Cryptoeconomics

Nathan Schneider has recently released an article describing his perspectives on cryptoeconomics, and particularly on the limits of cryptoeconomic approaches to governance and what cryptoeconomics could be augmented with to improve its usefulness. This is, of course, a topic that is dear to me ([1] [2] [3] [4] [5]), so it is heartening to see someone else take the blockchain space seriously as an intellectual tradition and engage with the issues from a different and unique perspective.

Cryptoeconomics

The economics in cryptoeconomics raises a particular set of anxieties. Critics 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. Here is Brown:

But exit may not be as easy as it appears, whether it be from a social-media network or a protocol. The persistent dominance of early-to-market blockchains like Bitcoin and Ethereum suggests that cryptoeconomics similarly favors incumbency.

A napkin sketch of classical, never-quite-achieved liberal democracy (Brown, 2015) would depict a market (governed through economic incentives) enclosed in politics (governed through deliberation on the common good). Economics has its place, but the system is not economics all the way down; the rules that guide the market, and that enable it in the first place, are decided democratically, on the basis of citizens' civil rights rather than their economic power. By designing democracy into the base-layer of the system, it is possible to overcome the kinds of limitations that cryptoeconomics is vulnerable to, such as by counteracting plutocracy with mass participation and making visible the externalities that markets might otherwise fail to see.

The aborted Ethereum-based project Civil sought to leverage cryptoeconomics to protect journalism against censorship and degraded professional standards (Schneider, 2020). Part of the system was the Civil Council, a board of prominent journalists who served as a kind of supreme court for adjudicating the practices of the network's newsrooms. Token holders could earn rewards by successfully challenging a newsroom's practices; the success or failure of a challenge ultimately depended on the judgment of the Civil Council, designed to be free of economic incentives clouding its deliberations. In this way, a cryptoeconomic enforcement market served a non-economic social mission. This kind of design could enable cryptoeconomic networks to serve purposes not reducible to economic feedback loops.

I have argued that pairing cryptoeconomics with political systems can help overcome the limitations that bedevil cryptoeconomic governance alone. Introducing purpose-centric mechanisms and temporal modulation can compensate for the blind-spots of token economies. But I am not arguing against cryptoeconomics altogether. Nor am I arguing that these sorts of politics must occur in every app and protocol. Liberal democratic theory permits diverse forms of association and business within a democratic structure, and similarly politics may be necessary only at key leverage points in an ecosystem to overcome the limitations of cryptoeconomics alone.

Prediction markets avoid the plutocracy issues inherent in coin voting because they introduce individual accountability: users who acted in favor of what ultimately turns out to be a bad decision suffer more than users who acted against it. However, a prediction market requires some statistic that it is measuring, and measurement oracles cannot be made secure through cryptoeconomics alone: at the very least, community forking as a backstop against attacks is required. And if we want to avoid the messiness of frequent forks, some other explicit non-financialized mechanism at the center is a valuable alternative.

But the autonomy of cryptoeconomic systems from external regulation could make them even more vulnerable to runaway feedback loops, in which narrow incentives overpower the common good. The designers of these systems have shown an admirable capacity to devise cryptoeconomic mechanisms of many kinds. But for cryptoeconomics to achieve the institutional scope its advocates hope for, it needs to make space for less-economic forms of governance.

If cryptoeconomics needs a political layer, and is no longer self-sufficient, what good is cryptoeconomics? One answer might be that cryptoeconomics can be the basis for securing more democratic and values-centered governance, where incentives can reduce reliance on military or police power. Through mature designs that integrate with less-economic purposes, cryptoeconomics might transcend its initial limitations. Politics needs cryptoeconomics, too ... by integrating cryptoeconomics with democracy, both legacies seem poised to benefit.

However, an increasingly popular blockchain concept called institutional cryptoeconomics offers the same benefits of data protection and setting organizational boundaries, all while being more secure and private.

In this article, we will discuss the basics of institutional cryptoeconomics, along with the concept of ledgers and its eventual evolution. We will also touch base on the economic consequences of blockchain and the benefits that it holds for society as a whole.

Institutional cryptoeconomics involves the study of institutional outcomes of hard-to-predict cryptographically secure ledgers. It also understands the economy consists of rules, such as laws, property rights, languages, regulations, societal norms, and ideologies.

Economic principles and theories justifying the blockchain and alternative blockchain implementations are the primary focus of cryptoeconomics. Game theory and incentive design are major influencers here since they relate to blockchain mechanism design.

To put things into perspective, institutional cryptoeconomics looks at the institutional economics of the cryptoeconomy and blockchain. While the economy itself is a system to coordinate exchange, institutional cryptoeconomics prioritizes ledgers (which is essentially data structured by rules) over generalized rules. It also deals with the social, political, and economic institutions that were developed to service these ledgers, and the way blockchain changes ledger patterns throughout society.

This article seeks to gives some of our perspectives on the nature of cryptoeconomics, and what it can accomplish and what its limitations are. These thoughts are particularly prompted by a recent article by Nathan Schneider and a response blog post by Vitalik Buterin that give their thoughts on this question, both of which feature Kleros in their discussions.

To begin it, it's helpful to reflect on what are the defining features of cryptoeconomics. Brekke and Alsindi define cryptoeconomics as "an interdisciplinary, emergent and experimental field that draws on ideas and concepts from economics, game theory and related disciplines in the design of peer-to-peer cryptographic systems."

Schneider, when considering definitions of cryptoeconomics, cites Coindesk, according to which cryptoeconomics is "an area of applied cryptography that takes economic incentives and economic theory into account". Schneider goes on to write on this theme, in describing Bitcoin, "the math secures the economy, which in turn motivates people to use the math".

We feel this gets to the heart of what cryptoeconomics is: namely it is a form of economics where the set of actions that are available to actors is defined by cryptography. One can sign a message or not, publish a block or not, but one cannot forge a signature corresponding to a key one does not control (without breaking a cryptographic primitive, in this case a digital signature scheme).

We would tend to agree that there are powerful human motivations that are not well-captured by economics, and then particularly not by cryptoeconomics. While economic factors are important, they are only part of what have allowed our societies to build the robust institutions that we have off-chain.

This is an issue that is not unique to blockchain applications. One approach to address these issues, built from the tools of cryptoeconomics is the Kleros-backed Proof of Humanity system which, in addition to providing a Sybil resistant mechanism under which people are limited to a single profile, by providing a notion of "blockchain identity" could also eventually allow for people to interact with blockchains in a way that more closely resembles off-chain social interactions.

Already, this "judicial review mindset" is a different way of looking at an issue than one might in the perspective of a pure token governance vote. So the different branches of governance under this scheme can interact with a given governance proposal in very different ways, while all being built out of cryptoeconomics, as they interact with human psychology differently.

In fact, the idea of embedding cryptoeconomics as a tool within a broader, non-economic system is similar to a recent approach taken by a Mexican arbitrator, Mauricio Virues Carrera, who has pioneered an approach where arbitrable clauses in existing contracts specify a traditionally accredited arbitrator, but these clauses indicate that decisions will outsourced to Kleros.

We broadly agree with the conclusions of Schneider and Vitalik that cryptoeconomics has a lot to offer, particularly when combined with non-economic logic that takes it beyond purely "financialized" applications. Indeed, Kleros can be a valuable component in these hybrid settings.

Cryptoeconomics applies economic mechanisms in combination with cryptography, to create robust decentralized P2P protocols. Cryptoeconomics is therefore interdisciplinary and requires a deep understanding of cryptography as well as economics. Economic mechanisms introduced a protocol that enables a universal state layer, something computer-science alone, before the emergence of Bitcoin, did not accomplish. Bitcoin and derived public and permissionless blockchains are products of cryptoeconomics. Cryptographic tools in combination with economic incentives are used in a way to make the economic cost of wrongdoing disproportionate to the benefit of doing so. The mechanism is designed to make the network fault-tolerant, and attack and collusion resistant. This allows entities who do not know one another to reliably reach consensus about the state of the Bitcoin blockchain. 041b061a72