istory provides evidence that macro-level shifts in how we organize our economies has at times required radical shifts in how we govern our people. Agriculture destroyed the chief, forcing a transition to oligarchy. Industrialization destroyed the king, forcing a transition to democracy. The information revolution, coupled with globalization, is eroding representative government and forcing a transition toward something completely new.
At the centre of this shift is a new technology that has the potential to reinforce our existing political scaffolding with tamper-proof, censorship-resistant, incorruptible “programs.” This technology, which builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, is the blockchain. Today — at this moment — developers across the globe are using blockchain-based smart-contract platforms to build the person-less institutions of the future.
Why Is This Happening?
The economic underpinnings of any society are the means and mechanisms of production and the distribution and allocation of goods, services and resources.
Every so often something new comes along that profoundly changes our economic foundations, forcing us to adapt how we govern ourselves in order to cope with these changes. With a historical lens it is apparent that these shifts can span decades, and sometimes centuries, but occasionally a change is big enough that it is labelled a “revolution.” The first agricultural revolution (the Neolithic Revolution) started in 10,000 BC and was the result of novel discoveries in the selective breeding of crops and farming, the domestication of animals as a means of labour, population consolidation and, as a result, population growth on an unprecedented scale.
A second agricultural revolution in Britain in the mid-seventeenth century saw transformational economic impacts through improved plough technology, land ownership rights, infrastructure (in the form of roads and canals) and a national tariff-free market system. This shift in the means and mechanisms of production resulted in massive changes in population density. These changes forced society to adopt centralized administrations, hierarchical ideologies, depersonalized systems of knowledge such as writing, divisions of labour, non-portable architecture and art, property ownership and more. These constructs may seem common to us today, but at the time they were intellectual innovations with competing ideologies that took generations to spread and become mainstream. Perhaps the most important of the changes caused by the Neolithic Revolution was how people were governed. There was a shift from tribal leadership to oligarchs. Humans would experiment with many more forms of government up until the 1700s; however, the dominant form of governance at the turn of the eighteenth century was the feudalist model with the king or queen as its focal point.
In the middle of the nineteenth century, a second period of change began when machines replaced hand production, chemical and iron production processes were invented, steam power and factory systems became available and accessible port systems for trade were built. This shift, the Industrial Revolution, brought increased social mobility and a boom not only in production but also in population. Among many new phenomena, including “the crisis of the family,” in which the pre-existing institution of the working family collapsed, was a greater shift in societal power structures.
Industrialist business owners, with their new fortunes, became the recipients in a power transition from the nobility class (land owners) to the business class (industrialist entrepreneurs) as the middle class grew. Feudalism was being eroded by the new capitalists and, as a result, elected “representative” government was put in place to govern the people and keep the industrialist business owners content. Closer lines of accountability were drawn between the government and the people.
More than 150 years later, this style of democratically elected representative government is a staple of the free developed world. However, as the twentieth century came to a close, several distinct innovations have put humanity on a new economic growth trajectory: the personal computer and then the handheld computer (smartphone); the internet as the connective tissue and network that every personal computer connects to; and software applications and their ability to capture and perform our routinized behaviours. And finally, e-commerce, the first truly global, borderless competitive arena for the distribution and allocation of goods, services and resources.
History has shown us again and again that if the economic forces that govern our production and consumption are altered by a set of technological and intellectual innovations to a substantial degree, new social governance methods must be adopted to cope with the change. In the modern age, the information revolution and globalization are radically altering our economic foundation and putting national politics under pressure. If we are not careful during this transitionary period, we run the risk of producing one of two equally unattractive outcomes: the collapse of government as we know it or the emergence of techno-totalitarian nation-states.
National Politics Is Not Equipped to Deal with New and Complex Global Problems
Current political systems, and the social evolution that led to their formation, all share common characteristics, resulting in universal challenges seemingly not addressed by any current form of government. Namely, these systems are designed around jurisdiction-based politics, which essentially divide the world into sovereign parcels of land and govern people based primarily on their geographical location.
Historically, this made sense, because commerce occurred and information flowed within hyper-local geographical areas, long before the world became globalized and the internet was created. On top of this confining legacy feature, our political and bureaucratic systems have, for the most part, become bloated to a point of snail-paced change and evolution, all while the world that they govern, and in which they operate, is changing at unprecedented speed.
In short, the way people are organized and controlled through forms of political governance no longer reflects the boundaries of commerce and communication, and, increasingly, there is evidence that our current frameworks won’t work for a rapidly changing world.
Today, an educated millennial is likely to have travelled to and even lived in multiple countries, have friends distributed around the world and interact heavily within online communities and markets — and the trend is continuing in this direction. On the other end of the spectrum, many of the historical barriers that prevented the inclusion of people living in secluded and poor regions of the world into the global economy have ceased to exist. What remains are artificial boundaries and restrictions to joining the rest of the world in prosperity. Take music as an example of this. In the past, the barrier to making music was production — it involved an expensive studio with equipment and distribution that was monopolized by a few geographically connected record labels. In 2019, you can record music on a phone and distribute it across the globe on YouTube, SoundCloud and Spotify in minutes. Innovation is driving this trend in the private sector; in the public sector, our governing frameworks will also see changes.
As a result of the current boundaries and restrictions, there exists a very rigid and inflexible system that seems difficult to adjust without force, even though there is more and more evidence pointing to its growing ineffectiveness. That said, although we can likely imagine a system of human organization and governance that is designed from a different set of starting assumptions — potentially something that results in a highly connected network of city states and global digital economies — the transition process may seem too insurmountable to be realistic.
In the meantime, efforts should be made to build toward systemic, incremental improvements within our current structures.
Social Governance Is, at Its Core, Powered by Trust
“A leader you can trust” — this is a message you are likely to hear from politicians during an election. People generally choose to vote for a candidate they trust. Our systems function and maintain the confidence of people based on that trust, which needs to exist within all layers of social governance in order for civilized society to function. Trust in politicians, trust in money, trust in education, trust in the free press, trust in infrastructure — the list goes on.
In its simplest form, social governance consists of the mechanisms employed to organize human behaviour toward commonly accepted positive outcomes. These mechanisms span commerce, education, the environment and social interactions, among other areas. Social institutions were designed to address these domains and have historically been adequate in meeting this requirement because the people they served trusted their competence and importance.
Governments, among other things, collect taxes, provide public goods and spend on economic externalities, redistribute income and provide social security. At its core, this behemoth of a bureaucratic engine is a “trust machine” that functions on the notion that if we collectively pay for its operation, then the institution will allocate funds appropriately. There are 195 of these engines operating with varying levels of success worldwide. Shared global economic externalities such as the ocean, polar ice caps and the biosphere are largely ignored, to our collective detriment. In addition to these challenges, the economic dependence on digital markets and the internet more broadly is increasing around the world; this is a domain that is not easily governed by individual nation-states.
The question is not whether change is needed, rather, what does the solution for a new global governance space look like in a world that is clearly changing? Many of us believe “programmable trust” plays a very important role in this new world. In order to understand it we must understand its inception — bitcoin.
The real innovation in bitcoin was that for the first time, we could engage in commerce on the internet without the need for trusted third parties to process electronic payments. Completely non-reversible transactions were not really possible before bitcoin since financial institutions could not avoid mediating commerce-related disputes. The cost of mediating disputes, building and hosting infrastructure, and setting up institutions to run and manage this infrastructure all result in economic waste and rent-seeking at the centre of our markets. According to Satoshi Nakamoto’s “white paper” on bitcoin, “the cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions” (Nakamoto 2018). The solution was to use cryptographic proof instead of third-party institutional trust.
This novel insight opened the door for unmediated transactions at the high and low end of the economic spectrum. Bitcoin’s design consideration is unique in that further exploration of the concept allows us to look at aspects of societal governance where third-party trust can be replaced by types of decentralized, ownerless, cryptographic platforms.
Although it’s difficult to predict how deep and fundamental some of these changes will be to the structures of society, we could begin by imagining how blockchain systems and programmable trust could play a role within our current systems. Remember, the transition from monarchs ruling over city states to democracies governing nation-states was a major paradigm shift. There are possible scenarios where structural transformations will be required for us to navigate this period in history and we should keep an open mind.
However, without calling for a revolution, here are some key practical areas that could see impact and improvement without significant structural change.
All government services are paid for by taxes. Without taxes, the government would have no capital to operate. In the United States, the majority of federal tax revenue comes from income tax, while the majority of state revenue comes from a general sales tax for products and services.
For tax collectors, blockchains, smart contracts and cryptographic currencies represent infrastructure that brings us toward a permanent cashless system with reduced tax fraud and increased compliance. Blockchains and smart contracts can record real-time transactions along the value chain, create smart contracts and calculate, withhold and remit taxes automatically to the tax authority. In Canada, this would mean a shrinking of the HST/GST tax gap that currently accounts for an estimated loss of $5 billion in annual revenues.
For individuals and businesses, tax compliance will become an “automated procedure” that is programmed to execute as a result of economic behaviours. The option to direct your contributions to public goods that you feel passionate about or that directly affect you could perhaps be embedded in tax collection. There is more on this below in the discussion of public goods.
A more reformist perspective could also include questioning the fundamental economics of taxation. Bearing in mind that income tax in Canada and the United States is relatively new (it was introduced in the United States during the Civil War, and in Canada during World War I to pay for wartime national debt), new forms of revenue could be made possible through the use of these systems. One such example is from the Zcash project, which has essentially created a system-wide programmatic inflation to pay for the core development and maintenance of its system.
As efforts are made toward retooling and retraining contributing members of society to their changing economic conditions, wealth and income distribution become important topics for public discourse. We are significantly underprepared for a world where jobs are replaced by artificial intelligence and machine labour; however, these are the economic and social realities of the next two decades.
Ideas such as universal basic income (UBI) are gaining traction in the wake of increased uncertainty around the longevity of our careers. Pilot projects are in development in Finland, the Netherlands and Kenya to test study these concepts. A candidate for the American Democratic presidential nomination, Andrew Yang (#YangGang), is making this a cornerstone of his campaign. The advent of cryptocurrencies and smart contracts means the potential to create unconditional basic income systems that operate by creating a blockchain that supports a fungible token and employs a decentralized identity system. A number of projects are experimenting with these systems, including Manna, BrightID, Swift Demand, Kuwa and Raha. It is difficult to imagine fair and cost-effective systems of income distribution that do not involve the programmatic allocation of capital.
Many, including Y-Combinator’s president, Sam Altman, who has been personally financing a UBI pilot, see a world in which decentralized finance networks operating on blockchain infrastructure will transcend local government. They will distribute coins or tokens to any provable unique human. If that network became big enough and people believed in it, it would be hard to stop.
Most notable among our market’s greatest externalities is the environment. The economic means of production has and continues to negatively affect our planet at an accelerated rate. Scientific consensus leads us to believe that we have 12 years to reverse a point of no return on this issue. As individuals and institutions act in their own self-interests, this tragedy of the commons continues; however, mechanism design and cryptocurrency may have an answer.
Similar to the function of carbon credits, enforced mechanisms can be made to incentivize behaviours that promote positive economic externalities and punish negative ones. These mechanisms will use cryptocurrency and smart contracts on a distributed, transparent shared platform. Core to this problem is a deep-rooted challenge that nation-states are not well equipped or incentivized to care about or have an impact on a global problem of this scale.
Incentive schemes will need to focus on water scarcity, natural disasters, climate change, biodiversity loss, air pollution and deterioration in ocean health if we are to succeed in this problem domain.
Cities are havens for an extensive set of public goods: sewage treatment, roads, parks, sidewalks, traffic lights, culture and services that are hard to create natural competitive markets around. If public funding for them ceased, they would not exist. Analogous to these public goods on the internet is open-source software, which often acts as the foundational underbelly for the creation of for-profit software companies. Open-source software is typically funded by “donations” (optional tax); however, new advances in the use of smart contract-based blockchains has generated promising new funding mechanisms such as CLR matching.1 Individuals make public goods contributions to projects of value to them. These individual contributions are “matched” or “topped off” by a government, grants program, or private philanthropist — programmatically. By making an individual donation, you contribute to a public good. This funding is guaranteed to be met by the matching fund, widening the reach of your donation. The contributions you make become immutable “law.”
Experiments such as this in open-source funding, if successful, will scale to have societal impacts on the allocation of capital in scenarios of broadened scope. Now more than ever, it is time to experiment with new forms of social governance using programmable trust as a technology for good.
With blockchain protocols as natural incubation environments for this experimentation, we need more of our best minds in the social sciences, policy, mechanism design and economics working alongside our brilliant computer scientists and cryptographers, focusing on international issues of coordination and leveraging advances in technology to imagine and create a world that can help us navigate this transition.
- CLR stands for Capital-constrained Liberal Radicalism. For more on CLR, see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3243656.