Rethinking Cryptoeconomics - Part 1: A Post-Capitalist Critique
Proposing a departure from prevailing cryptoeconomic theories that govern blockchain ecosystems, this series aims to establish a novel framework for decentralized consensus protocols
1. Market Incentives and Adverse Effects
Cryptoeconomics is the use of game theory, cryptographic proofs and computer science to guarantee future economic outcomes. Most of the top protocols in the blockchain ecosystem, such as Bitcoin, Ethereum and others, apply cryptoeconomics, for example in describing the fault tolerance of a protocol through the “Byzantine Generals Problem”, which is a coordination game problem, but also when incentivising the systems, such as proof-of-work mining rewards, proof-of-stake validator rewards, and making it very costly to perform attacks against the networks, eg 51% attacks.
The problem with cryptoeconomics today is that it has been used to theorize protocol development and user experiences in ways that assume that people are profit maximizing individualists and that, by seeking their own self-interest, this behavior is rational. For example, an individual stakes 32 ETH to become a validator, and there are validator rewards -- which is why anyone would become a validator -- and they are expected to behave accordingly (eg not maliciously) otherwise they face penalties and their ETH is slashed.
In this cryptoeconomics, self-interest is the invisible hand that makes everyone behave according to the rules of the game, but there are adverse effects. For example, when trading crypto pairs it is natural to buy cheap and sell dear for as low as personal risk as possible. This helps enable perverse market incentives where opportunities for arbitrage and frontrunning generate externalities and occur at the expense of the rest of network and community wellbeing. For example, the Flashbots team revealed that 'maximal extracted value'(MEV) accounted for ~900 million USD in 2021 through exploiting MEV frontrunning, arbitrage and other strategies.
2. Token Economics and Profit-Driven Abstraction
Another example is “Token economics”, which is a form of cryptoeconomics which abstracts away protocol considerations, is driven by the desire to tokenize everything. Distributed ledger technologies and decentralized consensus protocols are too important for people and planet to leave to the interests of self-interest and profit-maximization. A intervention is needed to promote an alternative so that protocols and applications can be built which promote better values.
3. Capitalist Framework and Bias in Development
That the assumptions underlying today's cryptoeconomics have biased the evolution of distributed ledger technology and decentralized consensus protocols towards self-interest and profit-maximization is no surprise. This is consistent in a society based on capitalism and markets where buyers and sellers fleece one another to gain wealth and power while the vast majority struggle to survive.
The profit maximizing individualist, today's proponent of cryptoeconomics, might roll their eyes before countering that the individual's struggle for personal wealth has reduced poverty overall and so profit maximization has done more good than harm. This is a basic liberal view consistent with social contract theory.
For example, John Rawls' theory of justice envisioned a just outcome being one that raised the position of those least well off in society to one that is better. He did so through a “veil of ignorance” thought experiment where an individual is asked to imagine the principles they would use to guide a basic structure of society, without knowing ahead of time what position they would hold in that society. The choice is made behind a “veil of ignorance” which prevents them from knowing their own race, class, gender, ability or decision-making status and also without knowing anyone else's.
The idea is for an individual to imagine guiding principles for a just society. But this is not enough. That's because in Rawls' formulation you can both improve the position of those least well off in society and -- at the same time -- increase the gap between the rich and poor, the powerful and the powerless, etc. and that is why self-seeking profit maximization is a poor argument for making societies more equal.
![Click the image to follow an interesting exchange between Vitalik Buterin and Jason Hickel debating the optimistic view that capitalism raises hundreds of thousands of people out of extreme poverty weekly. Click the image to follow an interesting exchange between Vitalik Buterin and Jason Hickel debating the optimistic view that capitalism raises hundreds of thousands of people out of extreme poverty weekly.](https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F66118609-3e5e-4e29-bed2-aa2c9c937a81_602x772.png)
4. Toward a Post-Capitalist Cryptoeconomics
The goal of a new post-capitalist cryptoeconomics is to increase the wellbeing of those less well off and minimize the gap between rich and poor, the powerful and powerless, incentivised overall to drive society towards solidarity, classless, self-managing, directly-democratic and diverse outcomes.
The post-capitalist cryptoeconomics spelled out in this series does not believe you can use game theory to program people or their behavior. That's because this theory abandons the outdated assumption that people are “homo economicus”, the profit-maximizing individualist that haunts the crypto scene today. Instead, this effort aims to apply game theory, cryptography and computer science to promote different values, however gently and non-deterministically, with an understanding that we cannot force people to behave the way we may want to.
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