Ethereum: the ultimate coordination technology
From Temporary Autonomous Zone to Sovereign Digital Jurisdiction
Introduction
Throughout history, humans have used multiple coordination technologies to organize their communities and achieve their goals. These coordination technologies can be physical instruments and techniques, but also imaginary constructs based on shared beliefs — e.g. religion, legal/political systems, and money.
Blockchain technology would be the last stage in the historical line of innovations that have conditioned the way in which human societies coordinate and organize themselves. However, some of the unique characteristics of Blockchain (its inherent neutrality, censorship-resistance and decentralization) make it a coordination technology that does not suffer from some of the flaws of its predecessors, e.g. capture by privileged groups, poor alignment of incentives, etc.
Bitcoin and Ethereum are by far the two biggest public blockchain networks in terms of on-chain activity, and the ones that have generated the greatest economic impact as coordination technologies. Both share certain theoretical foundations, values, and objectives, seeking to position their native currencies as stores of value and potential world monetary reserves. But where they differ completely is in the way they try to achieve those goals.
In this essay I’ll try to explain why I believe that Ethereum’s strategy — to act as a Temporary Autonomous Zone and grow economically to become a sovereign digital jurisdiction — is superior, more sustainable and potentially more successful than Bitcoin’s approach and why Ethereum is better equipped to compete head-on with other real-world coordination technologies and institutions.
But before detailing how Ethereum plans to achieve its ambitious goals, we must understand why stores of value have been important for humans throughout history as coordination technologies.
The human being, a social animal
The destiny of humanity is inextricably linked to community life. Helpless at birth, human beings are raised by their family units. Subsequently, they are educated in a group, either in public or private centers, where they take part in the schooling and enculturation process with colleagues of the same age. The labor sphere is nothing more than an extension of this process, since even the most individualistic professions require some degree of social interaction.
We may think that it all started with the Neolithic revolution which brought with it the discovery of agriculture, the abandonment of a nomadic way of life, the establishment of fixed settlements, and over time, the division and specialization of labor. But long before, humans already were social animals living in organized and itinerant tribes of hunters and gatherers, although with much less sophisticated hierarchies and a more rudimentary distribution of labor.
Hence, community life and coordination is something that we carry deep inside. It is part of our DNA.
Human coordination technologies
This innate drive of humans to live in societies would be satisfied over the course of history through different types of coordination technologies.
As I have explained in the introduction, I am not referring exclusively to physical and technical tools, but also to “institutions” (imaginary constructs, non-empirical realities) that are the result of the ability of human beings to create stories to coordinate in a flexible way and at a large scale , as Yuval Harari explains in his work Sapiens: A Brief History of Humankind.
Early examples of these institution-like coordination technologies are religion, political/legal systems, and money, the latter ideally being a good store of value, and, in relation to the thesis of this article, will be treated as such.
These coordination technologies would lead humanity to increasingly complex and sophisticated forms of organization, and would act as catalysts for new organizational systems. Those new organizational systems sooner or later begin to be stressed by forces that push towards disorder, disintegration, and entropy. This paves the way for new, more efficient, coordination technologies to emerge in a sort of self-reinforcing process. A good example of such a phenomenon — in this case, a global monetary reserve — can be found in Lyn Alden’s The Fraying of the US Global Currency Reserve System.
Alden’s article comes in handy to highlight that a large part of the organizing efforts that mark the future of humanity and its progress so far have to do with the adoption of coordination technologies designed to facilitate the economic activity of societies in constant demographic growth.
Institutions (as fundamental coordination technologies of every society) establish the rules that determine and condition the access and exchange of scarce resources. All of this under a market logic and formulas that are socially acceptable to the community as a whole — thus avoiding situations of violence and chaos.
Religion, legal systems and money
As Connor Wood and John H. Shaver explain in Religion, Evolution, and the Basis of Institutions: The Institutional Cognition Model of Religion, humans have the ability to create non-empirical worlds that are socially accepted as truths and materialized through rituals and social behaviors. This ability to generate cognitive alternatives to empirical reality took the form of myths and religions at the beginning, but evolved into legal and political systems later, which have facilitated the task of coordinating humans in a flexible way and at a large scale — something essential at the time in which humans decided to leave behind a nomadic lifestyle and establish permanent settlements, with different economic needs.
The problem with these coordination technologies is that they misalign the incentives of the community members. This is the result of core design flaws that prevent them from reaching an optimal level of neutrality, and the fact that they are subject to governance processes that tend to be initially controlled (or co-opted over time) by privileged groups that try to manipulate them in favor of their interests.
Most of the religions of antiquity went through formalization processes that lead to the emergence of a caste responsible for interpreting sacred texts and celebrating rites as well as the social norms derived from them. This monopoly on dogma, and the special prerogatives conferred to the figure of the priest or the church within society, would make religion an instrument of coordination controlled by a few — so, under its aegis, the alignment of incentives could hardly be optimal.
Something similar occurred with the emergence of the political and legal systems which would be essential for the rise of the first civilizations, the promotion of urbanization processes and, later on, the consolidation of nation-states. Although legal and political systems supposedly provide citizens with a level playing field on which to interact and compete, the reality is that these institutions are once again in the hands of elites with their own agenda.
These elites take advantage of their privileged position to favor their interests, to the detriment of the interests of other social groups — thus undermining the ideal conditions of free markets and competition. An example of this can be the strict financial regulations of the United States, which, far from protecting the interests of ordinary citizens, actually prevent their access to certain early investment opportunities — thus consolidating the privileges of accredited investors and large financial groups.
Money (considered as a store of value for the purpose of this article) is one of the coordination technologies that has had the greatest importance throughout human history. Its function is basically to define rules and provide incentives to facilitate large-scale economic activity by market participants — i.e it acts as a protocol.
The problem is that, similar to religion and political systems, money would also end up being co-opted by some players— in this case, central banks and governments responsible for its issuance and regulation.
Blockchain technology
Blockchain technology represents the last stage in this historical line of innovations that have facilitated the way in which human societies coordinate and organize themselves. However, its peculiar characteristics (its inherent neutrality, censorship resistance, and decentralization) make it a coordination technology that does not suffer from the same flaws of its predecessors.
As the Zeppelin team explains in The Global Coordination Machine, Satoshi Nakamoto’s discovery of a solution to the Byzantine Generals Problem allowed the internet to become a “global coordination machine.” Blockchain technology transforms the landscape of “games” that determine and condition the access and exchange of economic resources by the members of a community that is now global. In the same vein, Virgil Griffith posits that, thanks to Ethereum, any non-cooperative game can theoretically become cooperative.
As they are distributed, non-permissioned, open source networks, public blockchains cannot be captured by privileged estates or interest groups--or at least they should not be if they are truly decentralized and censorship resistant. Bitcoin and Ethereum allow anyone to join the network as a miner or validator, and although some consolidation of power is possible (e.g. mining pools in China, large holders of Eth once the Proof of Stake transition completes), the fact that both networks rely on governance minimization should theoretically make its capture near impossible.
The consensus rules of a public blockchain network are not arbitrary, but predetermined by code. There are public specifications of the protocol implementations, and the balances and state cannot be altered (unless the system succumbs to an attack and a reorg is successful). In the worst case, a public blockchain that has been captured by an interest group could be “forked”, which would allow the rest of the stakeholders to opt for an “exit” — to use the terminology of Albert O. Hirschman’s famous work.
As a result of the inherent network neutrality, early adopters of these technologies may be economically rewarded by the appreciation of their cryptoassets and the revenue obtained as miners/validators. They won’t be able to appropriate the infrastructure in favor of their interests at the expense of the interests of the rest of the stakeholders (“core” developers, entrepreneurs who launch their own protocols and dapps, users, etc.). This dynamic is reinforced by the fact that the process to update/reform the system is informal and requires consensus by disparate groups, making it very difficult to approve controversial upgrades.
Bitcoin and Ethereum are by far the largest public blockchains in the world. This is evidenced by the main metrics that measure on-chain activity: total active addresses, total number of daily transactions, and daily volume of transaction fees.
Both represent important milestones, a paradigm shift in relation to the coordination technologies that throughout history have been used by human communities. They also share certain fundamentals and goals — primarily, the ambition to position their native digital currency as generally accepted stores of value. But as I have explained in the introduction, where they differ completely is in the way to achieve this goal.
Bitcoin, the hedgehog. Ethereum, the fox.
In “The Hedgehog and the Fox”, Isaiah Berlin raises the idea that human beings can be divided into two categories: hedgehogs (those who understand the world based on a single guiding principle) and foxes (those who consider that the world it is not reducible to a single idea, and consequently, pursue multiple purposes).
Although this classification system is imperfect, it can be useful to understand the profound differences that mark the ethos and trajectory of the two main public blockchain networks: Bitcoin and Ethereum.
Because, unlike what Aesop's famous fable tells us and what many maximalists tend to believe, the modus operandi of the hedgehog is not superior to that of the fox. Isaiah Berlin explains in his work that both positions have their advantages and disadvantages “depending on the circumstances.”
Bitcoin is the paradigm of hedgehogs, a network that revolves around one guiding principle — security/predictability. The Bitcoin network has been optimized for a single function and value proposition. The one that it considers most important, and it believes it has no rival in: to place its native currency (BTC) as the best store of value (hardest money) that man has ever known.
Ethereum, for its part, is a purebred fox: a general-purpose smart contract platform, exuberant, vital and versatile. Far from the sobriety of Bitcoin, Ethereum has been designed for all kinds of use cases, and it does not limit its existence to satisfying a single value proposition, but many. The problem is that among these value propositions, the same one that Bitcoin pursues stands out — to position its native currency, ETH, as the best store of value that has ever existed.
That explains in great part why is there such a bitter rivalry between the two platforms. Not only because both compete for the same value proposition, but because both technologies (and their respective communities) are separated by a philosophical chasm.
In my opinion, in order to position their native digital currencies as prime stores of value and become coordination technologies on a global scale, Bitcoin and Ethereum only have two options: to impose themselves onto other coordination technologies that right now occupy a certain niche, or, simply, create a new niche.
Like a good hedgehog, Bitcoin approaches its task in a crude and direct way: it has a very clear idea of what an optimal store of value should be, and since it considers itself the best that has ever existed, it has no qualms about launching itself to compete head-on with other stores of value in the meatspace (the real world of states, financial institutions, corporations, laws and armies, where commodities such as gold and a number of fiat currencies have so far been hegemonic). That means that as primary strategy, the Bitcoin network has chosen to compete head-to-head with other coordination technologies (the main fiat currencies) that currently occupy the niche it claims for its own native digital currency (BTC).
Ethereum, as a fox, is more subtle. It understands that the world is a complex reality, full of nuances, and prefers to avoid direct confrontation. Unlike Bitcoin, instead of trying to displace global monetary reserves by directly fighting powerful nation-states that dictate the current status quo, Ethereum’s completely flexible and turing complete architecture allows it to create a new jurisdiction from scratch. A Temporary Autonomous Zone which by growing and absorbing economic and human resources, will end up becoming a true digital economic power.
But what is a Temporarily Autonomous Zone?
The term Temporary Autonomous Zone (TAZ) was coined by Hakim Bey as a “sociopolitical tactic consisting of creating temporary spaces that escape the formal structures of social control.” A TAZ is, therefore, a coordination technology that fosters creativity as an empowerment tool, and that facilitates forms of organization that efficiently align incentives and do not coerce individuals.
The problem with the concept is that it has always been associated with outdated pirate utopias (Libertalia) or with playful events (such as Burning Man in its early days). But the concept is perfect to understand what Ethereum is today: a coordination technology that encourages the creativity of entrepreneurs and programmers, allows voluntary self-organization (DAOs), and facilitates capital formation and free economic exchanges. Like all archetypal TAZs, Ethereum has tended in its initial stages of development to a certain media invisibility (leaving the foreground to Bitcoin), in order not to be the object of attacks from interest groups or political subjects that may see in this flourishing new digital jurisdiction a threat.
Because, in my humble opinion, that will be the final form that Ethereum will adopt after overcoming the current TAZ phase: a new sovereign jurisdiction, fully recognized throughout the world by the simple force of fait accompli, which will act as a full-fledged economic entity (but digital in nature) within the international concert of nations (economies linked to a geographical, cultural, political and administrative dimension).
Strategies for becoming the ultimate coordination technology
Trying to position your native digital currency as a world monetary reserve competing face to face in the real world against states and their fiat currencies (as Bitcoin intends to) is very problematic. Why? Well, because governments and their central banks are not going to willingly renounce the enormous privileges conferred on them by controlling the main coordination technology that exists: money.
I am not saying that BTC will not have a relevant role as a safe haven in the future — it probably will, although similarly to gold, somewhat niche. What I am saying is that when your ultimate goal is to become a hegemonic monetary reserve, the path that Ethereum is following has a much better chance of success.
History teaches us that there’s only one viable method for a challenger willing to replace the current monetary reserve: it has to grow its own economy till the point it matches, and eventually surpasses, that of the main global power of the moment — currently, the United States.
If we carry out a historical analysis, we will see that the same process took place at the beginning of the 20th century.
Although the United States had been catching up with the United Kingdom over the preceding decades, it wasn’t until 1914 that it finally overtook its gross domestic product. Once this milestone was achieved, it still took around 5 years — until 1919, when the United Kingdom was forced to abandon the gold standard — for the dollar to acquire the status of the new world monetary reserve. And another 30 years would elapse before the new dollar system would be consolidated under the Bretton Woods agreements.
This lag between the moment when an economy becomes hegemonic and the moment when its national currency becomes the world monetary reserve is, according to Ray Dalio, common.
Usually, the last thing that declining world powers tend to lose is the status of their national currencies as world monetary reserves. Currently, rather than an American decline that drags down the dollar in favor of a rising power (such as China and its currency, the yuan), many scholars anticipate a transition to a multipolar world where the political, military and economic power will be much more distributed — some even point out to a potential scenario of power fragmentation within nation-states. Faced with this new paradigm characterized by the atomization of power, having a public, neutral, secure and expressive blockchain network which allows digitizing the bulk of economic interactions between individuals, companies and political entities, will be essential for the world.
Only as a sovereign jurisdiction and global economic power will Ethereum (the network) achieve its full potential as the ultimate coordination technology. If Ethereum succeeds at that endeavour, ETH (the asset) will have a chance to become a prime store of value and global monetary reserve — which in turn, would reinforce its role as a vital coordination technology used across the globe.
