tl;dr: Cryptoeconomics may not be a panacea. An academic paper explains why.

In Cryptoeconomics as a Limitation on Governance, Dr. Nathan Schneider of the University of Colorado, Boulder, offers his opinions as to why “crypto” will not solve the many shortcomings of democracy as we know it.

I knew I would be biased against this coming in since, well, I think cryptoeconomics is one of the coolest thing I have ever encountered in mylife, but I recognized I owed it to myself to come to it with an open mind.

Crypto Governance is Still Immature

At times, however, I found Dr. Schneider’s paper to be overly critical of the potential of a nascent technology. Like a fan who wants the quarterback removed after a bad first quarter (sorry for the US-centric analogy there), and doesn’t want to give him a chance to get settled for the rest of the game.

As we discussed yesterday, crypto is nowhere close to adolescence so to say “it’s limited” right now when the number of experiments is still relatively small seems a bit harsh.

He kept referring (or quoting) sources that minimized the potential for crypto by essentially saying “not everything is an economic situation” and we are not homo oeconomicus. While that is true, I found the dichotomy to be simplistic. As he writes:

“Political institutions are domains for homo sapiens before homo economicus. Even if politics cannot—and arguably should not—fully depart from economic life, what distinguishes politics is its capacity to notice and address less-economic considerations.”

Having participated in a number of DAOs and DAO related conversations (the primary entity that Dr. Schneider analyzes), I am not sure I can accept the statement that “everything is economic.” Well, actually I can, if you extend economics beyond finance and think about “value maximization” across multiple domains, not just financial, which is pretty much what we do today anyway.

And, even if you take the more narrow definition of economics to only mean finance, I still think that he over-simplifies and over-glorifies our existing system.

For example:

“Vote-buying, a practice usually considered anathema in legacy political systems, has risen to an art in crpytoeconomic design (Automata Finance, 2021; Buterin et al., 2018), suggestinga culture in which economics is a preferable replacement for politics”

Really? Vote-buying is anathema?

Then, how come we see reports every day of how much money this lobby gave or that politician received? Isn’t that “vote-buying” of another sort?

Cryptoeconomics is a “Infinite Game”

And, at times, though he is obviously very familiar with a lot of how “crypto/Web3” works, I found his interpretation to be rather near-sighted.

For example, in discussing a dispute resolution system:

“the subjectivity of a cryptoeconomic juror on Kleros seeking to earn a fee is surely different from that of jurors deliberating in a legal courtroom, repeatedly reminded of their civic duty.”

While that is true, I feel like he isn’t thinking about the “long game.”

For example, Nexus Mutual encounters this challenge every time an insurance claim is made. By declining/rejecting the claim, all of the members of the mutual save money…in the short-term.

However, if we reject the claim and the larger population thinks we made a mistake or cheated the claimant out of their insurance, it’s going to hurt ALL of us down the road, since no one will buy coverage in the future.

That’s cryptoeconomics at work.

Yes, There are Limits

All of this isn’t to say that he doesn’t make some really good points, primarily about wealth concentration within these networks (a legit concern) and the fact that not everything should be financial.

The classic example of that is the “Assassination Market.”

The crypto ethos is that “anyone should be able to create any market they want at any time.”

So, if you want to create a market that says “When will Donald Trump get assassinated?”, there is a point at which the value of getting the date right becomes an incentive for a person to actually go out and commit the assassination.

Ok, maybe Trump is a bad example, but you get the idea.

Schneider’s argument is that a more-than-purely homo oeconomicus view would draw the line and say “sorry, we can’t allow that market to get created.”

Then, you are back to slippery slope land.

I also need to give him credit for his humility, recognizing that there are things he doesn’t know and there are plenty of things which are TBD.

What he does realize is that, regardless of the various ways that cryptoeconomic systems of governance are implemented, they are going to be a fundamental game-changer.

My favorite quote on that line was:

“Traditional preconditions of trust such as personal familiarity (Luhmann, 2000) andcredentialed expertise (Giddens, 1991) fall into obsolescence under the cryptoeconomic gale.”

I had 15 post-it notes and a bunch of underlines on this paper and I give credit to Dr. Schneider for tackling the subject so early.

We do agree that cryptoeconomics is going to matter and its arrival is going to fundamentally change the way that people, communities, societies, and nations (eventually) govern themselves. Since these aren’t, ultimately, about bits flying around the Internet, but rather around the lives we all experience, it’s important to raise these topics so that:

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.

He called it “enforceable mission orientation” (which I thought was a great term).

At the end of the day, Schneider recognizes that

Distributed ledgers can be a design space for democratic practice that governments  may be unable to explore on their own, due to gridlock or path dependency. It is  probably not sufficient or desireable to merely outsource politics to governments

But still, we must tread carefully.

If you care about this type of thing, take a look at the full paper.