Policy Proposals for Crypto Protocols to Make Them Less Dystopic and More Inclusiveby@ntnsndr
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1,481 reads

Policy Proposals for Crypto Protocols to Make Them Less Dystopic and More Inclusive

by Nathan SchneiderJanuary 7th, 2022
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If this technology is to mature into something truly useful and liberating, we will need to learn how to incorporate designs that present not merely a deceptive neutrality but positive commitments to the common good.
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The debates are intensifying about whether blockchain and cryptocurrencies and Web3—pick your favorite jargon—are salvific or demonic.

Having reported on and ridiculed this stuff for a good while, I find myself less enthralled than many of my friends with the question of whether crypto should exist. It does, and it is spreading.

To me the far more important question is how we use it, limit it, and encourage its better angels to flourish.

What are those better angels? Crypto is a tool for designing institutions. At a time when 18th-century republicanism is stalling out, this tool opens the door for new kinds of participation and accountability, a democracy native to the Internet. If you know where to look, there is tons of creativity and experimentation in governance happening, from small groups to massive protocols.

There are new ways for creators to make a living creating open-access works that all humanity can share, and distributing the benefits across communities. Crypto could enable coordination toward what the labor and cooperative movements have struggled to achieve: putting ownership of value into the hands of those who created it.

Smart contracts could incentivize the ubiquitous rooftop solar and mesh network paradise that governments keep failing to create. All this reaches across antique borders, enabling a bottom-up layer of global governance that can challenge the power of corporations and military-backed states with self-organizing, self-financing communities.

I am, however, under no illusions that this is inevitable. Much of crypto today is of the more dystopian sort. Automated factories of machines churning otherwise useless math help burn the planet beyond habitability. Super-rich “whales” wield outsized wealth and power that wildly exceed the already-bad Gini coefficients of non-crypto inequality.

At a time when a bloated financial sector already controls too much of our lives, the vast bulk of creative energy in crypto has gone to building dubious financial products in the almost total absence of non-financial use-value—an engorged Wall Street with no Main Street.

Wherever any potential for use-value arises, tokens get gobbled up by a deluge of cash from the same venture capital firms that built and ruined the Web 2.0 that Web3 is supposed to replace.

Smart contracts threaten to push the crudest kind of capitalism into every aspect of our lives, enforced by roving bands of bounty-funded mercenaries and killer drones.

Before handing the present mess over to its darker impulses, however, I want to take a moment to imagine what all this could look like, and how it might mature into institutions actually worth having.

To do this, I will turn to policy. But don’t worry, libertarian frenemies, I don’t mean government regulation! I am interested in the moment in what policy might look like within crypto protocols themselves. If code is law, as Lawrence Lessig famously put it, what kinds of law should be written into crypto code?

It’s not like this is a totally new question. It’s just that the code-law ‘written in crypto’ so far is focused on getting the basics to work: security, scalability, catching up to even a small fraction of Visa’s transaction-processing power. Thou shalt not double-spend! But pretend those problems are mostly solved for a moment, and the tech basically works, and we can ask more interesting questions.

An example of the benefits that policy can bring comes from—sorry—government regulation. In recent years crypto projects have been dragged, despite themselves, into spreading out tokens and power because of the Securities and Exchange Commission’s doctrine of needing to be “sufficiently decentralized” to avoid a hefty compliance burden. A small rule, or even a hint of a rule, can go a long way.

Beyond government, regulation can find a lot of points of intervention in crypto. The big “layer 1” protocols like Ethereum and Solana, or the layers on top of them, could offer enlightened policies as part of their value proposition for users.

Cross-chain protocols could serve as trade agreements or treaties, enforcing compliance with certain values in exchange for the benefits of participation.

Utility software that DAOs and products rely on could build policies into their design. Even the open-source licenses for code could carry ethical provisions on their use, as Ethical Source advocates envision. Being part of a good policy ecosystem can help protect products and communities from unintentionally harming their own participants or the wider world.

With all that in mind, what kind of policies might a crypto-verse want to include?

Here are some ideas—half-baked notions that I hope will start, not end, the conversation:

Sufficient decentralization. Borrow a line from the SEC, and throw in some Bernie. If a token reaches a Gini coefficient of x, carry out automatic redistribution from offending addresses to all active holders. Use AI and tokenized courts to sniff out Sybil attacks, where single holders spread out across multiple accounts.

If power consolidates too much in a DAO, the protocol halts its contracts. To back up all the talk in crypto about decentralization, the policy can make sure it is actually happening with a self-enforcing antitrust authority.

Transparent governance. A lot of what corporate regulation demands in the old world is disclosure. Blockchains potentially make that easier, as long as governance processes occur in clear, auditable ways. But in many cases, even with on-chain voting, governance can be a black box to outsiders.

Protocols might require that contracts they host employ standardized governance primitives—both to enable outside validation of project claims and to enable participants to better understand how they can get involved. Contracts that don’t meet certain requirements of transparency could fail to run.

Uniform building blocks can also help ease the process of creating innovative communities; this is why the Metagovernance Project, of which I am part, is leading a process for establishing cross-platform DAO governance standards.

Labor over Capital. Increasingly, ordinary users in crypto are finding themselves drowned out by the power of large investors. A protocol focused on creators might provide for tokens that distinguish between investors and direct participants. For instance, investor tokens might enable financial returns but not control, reserving control for the most direct value creators.

In this way, crypto could advance the old cooperative vision of labor renting capital, rather than the other way around. Tools like SourceCred already enable contribution tracking in ways that could support such a policy, coupled with identity verification tools like Proof of Humanity.

Taxation for public goods. Protocol designers are increasingly recognizing the perils of failing to fund the stuff no business wants to pay for.

When I once shared a cab with Ethereum founder Vitalik Buterin and asked what was on his mind, he said, tersely, “Public goods provision.”

Building a form of taxation into protocols has become increasingly common, from Zcash’s built-in Development Fund to Optimism’s investment in retroactive public goods. The need is so great that projects like Gitcoin have thrived by supporting voluntary grants for crypto infrastructure.

Protocol taxes could also disincentivize hoarding (as with a Harberger tax) or provide shared benefits (such as insurance pools, medical coverage, and education). Governance of these resource pools should counteract plutocracy with voting systems like conviction and quadratic voting, together with delegation.

Eliminating carbon emissions. Among the most profound failures of both mainstream capital markets and leading crypto protocols is their blindness to the real cost of carbon emissions to life on Earth. Some projects, like Celo, have sought to achieve carbon neutrality through buying offsets with their treasuries.

This idea could be taken further by creating an enforcement market that punishes network nodes using carbon-emitting energy sources. The purchase and hoarding of carbon credits could be part of the consensus mechanism. Rather than treating climate as a matter of voluntary charity, it can be inscribed into the basic economic logic.

Reparations. This is a hard one, but it matters immensely. From the eyeball-scanning Worldcoin to Proof of Humanity, a number of crypto projects have a built-in universal basic income, distributing tokens equally to all users. But should such distributions be more intentionally targeted?

Decentralized networks, over and over, end up reinforcing inequalities of the outside world, because people with existing power are best positioned with the knowledge, social capital, and money to benefit from new networks.

Crypto is no exception. Perhaps crypto protocols could intentionally counteract underlying inequality with requirements that token distributions only occur if they include, or exclusively go to, communities typically excluded from the power that comes with ownership and governance. We know that excessive inequality has poisonous effects on societies of all kinds. Shouldn’t network designers seek to counteract it from the start?

Human rights fail-safes. The dangers of using crypto to aid in violence, ransomware against critical infrastructure, labor abuses, hate groups, and other forms of dehumanization are real. While many crypto advocates celebrate the idea of “censorship resistance,” the same technology can also be designed to stop harmful activities more effectively than current systems.

Protocols can reverse transactions provably tied to abuses, preventing even powerful entities from carrying them out—something human rights law largely fails to do today. Once again, such a system will require governance that can reflect evolving norms, while also being resistant to being captured by entities seeking to cause harm.

I propose these rough notes as a provocation, in the hopes of expanding the range of discussion about how crypto protocols might be designed.

These ideas build on my more extensive research on the limits of crypto economics.

You may notice that I depart from the values that have often prevailed in crypto communities so far—values that seem to cherish the sovereignty of money over people, that treat social outcomes as an externality to the search for elegant systems or profitable investments.

Rather than taking the gold bug utterances of Satoshi Nakamoto as holy writ, I prefer to repurpose the technology he and others developed toward goals like those espoused in the DWeb Principles.

If this technology is to mature into something truly useful and liberating, we will need to learn how to incorporate designs that present not merely deceptive neutrality but positive commitments to the common good.