How Society Will Be Transformed By CryptoEconomics

Thoughts by Noah Thorp from his work @ Citizen Code & CoMakery.

We messed up when we built the internet. I’m not talking about Javascript. Despite the web’s fantastically successful decentralized headless nature — the first internet protocols did not bake some key features in to the protocol layer cake. The missing features are distributed user accounts, data storage, and asset ownership tracking.

The nature of our internet society has been shaped by the lack of these features in surprising ways. As these underlying protocols shift — we teeter on the edge of financial, institutional, and cultural transformation.

To understand the shift in progress we must go on a journey through the disintermediation of banking, the exponentially growing internet of things, growing freelancer economy, corporations run by AIs, and dynamic governance structures like holacracy. The journey begins with the question of trust…

The Trouble With Trust

Providing third party transactional trust at scale has been the business of banks and brokers since the Medicis gained extraordinary international power by revolutionizing banking in the 14th century. Similarly modern web services are based on the premise of a centralized trusted provider offering a user account, data storage, and services. But how trustworthy can a centralized provider be for exabytes of user account data?

In the current protocol paradigm, we must trust third parties with our assets. This need for internet authentication from trusted providers requires the creation of centralized authentication services. Data aggregates around authentication and powers fabulous multi billion dollar unicorns like Google and Facebook that store exabytes of personal account data. To some these giants are the pinnacle of civilization and to others these unicorns cast epic privacy and trust shadows.

It’s not just a slightly creepy internet thing that we get used to. Personal data is a new economic asset class recognized by the World Economic Forum as early as 2011.

In the current internet ecosystem, we must outsource trust and ownership services to centralized operators. We use Verisign for SSL certificate verification, Godaddy for domain name registration; PayPal, Square, Visa, and BofA for transaction settlement; Google, Facebook, and Twitter for secure login authentication. The $5 billion to $400 billion dollar valuations of these trusted third parties are rooted in their transaction brokering and account authentication services. User profile data warehousing and privacy threats are a natural outcome of our dependence on centralized trust brokers. To participate as a US Citizen in the modern economy we are required to trust our mobile information and SaaS data with centralized providers.

In the Internet of Things boom our data privacy crisis, enabled by centralized user accounts, threatens to increase exponentially. Gartner estimates 25 billion connected things by 2020. It’s big business to collect your intimate data while it’s still legal and store it for lucrative analysis later.

With CPU power increasing at the rate of Moore’s law and machine learning algorithms increasing in effectiveness the value of this data is remarkable. Today we are worrying about the NSA reading our Gmail; tomorrow we will also be worrying about smart watch heart rate monitors indicating our GPS located sexual habits and NEST perfecting our personal profiles with extra sensors inside our home. In addition to the conveniences personalization provides — these zettabytes of intimate data are a global revolution in surveillance at the service of marketing profit and government control.

However, the role of the banker, broker, and account host are hovering on the brink of disruption by new emerging internet protocols…

Disintermediating Banking and User Accounts

The revolution in progress can generally be described as “disintermediation”. It is the transference of trust, data, and ownership infrastructure from banks and businesses into distributed peer to peer network protocols.

A distributed “world wide ledger” is one of several technologies transforming our highly centralized structures. This technology, cryptically named the “block chain” is embodied in several distributed networks such as Bitcoin, Eris Industries DB, and Ethereum.

Through an encrypted world wide ledger built on a block chain, trust in the systems maintained by third party human institutions can be replaced by trust in math. In block chain systems, account identity and transactions are cryptographically verified by network “consensus” rather than by trust in a single third party.

Currencies are not the only assets that can be traded on block chain protocols. Distributed user accounts are the most basic element of the cryptographic network infrastructure. The next wave of innovation is in the transference of asset ownership of all types.

For example, ColoredCoins can be used to distribute asset ownership information via meta-data associated with low cost bitcoin transactions. In practice, ColoredCoins are used to represent and trade fractional ownership of art on Artlery.com and profit sharing rights of co-authored code at Assembly.com. Although ColoredCoins leverage the bitcoin protocol, other block chains authored by Stellar, Eris Industries, and Ethereum are quickly gaining momentum to offer similar functionality.

Whereas block chain protocols decentralize transactions, encrypted peer to peer file sharing networks promise to remove the need for centralized databases. In this area technologies like Inter Planetary File System (IPFS) and Maidsafe represent the edge of the innovating wave.

The world looks different when you combine distributed ledgers, file systems, cryptographic trust, and financial transactions. In this world interpersonal human trust is still essential — but opportunities for corruption are reduced.

This change in game theory equilibrium could modify the fundamental economic fabric of our society. It is less a question of “will the game change?”, it is more a question of “how will the game change?”

Cultural Interlude

Is money a common good? Was Alan Greenspan’s extensive use of monetary policy an act of socialism committed by a die hard Ayn Rand-ian? We are poised to build bounded crypto economies for thousands of block chain currencies — will the unholy union of micro libertarian choice and a macro socialist-currency-commons re-appear at a fractal scale across thousands of crypto currencies?

As our infrastructure shifts, our broad stroke categorization of libertarian, socialist, and capitalist systems is under heavy strain. Republican pot growers will leverage crypto currency to provide protections that banks are afraid to provide. Intentional communities and cooperatives will embrace cryptographically enabled equity structures to power “off the grid” solar energy markets using financial instruments previously wielded exclusively by venture capitalists.

The protocol shift towards decentralization is revitalizing the libertarian, collaborative, and self-organizing memes that circulated at the dawn of the internet revolution. As the sharing economy enables peer to peer transactions of underutilized assets at scale, cooperatives are cool again. Holacracy and co-working memes have become water cooler conversations instead of fringe encampments. This contemporary ecology grows on the rich meme humus of Norbert Wiener (Cybernetics), John Perry Barlow (EFF), Dee Hock (Visa’s chaordic founder), Kevin Kelly, Stuart Brand, Howard Rheingold, The Whole Earth Catalogue, The Well, Wired Magazine, Burning Man’s 10 Principles, and the Long Now Foundation.

So, let me drop the boldest form of the utopian peer to peer gospel on you.

Image by Clayton Meador

People of the free internet, we now have the opportunity to create a world where we choose to work a 4 hour work week at our whim, collaborating globally with whom we like, freely choosing compensation in currency or equity, frolicking in our hyper-creative and artistic, fractally self-organized fluid work groups, protected from catastrophic risk by a basic income provided by our egalitarian peer to peer protocols.

In this vision the tragedy of the commons is stamped out like polio by a collaborative network of trust and enforced by a consensus-based cryptographic protocol that ensures our aligned incentivization towards the expression of our personal and collective purpose.

Are you in? Ground control to Major Tom?

But as you know, with all utopian visions something could go horribly, horribly wrong…

Golden Age or Humans As Second Class Citizens?

Ok. So we are dropping transaction costs with crypto currencies, creating a world wide ledger, transform the internet, and disintermediating centralized banking. “Whatever,” you say, “as long as I can get a yerba mate and sit at my co-working hot desk with my headphones on and get my paycheck deposit to my decentralized bank account all is well.”

Have I mentioned the topic of legal innovation to enable unmanned corporations? Board participation by AI? Machine only economies for the Internet of Things? There’s a bigger cultural disruption brewing as non-human decision makers participate in market decisions and legal entity governance. You think high frequency trading is weird — what about high frequency legal contract signing by algorithms?

There are a couple important words for understanding these new structures. Let’s review them.

“Autonomous” means running on its own without intervention. A web hosted weather prediction service could run with minimal intervention. Self-driving cars are also autonomous.

“Smart contracts” are like spreadsheet scripts for a distributed ledger. Where a block chain defines the distributed immutable ledger of transactions, smart contract scripts define programmatic actions that will be triggered by block chain transactions. Smart contracts can legally signify buying and selling of equity, voting, and entering into contracts.

The earliest breakthroughs in merging block chains and smart contracts is promised by the Ethereum Foundation. Ethereum raised over $15 million in the second largest crowd equity fund to date. Their solution provides the first full featured programming environment that runs distributed applications on a block chain.

Imagine that you created a lightweight corporation that automates all of its contract signing, profit distribution, and financial transactions. This entity stores its data and executes its code on a distributed peer to peer network. It is “autonomous” because it can run on its own after setup. It manages its bank account and transactions via a distributed network such as Bitcoin. Its accounts are owned by a corporate legal entity registered with the state, but it has no employees. Surprise, you just invented a Distributed Autonomous Corporation (DAC).

The first Distributed Autonomous Corporations (DACs) are likely to be escrow and gambling services. As we bring more of science fiction into being, DACs may control financial decision making for self-driving car rentals, drone services, personal internet of things networks, and unmanned corporations. Consider: Foxconn, the world’s largest Chinese manufacturer, is manufacturing 30k robots per year; the CEO of Baidu has proposed a state level Chinese initiative to develop AI in an effort similar to the Apollo Space program. The smarter smart contract code becomes the more autonomous organizational decision making will occur.

The biggest concern is one of control. Distributed or not, autonomous entities will make many decisions representing trade offs of value. It’s not a question of if machines will make decisions for us, it’s a question of what decisions and under what conditions. For instance, if a self-driving car has a choice of crashing into a school bus or driving the passengers off a cliff which should it choose? Programmers are coding ethical decisions like this at this very moment.

Autonomous corporate entities raise fears of a dystopian technocratic future where machines in service of corporations replace people at scale. But let’s not get too distracted by images of black polluted forever night skies patrolled by drones with spotlights over tanks of humans in vats. There are positive alternate futures that we can create.

Genie bottle exits are historically one directional. This genie has some wishes to grant and we can become more conscious of the future we want to create.

As David Nordfors, chair of the Innovation For Jobs Summit says “If we care more about tasks than about people, then tech will replace people. If we care more about people than about tasks, then tech will leverage people.” There are many ways in which technological innovation can disrupt unemployment and machines can work for society rather than society for machines — but we have to want that.

A new legal and technological entity called a Distributed Collaborative Organization represents a new way of organizing multi-stakeholder cooperatives at scale. Could the difference between dystopia and protopia pivot on the structure of ownership?

The Transformative Promise Of Distributed Collaborative Organizations

As an estimated 40–50% of the US workforce will be freelance by 2020, new models of ownership must emerge to fit new ways of working. The shift of individual relationships with single organizations to an ecosystem of collaborators interacting with many organizations requires a shift in ownership and decision making.

Imagine regularly entering into ad hoc equity relationships with hundreds of collaborators. Distributed Collaborative Organizations (DCOs) are an example of collective peer to peer ownership suitable for ecosystems of stakeholders. Legal innovations for DCOs, pioneered by companies like Swarm.Fund, use carefully crafted legal structures to enable crowd funded investment in portfolios of private companies by non-accredited investors. The sociological outcome is the empowerment of multi stakeholder cooperatives at scale.

Meanwhile, dynamic governance structures are evolving to compliment the unboxing of collaboration into dynamic equity arrangements. These newly ascendant species of dynamically governed entities include Holacracy, Sociocracy, Podularity, and the working practices of SEMCO, Gore, Valve, and Morning Star.

Dynamic governance systems still have not fully related to the emerging crypto economic layer. However, distributed peer to peer networks, adaptive organizations, and currency protocols are co-evolving. Dialog at the 2015 Future of Working, Stanford Blockchain Workshop, and GETD conferences indicated strong and purposeful momentum for this co-evolution.

Prologue

Yesterday, walking in the global weirding sunshine of San Francisco, the city appeared as a mirage on the brink of a phase shift. In my minds eye the invisible streams of value soon to be represented by emerging protocols became visible. Beyond dollars and yen — the whole spectrum of reputation currencies, app coins, and machine economies streamed before my eyes in a rainbow of currency, equity, and distributed accounts. I could see a city transformed in the wake of the great protocol shift.

As Jeff Clearwater of Village Lab said, “most people think of economics as being gray and boring — but in actuality economics is juicy and psychedelic”.

“The challenge will be to find the balance between the dry code of computers and smart contracts — and the wet code of our hearts.”
- John Light, host of the P2P Connects Us Podcast

Going Deeper

There’s a lot to understand in this new world. Here is a primer to gain more depth in understanding these areas:

• The Age of CryptoCurrency is a book describing the rise of Bitcoin and its implications.
• Assembly enables collaborative value creation and profit sharing using AppCoins. It is a great early version of what the upcoming freelancer economy may look like.
• Ethereum is one of the most important projects under development for block chain technology, distributed applications, and smart contracts. There is a really good 10 minute Ethereum introduction video on YouTube. The deep awesome geeky details are in the Ethereum White Paper.
• Swarm.fund CEO Joel Dietz coined the term CryptoEquity. You can learn more about their collaboration with the Berkman center on DCO legal innovation in the swarm working paper.
• DAOs, DACs, DAs and More: An Incomplete Terminology Guide is a great overview of emerging organizational types Vitalik Buterin, Founder of Ethereum.

If you want to build the emerging collaborative economy, CoMakery, where I am a co-founder, is looking for partners for projects and co-organizers to convene communities of practice.

Gratitude

I have learned much from the people and collaborative spirit of this community. Many thanks to the efforts, conversations, and contributions of:

• Canyon Boak for the Mt. Fuji photo.
• Clayton Meador for the grass mandala and image processing of Mt Fuji.
• David Thomson (Artlery)
• Matthew Deiters (Assembly)
• John Light (P2P Connects Us)
• Primavera De Filippi (Harvard Berkman Center for Internet & Society, Artlery)
• Joel Dietz (Swarm)
• Harlan T Wood (Enlightened Structure, CoMakery)
• Danny Spitzberg (Peak Agency)
• Edward West (Hylo, Impact Hub Oakland)
• David Hodgson (Hummingbird Labs)
• My co-founders and team mates at CoMakery