Money, blockchains, and social scalability

Introduction

Blockchains are all the rage. The oldest and biggest blockchain of them all is Bitcoin , which over its eight-year history so far starshipped in value from 10,000 bitcoins per pizza (before there were exchanges that priced bitcoin in traditional currencies) to over $1,000 per bitcoin. As of this writing Bitcoin has a market capitalization of over $16 billion. Running non-stop for eight years, with almost no financial loss on the chain itself, it is now in important ways the most reliable and secure financial network in the world.





The secret to Bitcoin’s success is certainly not its computational efficiency or its scalability in the consumption of resources. Specialized Bitcoin hardware is designed by highly paid experts to perform only one particular function – to repetitively solve a very specific and intentionally very expensive kind of computational puzzle. That puzzle is called a proof-of-work, because the sole output of the computation is just a proof that the computer did a costly computation. Bitcoin’s puzzle-solving hardware probably consumes in total over 500 megawatts of electricity. And that is not the only feature of Bitcoin that strikes an engineer or businessman who is focused on minimizing resource costs as highly quixotic. Rather than reduce its protocol messages to be as few as possible, each Bitcoin-running computer sprays the Internet with a redundantly large number of “inventory vector” packets to make very sure that all messages get accurately through to as many other Bitcoin computers as possible. As a result, the Bitcoin blockchain cannot process as many transactions per second as a traditional payment network such as PayPal or Visa. Bitcoin offends the sensibilities of resource-conscious and performance-measure-maximizing engineers and businessmen alike.





Instead, the secret to Bitcoin’s success is that its prolific resource consumption and poor computational scalability is buying something even more valuable: social scalability. Social scalability is the ability of an institution –- a relationship or shared endeavor, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors -- to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate. Social scalability is about the ways and extents to which participants can think about and respond to institutions and fellow participants as the variety and numbers of participants in those institutions or relationships grow. It's about human limitations, not about technological limitations or physical resource constraints. There are separate engineering disciplines, such as computer science, for assessing the physical limitations of a technology itself, including the resource capacities needed for a technology to handle a greater number of users or a greater rate of use. Those engineering scalability disciplines are not, except by way of contrast with social scalability, the subject of this essay.



Even though social scalability is about the cognitive limitations and behavior tendencies of minds, not about the physical resource limitations of machines, it makes eminent sense, and indeed is often crucial, to think and talk about the social scalability of a technology that facilitates an institution. The social scalability of an institutional technology depends on how that technology constrains or motivates participation in that institution, including protection of participants and the institution itself from harmful participation or attack. One way to estimate the social scalability of an institutional technology is by the number of people who can beneficially participate in the institution. Another way to estimate social scalability is by the extra benefits and harms an institution bestows or imposes on participants, before, for cognitive or behavioral reasons, the expected costs and other harms of participating in an institution grow faster than its benefits. The cultural and jurisdictional diversity of people who can beneficially participate in an institution is also often important, especially in the global Internet context. The more an institution depends on local laws, customs, or language, the less socially scalable it is.





Without institutional and technological innovations of the past, participation in shared human endeavors would usually be limited to at most about 150 people – the famous “Dunbar number”. In the Internet era, new innovations continue to scale our social capabilities. In this article I will discuss how blockchains, and in particular public blockchains that implement cryptocurrencies, increase social scalability, even at a dreadful reduction in computational efficiency and scalability.

Cognitive capacity – here in the form of the relative size of a species’ neocortex – set limits on how large primate groups can be. Maintaining animal or intimate human groups requires extensive emotional communications and investments in relationships, such as grooming in primates and gossiping, humor, story-telling, and other conversations, songs, and play in traditional human groups. Overcoming human cognitive limits to who or how many people can participate in an institution – the famous “Dunbar number” of around 150 people -- requires institutional and technological innovation. (Source)

Alfred North Whitehead said, "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." Friedrich Hayek added: “We make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess. We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up.” Innovations in social scalability involve institutional and technological improvements that move function from mind to paper or mind to machine, lowering cognitive costs while increasing the value of information flowing between minds, reducing vulnerability, and/or searching for and discovering new and mutually beneficial participants.





A wide variety of innovations reduce our vulnerability to fellow participants, intermediaries, and outsiders, and thereby lower our need to spend our scarce cognitive capacities worrying about how an increasingly large number of increasingly diverse people might behave. Another class of improvements motivates the accurate collection and transmission of valuable information between an increasing number and variety of participants. Yet other advances enable a wider number or variety of mutually beneficial participants can discover each other. All these kinds of innovations have over the course of human prehistory and history improved social scalability, sometimes dramatically so, making our modern civilization with its vast global population feasible. Modern information technology (IT), especially by making use of the historically recent discoveries of computer science, can often discover many more mutually beneficial matches, can improve motivations for information quality, and can reduce the need for trust within certain kinds of institutional transactions, with respect to an increasingly large number and variety of people, thereby further increasing social scalability in some very important ways.





Information flows between minds – what I have called intersubjective protocols – include spoken and written words, custom (tradition), the contents of law (its rules, customs, and case precedents), a variety of other symbols (e.g. “star” ratings common in online reputation systems), and market prices, among many others.





Trust minimization is reducing the vulnerability of participants to each other’s and to outsiders’ and intermediaries’ potential for harmful behavior. Most institutions which have undergone a lengthy cultural evolution, such as law (which lowers vulnerability to violence, theft, and fraud), as well as technologies of security, reduce, on balance, and in more ways than the reverse, our vulnerabilities to, and thus our needs to trust, our fellow humans, compared with our vulnerabilities before these institutions and technologies evolved. In most cases an often trusted and sufficiently trustworthy institution (such as a market) depends on its participants trusting, usually implicitly, another sufficiently trustworthy institution (such as contract law). These trusted institutions in turn traditionally implement a variety of accounting, legal, security, or other controls that make them usually and sufficiently, at least for facilitating the functionality of their client institutions, trustworthy, by minimizing vulnerability to their own participants (such as accountants, lawyers, regulators, and investigators). An innovation can only partially take away some kinds of vulnerability, i.e. reduce the need for or risk of trust in other people. There is no such thing as a fully trustless institution or technology.





The nonexistence of complete trustlessness is true even of our strongest security technology, encryption. Although some cryptographic protocols do guarantee certain specific data relationships with astronomically high probability against opponents with astronomically high computing power, they do not provide complete guarantees when accounting for all possible behaviors of all participants. For example, encryption can strongly protect an e-mail from direct eavesdropping by third parties, but the sender still trusts the recipient to not forward or otherwise divulge the contents of that email, directly or indirectly to any undesired third parties. As another example, in our strongest consensus protocols harmful behavior by certain fractions of participants or intermediaries well short of 100% (as measured by their computing power, stake-holding, or individuation and counting) can compromise the integrity of transactions or information flows between participants and thereby on balance harm the participants. The historically recent breakthroughs of computer science can reduce vulnerabilities, often dramatically so, but they are far from eliminating all kinds of vulnerabilities to the harmful behavior of any potential attacker.





Matchmaking is facilitating the mutual discovery of mutually beneficial participants. Matchmaking is probably the kind of social scalability at which the Internet has most excelled. Social networks like Usenet News, Facebook, and Twitter facilitate the mutual discovery of like-minded or otherwise mutually entertaining or mutually informing people (and even future spouses!). After they have allowed people more likely to be of mutual benefit to discover each other, social networks then facilitate relationships at various levels of personal investment, from casual to frequent to obsessive. Christopher Allen among others has done some interesting and detailed analyses about group size and time spent mutually interacting in online games and associated social networks.





eBay, Uber, AirBnB, and online financial exchanges have brought social scalability via often great improvements in commercial matchmaking: searching for, finding, bringing together, and facilitating the negotiation of mutually beneficial commercial or retail deals. These or related services also facilitate performances such as payment and shipping, as well as verification that other obligations undertaken by strangers in these deals have been performed and communication about the quality of such performances (as with “star rating” systems, Yelp reviews, and the like).





Whereas the main social scalability benefit of the Internet has been matchmaking, the predominant direct social scalability benefit of blockchains is trust minimization. A blockchain can reduce vulnerability by locking in the integrity of some important performances (such as the creation and payment of money) and some important information flows, and in the future may reduce the vulnerability of the integrity of some important matchmaking functions. Trust in the secret and arbitrarily mutable activities of a private computation can be replaced by verifiable confidence in the behavior of a generally immutable public computation. This essay will focus on such vulnerability reduction and its benefit in facilitating a standard performance beneficial to a wide variety of potential counterparties, namely trust-minimized money.

Money and Markets

Money and markets directly benefit the participants in each particular trade by the market matching a buyer with a mutually beneficial seller and by a widely acceptable and standardized counter-performance (money). I use markets here in the sense Adam Smith used the term: not as a specific place or service where buyers and sellers are brought together (although it might sometimes involve these), but rather the broad set of typically pairwise exchanges whereby the supply chain that makes a product is coordinated.





Money and markets also incentivize creation of more accurate price signals that reduce negotiation costs and errors for participants in other similar exchanges. The potent combination of money and market thereby allowed a far higher number and variety of participants to coordinate their economic activities than previous exchange institutions, which more resembled bilateral monopolies than competitive markets.





Markets and money involve matchmaking (bringing together buyer and seller), trust reduction (trusting in the self-interest rather than in the altruism of acquaintances and strangers), scalable performance (via money, a widely acceptable and reusable medium for counter-performance), and quality information flow (market prices).





The greatest early thinker about money and markets was Adam Smith. At the dawn of the industrial revolution in Britain, Smith observed in The Wealth of Nations how making even the most humble of products depended, directly and indirectly, on the work of large numbers of a wide variety of people:

Observe the accommodation of the most common artificer or day-laborer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. 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! What a variety of labor, too, is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labor is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick maker, the brick layer, the workmen who attend the furnace, the millwright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears nest his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen grate at which be prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniences; if we examine, I say, all these things, and consider what a variety of labor is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided , even according to what we may falsely imagine the easy and simple manner in which he is commonly accommodated.

And this was before the many successive waves of industrial revolution and globalization between 1776 and now that refined, elaborated, and extended the division of labor many times more. Rather than trusting in the unlikely altruism of so many strangers, markets and money create many pairings of mutual benefit and thus motivate this large network of mutually oblivious people to act in our interests:

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…[In contrast to other animals, man has an almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only. [Exchange is the] manner in which we obtain from another the far greater part of those good offices which we stand in need of. 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.

Smith goes on to describe how division of labor, and thus labor productivity, depends on the extent of the network of pairwise exchanges: “As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market”. As the exchange network around a country and around the globe grows, involving a greater number and variety of producers, so grows the division of labor and thereby labor productivity.





Money facilitates social scalability by increasing the opportunities for this exchange. By lowering coincidence problems (coincidence-of-wants in exchange and coincidence-of-want-and-event in unilateral transfers), via a widely acceptable and reusable form of wealth storage and transfer, money greatly lowered transaction costs, making possible more exchanges of a greater variety of goods and services involving exchanges and other wealth transfer relationships with a much larger number and much wider variety of people.



