research in 2019 in Berlin.

How might we enable cryptoecomics with heuristics?

The thought-provoking duality - or evolution - with homosapiens versus cryptosapiens leads to think of heuristics.
The relentless wave of DLT is going towards to disrupt the financial world as we know it. If we assume that cryptoeconomics aims to empower a systemic change, success should not be determined by only economic or power metrics - proof-of-stake / work. How does the cryptoeconomics algorithm align with heuristic design? Do we need to expand or rivisit the UX principles? Inclusivity and accessibility must be - maybe - at the forefront as understand how to include all participants.

How about cryptoeconomics as new gear for regenerative platform?

At cultural level, it means to set up cultural practices based on regenerative principles for developers as much as for platform designers and shapers. At systemic level, cryptoeconomics unlocks new ways of designing a platform with non extractive effect without - hopefully - negative externalities as the opposite of sharing-economy that only reinforced monopolies. Good case studies of regeneration are here: https://www.r3-0.org/plus-maverick-thinking/#case . And crypto, with decentralized governance platforms, must consider at the core this mantra: ‘The end of winner-takes-all.’ Read more how here

Confidence and…empathy machine: echoes from Blade Runner!

CBDCs is another example of a positive crack in a new financial settings. I interpret this as empathy step towards institutions. I doubt institutions will disappear. They are not androids to be killed ! We do need to create bridges with institutions with a new Rick Deckard! DAOs are going to reduce their negative effect and nurture the ‘confidence machine’. In the DAO world, a small step forward happened formally in Wyoming ad they acknowledged in Wyoming as LLC.

About the Bitcoin environmental impact, here I share a link with her arguable - potentially compelling - point about the issue: https://www.lynalden.com/bitcoin-energy/

Final point and call to action

The training zone mentioned in the end made me think of should have fractal approach where adaptation, patience and continuous adjustment and empathy are the mantra to learn. These traits can accomodate the interdisciplinary nature of cryptoeconomics and therefore the upcoming future in governance. Ultimately, your work is a signal to embrace experimentation and realign the level of ambition to the envisioned transformation backed up by adoption’s evidence.

As a cycle of input, I see the potential in your piece to empirically dare with even further call to actions. The readers might be already stimulated to act, however, I share what you, we and all, might want to articulte further.

Training zone: yes, we do need to unlearn, be aware of old habits and replace them with structured experimentation. ‘The bigger world’ needs a motivational access to knead with the various community of Gitcoin, Klero and more. A structured experimentation could fuel DLT as social design to realign econimic incentives as driver for collective impact. As it matches my current mission, your research is an important nugde to believe in action research within a collaborative context. A combination of data-driven collaborative analysis and observational action could underlay causes enabling future predictions about personal, organizational and societal change.

Hope this review with input might help to expand the impact of your work.

Thank you again,
Renzo

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Thank you so much! I really appreciate your reply and your thoughts.

On the question of UX, I’d love any thoughts you might have on CommunityRule.info, where we’re trying to experiment with governance interfaces.

And I’ve been struck by how much response I’ve gotten around the energy usage question! That’s an interesting article you shared. I’m still pretty unconvinced that the energy usage is worth it, but regardless, that’s not an argument I make in the article; regardless of whether it is justifiable or not, it is still largely an externality. Like other externalities of business processes, it is striking to see how much people involved in those processes feel motivated to justify it as somehow the best of all possible worlds.

There is so much here, and I am grateful!

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It sounds like you are focusing on the limitations of using cryptoeconomic incentives to guide behavior in distributed ledger systems and the potential for a more holistic approach incorporating political considerations to address these limitations.

As for the energy usage question, it is definitely an important consideration in the use of distributed ledger systems and one that has received a lot of attention in recent years. While the energy consumption of these systems has been a topic of debate, it is important to consider the potential environmental impacts of their use.

In terms of CommunityRule.info, it would be helpful to know more about what you are trying to achieve with this platform and how you envision it being used in the context of governance interfaces. It would be interesting to see how you are addressing the limitations you have identified in your paper in the design of this platform.