After a few more days of deep thinking, and also feedback from partners at Perkins Coie, @Gadkian, and @thomasdylanan2 on Twitter, I have a new level of understanding to share in my quest to fully unriddle the secrets of our new platypus — i.e. not mammal & not bird, but a unique hybrid form of “social constraint” that sits as it’s own family & genus within the classification of the species — that is the blockchain protocol institution.
Blockchain protocol institutions (BPIs):
- Formality of Specification: the BPI is similar to an old world Formal Institution in the sense that it is formally enshrined (in our case in computer code as opposed to parchment paper).
- Enforcement Mechanism: the BPI is similar to an old world Informal Institution in the sense that it uses the same enforcement mechanism (shunning from participating in the group), which was the dominant system of ordering human behavior prior to sovereigns / nation states, ie, people who don’t follow the convention were shunned, exiled, or banished from the village or tribe.
- Enforcement Efficacy: the enforcement of the BPI is much more effective then the enforcement of either old world Formal Institutions or Informal Institutions; actually enforcement of the BPI is 100% effective as it shifts the paradigm from reactive enforcement to pro-active enforcement, which works with the precision of a Swiss watch 100% of time at very low marginal cost, even for millions or billions of people involved in a protocol group.
- Enforcement Cost: the enforcement cost involved in enforcing the BPI is much lower then the cost of enforcing Formal Institutions in the old world (which involved police, courts, jails and a lot of lawyers); it is more similar to the low cost enforcement of old world Informal Institutions; since the cost of running a network of computer validators has an upfront set-up component, there is also a phenomenon of marginal costs of running a BPI falling per transaction as the group scales, infra becomes commoditized, and competitions b/w validators ensures long-run efficiencies.
Across the dimensions of analysis how does our ‘BPI platypus’ stack up?
Our BPI has superior specification, as computer code is more precise then natural English, and thus it is even more formal/precise in terms of specification than an old world Formal Institution written on parchment with a quill pen or published in a book.
Our BPI uses the softer enforcement mechanism of proactively auto-excluding people from the group practicing the institution if they don’t follow each and every rule and sub-rule exactly. This feature can be incredibly effective around eliminating white collar crime connected to transaction sector of the economy, for example, financial institutions, lending, pensions, insurance, taxation, public goods, and social contracts of all kinds; a great deal of the white collar crime can be cleaned up if we harness this tech to create new open-access public goods and social coordination economy.
Our BPI has 100% enforcement efficacy as it restricts behavior within the protocol unless the behavior follows the rules. It catches bad behavior at the gate, so to speak, and doesn’t allow it to happen. In contrast old-world formal and informal institutions which are reactive in nature come nowhere close to 100% efficacy. As a swag, they are likely in realm of 1/20th enforcement efficacy for white collar crime, 1/5 enforcement efficacy for vandalism, and 1/2 enforcement efficacy for murder (and these are US stats; Nigeria, is far worse). The reactive enforcement of old world institutions is basically like Swiss cheese with hit and miss outcomes, and hence the need for police, detectives, long discovery sessions in law suits, and enormous amounts of lawyering in determining “what happened?” and “who did wrong?” and it’s all such a mess.
Since a BPI uses the enforcement mechanism of an old world Informal Institution (ie ostracization, shunning, exclusion of a member from the group), but in a proactive as opposed to reactive way, and doesn’t rely on the violence necessary to enforce old world Formal Institutions, our BPI is highly efficient, and marginal costs of enforcing at scale of millions or billions of people is nearly negligible.
Summary:
* Our BPI is vastly superior to an old world Informal Institution, it is more precisely specified/codified, it can scale up to millions or billions of people, and even at such a ridiculously huge scale it can still achieve 100% enforcement rate. Without relying on violence at all.
* Our BPI is vastly superior to an old world Formal Institution, as the cost of enforcement is dramatically lower (ie, doesn’t require system of courts, police, jails, and lawyering), the enforcement is proactive rather than reactive preventing bad behavior happening at all, and it is morally superior in its mechanism of enforcement because it doesn’t rely on violence, and, also, it can achieve a vastly higher enforcement rate, 100%, which puts even the best system of police, judges, and jails to shame!
I believe that this descriptive work to define “the micro-foundations of Blockchain protocol institutions” and to compare and contrast with old world institutions, which were the dominant systems of ordering human behavior within corporates and nations states over the past 200 years, is necessary if we want to explain to the older generation who still run the world why BPIs are superior to any other institution building tool in human history.
While what I presented above may seem obvious, even as a person who did a doctorate with Douglass North and W.Richard Scott, and who took classes with Masahiko Aoki, Avner Greif, Jim March, and Woodie Powell (a community of social scientists at Stanford who have published a majority of the foundational work on institutions, institutional theory, and economic systems over the past 25 years), it actually took me 9 years to fully arrive at these insights. I always had a sense that blockchain was very special, but I was never quite able to explain “why?”. What makes it so hard to comprehend, is the double change: both proactively enforcing rules with validators (thereby totally preventing bad behavior), and also harkening back to the old world “exclusion from the protocol” model of enforcing rules (which is not a model we really focus on in the West anymore). This blog post is my attempt to finally explain in a way that any mainstream Nobel prize winning social scientist or US Senator or Congressperson can understand from the micro-foundations why this technology is so special and promising, in terms of profound future benefit that can be harnessed in building political-economies.
Humanity 3.0 