Taylor Pearson

@ctaylormpearson

Social Scalability: The Most Important Idea In Cryptocurrency?

It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them.” — Alfred North Whitehead

70,000 years ago, there were between 6–10 species of the genus Homo. Now, of course, there is just one: Homo sapiens. Why did Homo sapiens prevail over the other species like Homo neanderthalensis?

Neanderthals were by all accounts much physically stronger than humans.

The crucial difference was Homo sapiens’ ability to form groups and coordinate activities. A coordinated group of Homo sapiens could outcompete a stronger individual either directly through fighting, or indirectly through taking control of scarce resources.

Homo sapiens prevailed because of their ability to coordinate, which created what researcher Nick Szabo calls social scalability: a component of Homo sapiens’ evolution that allowed them to “extend the number of important operations which they can perform without thinking about them.”

Increased neocortical size led to an ability to coordinate between increasingly large groups. The brain of Homo sapiens has proven able to invent other, external structures which further social scalability.

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What is Social Scalability and Why Does it Matter?

A wide variety of innovations reduce our vulnerability to other participants, intermediaries and outsiders.

Each of these innovations lowers our need to spend scarce cognitive capacity worrying about how an increasingly large and diverse group of people might behave.

Language is probably the technology which most increases social scalability by allowing humans to communicate, but humans have evolved many other technologies to increase social scalability since then.

Culture, be it within a company or nation-state, increases social scalability by allowing individuals to better predict the behavior of others in that culture.

Double entry bookkeeping was another technology that enlarged our ability to coordinate by letting us trust others. Prior to double entry book keeping, only a single copy of each transaction was kept by a central party which made it easy for the record of debts to be lost, erased or modified. Double entry bookkeeping reduces your reliance on trusting your counterparty in a trade by keeping your own copy of the transaction that can’t be altered.

Together, all these innovations facilitate the economic miracle that has taken place over the last few hundred years.

The essential component of all of them is trust minimization. The modern legal system dramatically increased social scalability because it meant anyone could enter into a contract with anyone else and always have recourse to the courts rather than having to develop a personal relationship with them.

You don’t need to worry about your morning juice being poisoned or rancid when you buy it from a store because of a host of technical and social innovations which strongly incentivize the vendor to provide safe products.

One of the greatest improvements in social scalability in recent memory is the improvement in matchmaking through online rating systems:

  • Amazon matches consumers and manufacturers
  • Online dating sites match people who would otherwise not have met but are more compatible
  • Lyft and Uber match drivers and riders
  • AirBnB matches travelers and homeowners with spare rooms

The rating systems of these platforms reduce the trust needed in each transaction. I do not need to a background check before I get in a Lyft or Uber because I can see that hundreds of other riders have rated the driver as safe and reliable.

Blockchains have the potential to minimize trust and increase social scalability through the widespread application of money and markets.

Historically, the combination of money and markets reduced transaction costs through:

  • Matchmaking (bringing together buyers and sellers),
  • Trust reduction (trusting in the self-interest rather than in the altruism of strangers)
  • Scalable performance (via money, a widely acceptable and reusable medium for counter-performance)
  • Quality information flow (market prices).

Adam Smith offered this explanation of how markets facilitated incredible social scalability:

“The woolen coat, for example, which covers the day laborer, as coarse and rough as it may appear, is the produce of the joint labor of a great multitude of workmen.
The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production.
How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country!
How much commerce and navigation in particular, how many shipbuilders, sailors, sail makers, rope makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world!”

Using markets, people were able to benefit from other’s labor without necessarily needing to trust them. The buyer of the wool coat doesn’t need to personally know and trust the sail maker who made the sails on the ship that brought the dye from India back to Britain.

Rather than relying solely on bonds of kinship, markets create a way for a large network of mutually oblivious people to act in our interest:

“In civilized society man stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons … It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own interest.”

This was before the successive waves of the Industrial Revolution that refined, elaborated and extended the division of labor and reach of markets many times more.

Today, the supply chain and different actors involved in the coat in your closet is staggeringly larger than the one Adam Smith chronicled in the 18th century.

Money facilitates social scalability by solving the coincidence of wants problem. If you make shoes and I make bread, but you want bread and I don’t want shoes, we use money as a medium of exchange, store of value and unit of account to facilitate that transaction.

In this way, money makes possible more exchanges of a greater variety of a goods and services with a much larger group of people, an increase in social scalability.

The first money used by humans were collectibles like seashells and stones. Precious metals then took over as money and then paper. Today, most money is electronic. Programs and protocols running on our computers and servers around the world facilitate most transactions by dollar value

This has greatly improved matchmaking and information flow, but has come at the cost of vulnerability.

Traditional computer security is not very socially scalable because it relies on a trusted third party to monitor your data. With the current internet architecture, we are fully trusting the person on the other end as well as the insiders and hackers that might gain access.

But, for most of these institutions, your security is not their top priority as the flurry of recent data breaches from Equifax to Cambridge Analytica has shown.

To increase social scalability, we need to scale markets around the world. To scale markets around the world, we need scalable money. In the 21st century, scalable money requires scalable computer security.

If you’re looking for more about blockchain and cryptocurrency for business, click here to access my personal resource lists of where I’ve found the best and most reliable information.

What Gives Bitcoin Value?

In 2009, an individual or group using the name “Satoshi Nakamoto” created the most socially scalable money in history. Instead of fully relying on a single trusted intermediary, bitcoin relies on a decentralized group of intermediaries.

When we can secure a financial network by computer science rather than by accountants, regulators, police and lawyers, we go from a system that is manual, local, and less secure to one that is automated, global, and more secure.

When done properly, cryptocurrencies can substitute an army of computers for an army of financial intermediaries.

Because it is independent from existing institutions for its core operations and can operate seamlessly across traditional borders (institutional and national), cryptocurrency provides high levels of security and reliability without requiring human intervention.

In order to achieve the increased level of social scalability via globalization over the past century, we had to scale human institutions. To do so in a reliable and secure manner required an increasing number of accountants, lawyers, regulators, and police.

The transaction sector of the American Economy (accountants, lawyers, regulators, and police) in 1870 was 24% of Gross National Product (GNP). By 1970, it represented 46% of GNP.

We needed more and more human cognitive capacity to monitor these transactions. Humans today have no better ability to scale up their cognitive capacity beyond what it was in 1950, but computers are many orders of magnitude more powerful.

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However, in computer science there are fundamental tradeoffs between security and performance. The security required to make cryptocurrency socially scalable comes at a high price: its resource usage, primarily the electricity used in mining.

This security is necessary for anything to be money. Money should be very hard for any participant or intermediary to forge. Gold has value in part because it is very difficult to mine, and there is a limited amount of it so there’s no way to rapidly make more of it.

The benefit of cryptocurrency security is that a transaction which would have required an army of intermediaries in the past, say sending money from Bangkok to Malawi, can now be done between any two parties with an internet connection.

Cryptocurrency sacrifices computational scalability in order to improve social scalability. The computational inefficiency (electricity usage and huge amounts of processing power used) enables its social scalability (the ability for two pseudonymous parties to transact across institutional and national borders).

It’s impossible to calculate the value of this increase in social scalability, but seems reasonable to put it on the same order of magnitude as the matchmaking facilitated by the internet.

As the cost of computing power and renewable electricity sources continues to come down while human cognitive capacity remains static, this tradeoff is increasingly beneficial.

This is not to say that adapting our institutions to this new paradigm will be easy, or that we are heading to some sort of Utopia. But, cryptocurrency opens up the possibility to expand on what makes humans unique and has brought the gains we’ve seen over the last few centuries — social scalability.

Acknowledgements: This article is mostly just a summary of Nick Szabo’s essay: Money, blockchains, and social scalability because I wanted something shorter to send people to explain the idea. The essay is very much worth reading in full. All errors and omissions are mine.

Taylor Pearson is the author of The End of Jobs and writes about entrepreneurship, history, complexity and blockchain technologies at TaylorPearson.me. Sign up to receive his popular newsletter.

If you’re looking for more about blockchain and cryptocurrency for business, click here to access my personal resource lists of where I’ve found the best and most reliable information.

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