As we discussed in the prior post, institutions are constraints on human behavior established within human groups as operating rules about what is allowed and disallowed within the group. Shared beliefs about these rules and their interpretation are a precursor to making institutions work in society.
For this post, we shall use the term Decentralized State Machine as opposed to the term blockchain, in the same spirit as it has been used over the past several years by Cosmos founder Ethan Buckman, to define networks of computerized validators consisting of both CPU and memory that run a software client and apply consensus rules to keep a decentralized and shared log of transactions, votes, and social events carried out by members of the network (i.e. signed by their private keys).
Now, let’s take all that we’ve learned about Institutions from the prior post, and apply this lens of analysis to how we might possibly carry humanity forward with a new social, political, and economic order fashioned predominantly from informal institutions maintained by Decentralized State Machine networks.
While I have been big believer in the American system, and the framework that it has provided over the past 245 years to unleash human prosperity, I am writing this blog because I believe we now have the tools to do substantially better as a human species!
The key insight is that it has now become possible to establish a whole new family or class of informal institutions grown on top of Decentralized State Machines to deliver social, political, and economic order within local communities and at scale. Early examples of such informal institutions are now emerging and becoming tangible within many blockchain and cryptocurrency projects, and serve as proof of concept.
Want to learn more about this crazy ‘fever dream’ that I can foresee in my mind’s eye?
Here we go!
First, we make two simple observations:
- Decentralized State Machines are record-keeping systems w/ capacity to maintain perfect socially-agreed accounts of social, political, and economic events. Saying this in another way, all of the nodes in a network that support a Decentralized State Machine maintain an exact-copy of the record of history of transactions, votes, and social events between members of that network, and since all of this record-keeping is public and subject to consensus rules, there is zero-discrepancy about the true history of events for any member of the community who is participating. Thus, a Decentralized State Machine is a perfect system for maintaining shared beliefs and a single record of truth about history for any community engaging in joint economic activity, decision-making, political-fact keeping, and social-fact keeping. In other words, even the the most forgetful, self-interested, or confused member of a community cannot dispute the record of facts in a socially-credible fashion if those facts have been recorded via a Decentralized State Machine network.
- Decentralized State Machines make it possible to enact new kinds of informal institutions within huge communities of both humans and machines at massive societal scale at very low cost. For all of you blockchain builders: A new decentralized protocol programmed in a smart contract and accessible via a dApp is really a new kind of informal institution, as per the definition of the term ‘informal institution’ provided in the prior post. These new kinds of informal institutions can have myriad purposes and interaction points for human and machine users, and each interaction must follow the rules of the protocol and be signed by the users private key (we will discuss this more in the next post). In this sense, the protocol enforces the desired behavior and creates order or routine behavior within the community of users of the protocol. If a person or machine doesn’t follow the rules of a particular protocol, they simply cannot participate. They are effectively ostracized or banished from the group that is repeating the actions of the protocol and gaining its benefits.
For example, if a person doesn’t like the fact that Bitcoin transactions are irreversible and they don’t want to use the protocol, no one is making them join it. But if Bitcoin becomes dominant in society, and a small hold-out of people refuse to use it, or if they refuse to follow the protocol exactly as designed, then those individuals become unable to access the benefits of the protocol, and they are effectively banished and may not gain in the wealth creating associated with a society booting-up a new form of money. (in this regard, Peter Schiff sits outside of the Bitcoin protocol, and he will remain in this banished condition, until he gets with the ‘shared beliefs’ and starts to accept and follow the protocol rules).
Now, connecting observation 1 and 2 together, since all of the events within a community that builds its social, economic, or political activities on top of a network of Decentralized State Machines are perfectly recorded via a system of maintaining shared beliefs, without any possibility for social disagreement about the facts, and since blockchain protocols can be used to program voluntarily-accepted constraints on both human and machine behavior in terms of what that community of humans and machines can do relative to the protocol, thus a Decentralized State Machine is the ultimate substrate layer for creating new kinds of informal institutions, to underpin new kinds of social, political, and economic arrangements in humanity. (read: it becomes possible to create a whole new basis of order in society, polity, and economy relying on informal institutions and not so much on formal institutions, nor on the premise of violence on which formal institutions are enforced. This is because informal institutions DO NOT REQUIRE formal punishments, ie. there is no need for a police-state with fines, jailings, and electrocutions!)
The key insight here, as we move from Humanity 2.0 to Humanity 3.0 institutional arrangements, is that we are shifting the basis of “order” from formal institutions that were maintained by the nation-state with enforcement via violence and draconian limitations on personal freedoms, to informal institutions maintained by voluntary protocol societies with enforcement via loss of access.
A corollary insight: When we are in the realm of informal protocols, deviation from the protocol whether intentional or accidental, basically becomes synonymous with lack of access, or being fenced out, or in the language of institutional theory, ostracization or banishment from the protocol. In other words, if you don’t follow the protocol, you lose privilege of its benefits!
Please pause and think about this for a few moments: This link between Decentralized State Machines and Informal Institutions has wildly exciting potential for the organization of all of humanity! There may be a pathway that has opened up to our species, made available by harnessing this new Decentralized State Machine technology to create informal institutions, that allows us to replace the political and economic arrangements of the nation-state (which rely on formal institutions and enforcement by violence) with a new system that relies on informal institutions as a primary basis for societal order!
Here is the big idea: If we can build new kinds of informal institutions to replace — and re-factor and re-do even better –the formal institutions responsible over the last century for the delivery of public records, money markets, property rights, governance systems, professional credentialing bodies, scales of justice, other kinds of public goods, and so on and so forth, then we can build a new kind of Humanity 3.0 not premised on violence, and create a much better future for our species.
Another insight from economic historian Douglass North: history is path dependent. So, where you end up in any institution-building project is very much dependent on the philosophical underpinnings and where you start! So, if your entire system is premised on violence as a core starting-out assumption, probably that isn’t going to take you to very good places as a human species! I believe America now has a greater number of people locked up in cages out of any species in all of human civilization. I believe we can fix this now, with a system pinned on new starting assumptions.
Perhaps we can use Decentralized State Machines as a foundation for a parallel system built entirely on informal institutions, and slowly transition as a species away from the violence-underpinned system, and slowly create a new set of informal institutions to deliver governance systems, financial markets, and so on to support humanity running at scale, without needing for it to be ordered by the heavy cudgel of violence.
We know from institutional theory that informal institutions can be just as powerful and as useful for ordering human behavior as are formal institutions. In many respects, they are more persistent and enduring, as we have learned from the example of informal institutions in Russia outliving the implementation of both the communist and capitalist formal institutions.
The problem with them, is that it was difficult to enforce them at massive scale, due to the informal nature of enforcement. However, this has been solved now, with informal institutions enforced by networks of Decentralized State Machines.
In many respects, the birth of the nation-state was only possible with the advent of parchment paper, and the writing of rules, codes, and punishments with a quill pen down on the parchment paper, e.g. Hammurabi’s code, British common law, French Napoleonic law. The shared set of beliefs about crimes and requisite punishments recorded on ink on the parchment paper could be copied hundreds of times, could be replicated in libraries, and could became the basis of enforcing a consistent formal order. Thus, you can say that the quill pen and parchment paper were the technological precursors to formal rule of law systems as a basis of human order. Prior to the quill pen and parchment paper, the ordering of humanity was done through family clans and village councils mostly using informal institutions, i.e. if the village turned against you you were banished and needed to hunt and gather on your own as an excile.
Now, with the emergence of Decentralized State Machines as a new technology for implementing informal institutions, we could see a renaissance in ‘societal order building activities’ based entirely upon the informal institutional model, but in a much more sophisticated way.
The great thing about a network of Decentralize State Machines is that it is like a “clipboard army” of neutral, third-party observers to do “fact checking, certifying, auditing, and rule verifiying” for every event that is logged into a protocol. If it is a business protocol, then business rules can be enforced within a network (eg. see work being pursued at Chronicled). If it is a democracy protocol, then voting rules can be enforced within a network (eg. see everything happening within Polkadot, Cosmos, Decred, and Tezos).
For example, if the network encompasses a million people, and they all vote once during an important election, then the invisible clipboard army that is built-into that network is performing the function of a million third-party certifications that the votes were recorded correctly according to the rules. For example, rules might include that:
- every single eligible vote must be for one of the three candidates,
- the vote must be recorded during the proper window of time, and
- an account on the network must not vote more than one time.
Although simple, the costs of enforcing these three rules over a million people is non-trivial in a world of paper and pens, or, even in a world of desktops and central databases. Prior to decentralized consensus systems, the transaction costs of doing one million third-party verifications to certify adherence to the voting protocol was extremely cost-prohibitive. Now, it is virtually costless with dApps running on Decentralized State Machines and reliable enforcement of dApp accessible via network protocols.
In the Humanity 2.0 era, most of the important institutions that you and I and every other citizen of the nation-state encountered were formal institutions, passed by the Congress, and these formal institutions were the backbone of the entire American system. Indeed, when there was failure to comply with a formal institution, to make the American system work, it was necessary to institute jail or fines as punishment, backed by the monopoly on violence carried by the State. Of course, there were informal institutions scattered throughout the system, but somehow they were of secondary importance to the formal institutions in terms of the functioning of the system.
In the humanity 3.0 era, there will be much greater centrality placed on informal institutions, as network protocols can be used as a new substrate layer to boot-up money, run democratic processes to choose representation, deliver public goods, gain credentials, and access the scales of justice. Thus, informal institutions will emerge as the backbone of the new voluntary Libertarian system, and formal institutions will become a lot less central.
As this new order emerges, banishment from the networks — and loss of access to opportunities for creating wealth, gaining credentials, and developing reputation — will become the worst form of punishment that could be imagined within this new order.
Given that decentralized blockchain networks will increasingly become a source of important public goods and services that human beings depend upon for liberty, freedom, and happy livelihoods, human beings will generally become considerably more careful about not to be banished from these important networks, and in a sense banishment will become worse then doing jail time as we approach the 22nd century and this new social order built upon informal institutions fully unfolds.
Many economic historians have justified the violence present in the nation-state model, as something that is inevitable if you are going to create order in society, and thus they have accepted this premise of violence using an ‘ends justifies the means’ argument. However, one can only argue that the ends justifies the means if there is no better means available to achieving those same ends. As soon as the technology frontier evolves such that the formal institutional means built on violence can indeed be replaced with something better, then isn’t it a moral obligation as a human species to re-build better on the new foundations? If we can do successfully, the sustainability of humanity on planet earth and the citadels that we can climb to as a human species can be vastly improved, imho.
Humanity 3.0 