The Future of Crypto is Network Economies

Network Economies are voluntary systems based on a stable cryptocurrency and the ability of the network to create credibly neutral institutions that facilitate the network’s economic growth. They can be the foundation to dynamic 21st century institutions that work efficiently to serve the people while avoiding capture from special interest groups or bureaucratic processes.

The institutions we have today were never designed for 21st century challenges. With each new challenge we see the growing shortcomings of these systems and the perverse incentives that lead to their failings.

But what can we do about it? Reforming our institutions may take decades. Not just because a lot of work needs to be done, but also because of internal resistance to any such changes. For those willing to engage in this sisyphean process I wish the best of luck, but I don’t think the multiple crises we face today can wait.

Tearing down our institutions is not a solution either. Especially since no one is offering an effective alternative to put in their place. 

We don’t need chaos. We need a way to empower people and let them effectively deal with challenges that require broader coordination. What we need are Network Economies.

A Network Economy differs from a regular economy in two main aspects: it is not bound by national borders and it is voluntary: people participate in it because they get a benefit from participating in it, not because they have to.

A Network Economy can be local, it can be on the level of a city, region, or transnational. It can be in the physical world, exclusively online, or in both worlds.

The key defining characteristics of a Network Economy is having a stable cryptocurrency and the ability to issue the currency to fund critical infrastructure and institutions that are necessary for maintaining and growing the economy.

Since we’re talking about a functional economy here, if we want both consumers and producers to want to use a currency it helps if that currency doesn’t fluctuate in value a lot, nor appreciate or depreciate in value over time. If the currency appreciates over time, buyers would want to wait for products to be cheaper, which hurts productivity. If it depreciates, everyone’s purchasing power suffers. But if it stays stable, the economy can function well.

This doesn’t mean the currency should be pegged to some fiat currency, because then the economy isn’t really independent and cannot act in the interests of the people who use the currency.

The second point is funding critical infrastructure. What is this critical infrastructure and why is it necessary to fund it through currency issuance? Critical infrastructure in a Network Economy can be considered any infrastructure that is needed to facilitate the functions of the economy.

If we look at the most primitive type of a Network Economy – one where you only have basic transactions between people and nothing more – transactions still need to live on a blockchain, and need to be secured. But for transactions to be secured – and for participants to know that they’re secured (and are not manipulated) – you need credible neutrality.

Credible neutrality means that the mechanism treats everyone fairly, and doesn’t discriminate against – nor favors – any participant. Credible neutrality therefore depends on an alignment of incentives between those who operate the mechanism and the source of funding for their compensation. If for instance the reward for securing the network comes from a private company, it may decide to pay more for transactions made by its customers. It may even censor transactions made by competitors. How likely are others to want to participate in such an economy? Not very. How likely then is such a Network Economy to grow and thrive?

On the other hand, if the Network itself rewards those who secure it (through currency issuance), participants can trust that their transactions are treated fairly.

So the ability of a Network Economy to grow and thrive depends on having credibly neutral infrastructure that facilitates the functioning of the economy.

Funding network security through currency issuance – ie. inflation – is how practically every major blockchain works today. And if all you’re doing is funding network security the issuance function can be hard-coded into the protocol. But what if you need a much more dynamic Network Economy? Maybe one where people can operate businesses, manufacture products, engage in commerce – in other words, a real economy?

Hard-coding currency issuance into the protocol will obviously not get you the infrastructure and institutions needed for a complex economy. So the question is how to get there. How can the Network decide what infrastructure to fund and how much funding should be issued?

There are two aspects to this question; a practical one and a technical one. The practical question is whether this is infrastructure that really needs to be credibly neutral and whether it is critical for the network. If it’s not both, members wouldn’t want to fund it. It’s also possible that adequate local infrastructure already exists that can be used by the Network instead.

The second question is more technical: how would the Network reach consensus on what to fund and how much funding should be issued? Is it possible to make this process credibly neutral as well (or at least something that approximates a “fair” decision that benefits the Network as a whole)? In other words, what we want here is some sort of voting process that is difficult for any individual or group to exploit to their own advantage at the expense of the Network.

If this voting process is merely based on the amount of the currency that members hold, the vote could advantage wealthy holders – a plutocracy. If it is one-person one-vote (something that is in itself very difficult to achieve on permissionless blockchains) that would advantage those who may have little to no skin in the game.

What we want then is a process where those with the greatest alignment with the Network would have the most say in issuing funds. And since funds are issued through currency inflation, everyone’s interests in the Network are aligned to not devalue their holding. This means that everyone would want to fund infrastructure in the amount that they believe would contribute to economic growth in the economy (to counterbalance the inflation). This would allow the currency to remain stable while the Network can still fund critical infrastructure and institutions that are necessary for its growth.

If you asked what exactly constitutes “alignment with the Network,” the answer to that depends on the Network Economy itself. For some networks it may be simply securing the network. For others it may be length of residence in a location, contribution to the network in various ways, and so on.

Each Network needs to decide the criteria by which members can have impact in it. If these criteria are fair – and have effective mechanisms to prevent manipulation – the Network would be attractive to members and can grow and thrive in the long term.

The mechanism to establish member impact on the network (which could come from both onchain and offchain sources) obviously must also be part of a credibly neutral infrastructure. Otherwise members will not think the system is transparent and won’t trust it.

So now we’re getting an intuitive sense of how a Network Economy works, and how it empowers people and allows them to voluntarily participate in economic activity. We  see how it can create and fund credibly neutral infrastructure and institutions based on value consensus. We can also see why these institutions can be more agile and capable of dealing with 21st century problems.

Credibly neutral institutions can be trusted by everyone in the Network to be fair and have the Network’s interests in mind (instead of the interests of competing constituencies within the network). They would therefore strive to use resources efficiently for their designated purposes. Such institutions would also have direct and continuous feedback from the Network; a “high-definition democracy” instead of a vote once in four years or an unaccountable bureaucracy.

Network Economies are the missing link between the desire to "onboard the next billion people" into crypto and a system that can actually be built with crypto technology and help billions of people. So that instead of reforming or tearing down existing institutions, we can build dynamic 21st century institutions that act as a “high definition democracies” that cannot be captured by special interests or bureaucratic processes.