# Cryptoeconomics as a Limitation on Governance by Nathen Schneider (2021/2022)

# Introduction

### Cryptoeconomics

> I refer to the dominant design logic that undergirds Bitcoin, derivative blockchains, and other distributed-ledger technologies with a colloquialism among practitioners, _cryptoeconomics_ (Brekke and Alsindi 2021). The industry publication _CoinDesk_ defines this “crucial concept” as “an area of applied cryptography that takes economic incentives and economic theory into account”—neither abstract cryptography nor economics but a practical fusion of the two (Stark 2017). The term is widely associated with Ethereum founder Vitalik Buterin (Voshmgir and Zargham 2020), according to whom “cryptoeconomics is fundamentally about the use of economic incentives together with cryptography to design and secure different kinds of systems and applications” (Buterin 2018). For example, Bitcoin’s cryptographic math protects the scarcity of units on its ledger; the perceived value of those units, in turn, motivates users to expend computing energy to perform expensive cryptographic math problems to win rewards. The math secures the economy, which in turn motivates people to use the math (Maurer _et al._ 2013, Babbitt and Dietz 2014).

### Crypto means we can reduce social trust assumptions

Incredible quote from Buterin, so start in its assumptions (and IMO its naivete)

> For Buterin (2018), this has everything to do with trust: the goal is “to reduce social trust assumptions by creating systems where we introduce explicit economic incentives for good behavior and economic penalties for ba[d] behavior.” Traditional preconditions of trust such as personal familiarity (Luhmann 2000) and credentialed expertise (Giddens 1991) fall into obsolescence under the cryptoeconomic gale.

### Classic concerns about the expansion of economics (into every sphere)

> The _economics_ in _cryptoeconomics_ brings with it a particular set of anxieties. Diverse voices have long warned against the expansion of economic logics, crowding out space for vigorous politics in public life.  From the Zapatista insurgents of southern Mexico (Hayden 2002) to political theorists like William Davies (2014) and Wendy Brown (2015), the “neoliberal” aspiration for economics to guide all aspects of society represents a threat to democratic governance and human personhood itself.  According to Brown:
>
>> neoliberalism transmogrifies every human domain and endeavor, along with humans themselves, according to a specific image of the economic. All conduct is economic conduct; all spheres of existence are framed and measured by economic terms and metrics, even when those spheres are not directly monetized. In neoliberal reason and in domains governed by it, we are only and everywhere _homo oeconomicus_ (p. 10)
>
> ...
> 
> The things not visible to the market, that is, become unthinkable and impossible. If the market cannot see a changing climate, there is no motivation to act on it. If the market does not recoil at the plight of homelessness, neither can we, if we learn to be what the market sees in us.

### The Hayek-ian, libertarian strand in crypto is strong

Crypto is indeed highly inclined to [libertarianism](../concepts/libertarianism.md)

> David Golumbia (2016) has argued forcefully that it is, recognizing the affinities that many blockchain designers have with far-right politics and Austrian School economists such as Friedrich Hayek, a godfather of neoliberalism. Golumbia regards this alignment as a fatal flaw. I contend there is need for more admiration for what cryptoeconomics has accomplished—including its ambivalence and its opening of possibilities. Jillian Crandall (2019), for instance, observes neoliberalism _par excellence_ among crypto enthusiasts colonizing Puerto Rico, but she also identifies the technology’s potential for decolonial resistance. While Hayek retained at least a minimal role for the state in organizing markets, **the designers of these systems hope they can go even further, supplanting governments with cryptography and incentives**. Here, I find myself siding with the rejoinder to Hayek of Karl Polanyi (2014), who regarded markets as downstream from politics.

### But on the progressive side one can see crypto as an "engine of commoning"

See e.g. [regenerative-finance](regenerative-finance.md)

> Meanwhile, a growing body of analysis interprets cryptoeconomics and its associated technologies as engines of commoning, in the spirit of Elinor Ostrom (Reijers _et al._ 2016, Rozas _et al._ 2018, 2021, Cila _et al._ 2020, Fritsch _et al._ 2021). There is much to commend this approach, as participant-governed blockchains do seem to resemble common-pool resources.

### Yet in many respects it seems the opposite of commoning: common resources are being privatized, financialized and traded

> Yet there are respects in which cryptoeconomics also resembles an opposite of the commons: the enclosure, in which what was once held in common becomes subdivided into ownable, tradable assets (Federici 2004). Under cryptoeconomics, things previously difficult or impossible to buy or sell, from cryptographic computing power to real estate in digital games, have become the basis of markets. Cryptoeconomic markets depend on some sort of artificial scarcity, such as Nakamoto’s limit on supply at 21 million bitcoins. More invasive forms of enclosure and scarcity could follow. In the past, major advances in commodification produced markets for enslaving human beings and conquering the once-common lands of indigenous peoples. Such comparisons might seem alarmist if cryptoeconomic enthusiasts were not setting their world-transforming sights so high.

# The cryptoeconomic explosion

This section starts with a sympathetic reading of the general claim that crypto enables [[notes/claim-innovation-governance|innovations in governance]].

### Cryptoeconomics introduces novel governance that deserves further study

> This article joins an expanding literature on cryptoeconomic governance. The literature largely agrees that cryptoeconomics introduces novel governance instruments with consequences that deserve further study. Cryptoeconomics has been notable, for instance, in achieving more rapid growth and adoption than other recent efforts to organize complementary and alternative currencies (Meyer and Hudon 2019); distributed ledgers have meanwhile amassed significant value outside the control of corporations or governments, making the question of how to govern them urgent and yet beyond the reach of prevailing regimes. Although it is far from clear what role cryptoeconomic systems will play in the economy and society of the future, the actually existing experiments contain innovations in governance that attract persistent interest (El Faqir _et al._ 2020, Wright and Law 2021, e.g., Wharton Cryptogovernance Workshop n.d.).

Ed: of course this literature 

### List of potential innovations

> 
> Some of these innovations include:
> 
> -   Dynamic decision-making processes that evaluate preferences in nearly real time (Beck _et al._ 2018, Reijers _et al._ 2018)
> -   Voting systems unavailable in conventional politics or business (Emmett 2019, Karjalainen 2020)
> -   Mechanisms for incentive alignment among diverse participants (Beck _et al._ 2018, Karjalainen 2020)
> -   Algorithmic dispute resolution (Barnett and Treleaven 2018, Aouidef _et al._ 2021)
> -   Permissionless participation (Beck _et al._ 2018)
> -   Widely shared accountability and distribution of benefits (Beck _et al._ 2018, Fritsch 2019, Mannan and Schneider 2021)
> -   Self-enforcing security and censorship resistance (De Filippi _et al._ 2020)
> -   Sovereignty from external control or regulation (Duffy 2017, De Filippi and Wright 2018, Manski and Manski 2018)
> -   Transparency of on-chain activity (Cila _et al._ 2020)
> -   Competitive markets for governance (Alston 2019)
> -   Ease of exit and capacity to fork systems (Caliskan 2021, Ba _et al._ 2022)

### Enthusiasts envision that DAOs will someday reorganize every level of organizational life which would mean a radical financialization of everyday interactions 

Enthusiasts envision that DAOs will someday reorganize every level of organizational life, and perhaps they will. Current practice suggests that doing so would mean a radical financialization of everyday interactions. Projects apparently engaged in non-financial activities, like the immersive game Decentraland and the social-media network Hive (not to be confused with 1Hive), differ little from their corporate competitors except by distributing power through along cryptoeconomic lines and providing new means of commodifying the experience. Vote-buying, a practice usually considered anathema in legacy political systems, has risen to an art in crpytoeconomic design (Buterin _et al._ 2018, Automata Finance 2021), suggesting a culture in which economics is a preferable replacement for politics.

### Vote-buying has risen to an art in cryto suggesting a culture in which economics is a preferable replacement for politics

From previous para

### The contradictions of the crypto-rati who acknowledge the centrality of money and the growing plutocracy yet still think the solution is more cryptonomics

> Gitcoin founder Kevin Owocki wrote in a tweet, “The momentum behind ETH/Defi has a greater purpose than profit,” and describes Gitcoin’s purpose with the economic concept of “public goods,” which often require non-market forces to produce (Owocki 2021). Later in the same Twitter thread, he added [sic], “i only hope we dont let people down + actually create lasting good [heart emoji].” Ethereum founder Vitalik Buterin has lamented that “plutocracy is still bad,” despite its prevalence in cryptoeconomic systems, including the one he founded (Buterin 2018). He has also called for ways of determining community membership beyond simple token-holding (Buterin 2021a). And yet he maintains, “The answer is what we’ve been saying all along: _cryptoeconomics_” (Buterin 2018).

That last part is incredible:

> Ethereum founder Vitalik Buterin has lamented that “plutocracy is still bad,” despite its prevalence in cryptoeconomic systems, including the one he founded ...  And yet he maintains, “The answer is what we’ve been saying all along: _cryptoeconomics_”

# Cryptoeconomic limitations

Fascinating statement at the start:

> If the purpose of a governance system is to enable participants to have as much self-determination as possible

Is that the purpose of governance system? For example, instead it could be to maximize the ability to solve collective action problems.

Key issues he identifies

- Lack of personhood means that an *economic* has primacy
- Plutocracy: 

### The purpose of a governance system is for participants to have as much self-determination as possible

> If the purpose of a governance system is to enable participants to have as much self-determination as possible—a tolerable oversimplification, I hope—whatever inhibits that self-determination becomes a limitation. If a governance system faces serious limitations on its ability to problem-solve, how deserving is it of either trust or confidence?

### The problem of personhood: if you can't identify the person then the basic unit is control of *economic* units (tokens)

> But cryptoeconomics has yet to deliver a widely adopted means of identifying unique human users. Therefore the control of economic units, rather than units based on personhood, remains the basic logic of governance. This presents challenges for governance if personhood should still possess intrinsic importance.

## Persistent plutocracy

- Proof of stake and proof of work in essence mean "more gold, more votes"
- Very similar to corporations were one share equals one vote so those who own more shares have more power (joint stock companies)
- Corporations are regulated but crypto is not: "Yet companies operate within the constraints of state policy, which ultimately govern obligations among state-recognized persons, whether corporate or natural."

### Proof of stake and proof of work in essence mean "more gold, more votes"

> The prevailing consensus mechanisms, known as “proof of work” and “proof of stake,” grant governance rights roughly in proportion to a given node’s buy-in on the network—through computing power or token holdings, respectively. Applications and organizations built on such networks tend to follow a similar logic, granting power to whomever holds their tokens. Those with more tokens than others hold more decision-making power than others.

### Similar to corporations

> Governance by economics is nothing new. Joint-stock companies conventionally operate on plutocratic governance—more shares equals more votes. This arrangement is economically efficient for aligning shareholder interests, even while it may sideline such externalities as fair wages and environmental impacts.

### Corporation existing within the state and are (heavily) regulated 

> Yet companies operate within the constraints of state policy, which ultimately govern obligations among state-recognized persons, whether corporate or natural. The earliest companies formed to fulfill the charters of mercantilist monarchs; today, companies must at least adhere to the rules of governments that purport to represent the will of society as a whole, not just the company’s participants. Governments impose rules about transparency, conduct, accounting, equity trading, and more. So while plutocracy is prevalent in the joint-stock universe, governments can counteract it through progressive taxation, collective bargaining rights, environmental regulations, antitrust enforcement, and more.

### Yet web3 organizations e.g. DAOs are (in theory) outside of the state

>  If distributed ledgers are based on cryptoeconomics “all the way down,” without an underlying political order, such options are not available. But if “a DAO is closer to a country than to a corporation,” participants will expect countermeasures against rule by wealth.
> 
> For cryptoeconomic systems, as in many economic markets, a critical means of accountability and redress against plutocracy is user exit—leaving one network and moving to a more agreeable one; in some cases, users have succeeded in challenging takeover attempts by exiting a protocol and starting again on their own (Caliskan 2021, Ba _et al._ 2022).

This is the [dictator and the anarchist argument](https://rufuspollock.com/nonfiction/dictator-and-the-anarchist/) -- however that only works when you can easily and relatively costlessly fork, as one can with digital information.

### Plutocracy is endemic in crypto systems and there don't seem any good solutions

> For now, plutocracy may be endemic in cryptoeconomic systems. Ferreira _et al._ (2019) predict a high likelihood of corporate capture in proof-of-work blockchains such as Bitcoin. Some hope that the influence of venture-capital firms in token markets might be warded off with efficient vote-selling (Automata Finance 2021) or other incentive designs that make plutocracy less attractive (Buterin 2018, Eyal 2019). But as long as governance is reducible to economics, it will be difficult to prevent the feedback loops between wealth and power from spiraling into plutocratic outcomes.

## Suppressing participant interests

> Like economics itself, cryptoeconomics is surely normative as well as descriptive. Ferraro _et al._ (2005) find across numerous studies that “self-interested behavior is learned behavior, and people learn it by studying economics and business.” Although this picture of human flourishing finds limited validation in empirical psychology and anthropology, _homo economicus_ has spread across organizational life through managers with economics-informed business education. It shapes the institutions people create, as well as people themselves.

## Discounting externalities

See [is-environmental-footprint](../claims/is-environmental-footprint.md)

Subtle point here is not that there is an environmental footprint but the ignoring of externalities is inherent and harder to address because of the soliptistic nature of crypto: i.e. that only that which can be tokenized or somehow represented "on chain" exists.

### Variety of externalities most prominently the energy consumption

> a rare case in which Bitcoin faced at least a semblance of accountability for its country-sized energy consumption and environmental impact. Its proof-of-work system is governed by its users—especially the “miners” who carry out energy-intensive computation—and those users may stand to benefit from ignoring their collective carbon footprint. A busier network roughly correlates to higher energy consumption and a higher trading price. Competing cryptocurrencies have promised lower environmental impact, but the incentives associated with Bitcoin’s dominant market position have prevented mass exodus.
>
> The environmental costs are classic externalities—invisible to the feedback loops that the system understands and that communicate to its users as incentives. Other externalities relevant to distributed ledgers include money laundering, dealings in dangerous drugs and weaponry, tax evasion, and the growth of ransomware attacks on public infrastructure that cryptocurrencies have facilitated.

### With state we have means to address these

> Non-cryptoeconomic systems have some similar properties; shareholders of oil companies also have incentives to pollute, and paper money can support dangerous black markets. **But such abuses, at least in principle, are subject to oversight and enforcement by governments tasked with protecting the common good.** Political processes enable participants to negotiate compromises among a variety of economic and non-economic interests. If the firm on its own does not see a given externality, the regulatory layer can compel it to do so, such as through disclosure requirements or selective taxation. The externality thus becomes visible to the firm’s incentive structures. **For distributed ledgers, similar oversight remains either crude or nonexistent.**

### Similar issues with the commons - and are turning to same models as the state

> The challenge of funding “public goods” is another example of an externality—and one that threatens the sustainability of cryptoeconomic systems (Buterin _et al._ 2018). As has been the case for commons-based software in general (Arp _et al._ 2018), market mechanisms struggle to support critical infrastructure that does not produce direct financial returns. Non-market institutions such as governments and (at vastly smaller scales) charities have been necessary for the provision of public goods before cryptoeconomics; increasingly, distributed ledgers are reinventing them through fee-funded treasuries and donor grant pools. In these and other respects, cryptoeconomic designers are beginning to venture into the realm of the political.

# Towards Politics

## State regulation

## Cooperative incorporation

## Cooperative incorporation

## Temporal modulation

# Conclusion