1. In Money, Blockchains and Social Scalability, Nick Szabo writes;
“Social scalability is the ability of an institution –- a relationship or shared endeavour, 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”
2. Paul Graham more recently tweeted that:
“Instead of switching from programming to management as their companies grow, I wonder if founders could one day manage by programming….I don't mean the software would manage people. I mean more that management would take the form of feature requests.”
3. Chris Burniske responded:
“All the more reason why fair incentive systems will become more important. #Blockchain based rules may become the ADAS (Advanced Driver Assist System) of human emotion.”
If we act primarily based on incentives, and cryptocurrencies are an increasingly effective way to align or remove incentives, we are starting a period of incentive experimentation. We are testing incentive machines.
Incentives vs Narratives
Within the Bitcoin community, there is constant tension around the perceived ideal incentive structure. Bitcoin was an experiment, launched into a complex market and so is inevitably, highly unpredictable. In contrast, humans think in narratives and stories. As the experiment unfolded in directions that didn’t tie into preconceived stories, tensions grew. Bad actors were identified who, in retrospect, were making commercially rational, if self-interested decisions.
Rational responses to the Bitcoin incentive structure should be encouraging. Miners should in theory mostly care about improving their fees, and there is evidence that is the case. It is worth listening to this interview with Charlie Lee. Not only do miners not care about the centralization of the network, they asked not to be left with the decision of how to scale in the first place. Users protest that the voting structure needs to be changed to reflect this, without success to date, and yet Bitcoin proceeds. The incentives for all groups to see it continue, even with elements of centralisation, remain intact. Bitcoin may no longer be exactly what many wanted it to be, but it's close enough to prevent them from selling their bitcoin.
The most promising change to incentives is the activation of Segregated Witness on Litecoin. Litecoin is now a version of Bitcoin, with arguably better technology. Developers are moving towards it with an interest in working with the Lightning Network and SegWit. Most people discuss this move as a way to test Segwit before it activates on the Bitcoin Network. But if the stalemate continues, and Litecoin gains further adoption, Bitcoin miners may need to vote for Segwit to ensure that Litecoin doesn’t become more valuable, or just switch to Litecoin mining. There are dozens more ways that this could play out of course. The experiment continues.
ICO’s and Weak Incentives
ICO’s are a rational way to raise money because they are easier than pitching VC’s. Many in the community refer to them as scams. The real issue is that there is no strong incentive, to not scam. Zach Herbert has suggested that we publish ‘total market cap and inflation factor’ to remedy this problem. This incentive is too weak in my opinion. The current level of excitement can only be deflated through an eventual sudden revelation for many investors that most ICO’s will fail, and a crash.
Traditionally we use law and regulation to disincentivize bad behaviour. If cryptocurrencies can replace the punitive elements of the legal system by eventually disincentivizing nefarious actors, they will have succeeded in a novel way as incentive machines. So far we have developed some interesting carrots, but the sticks have proved to be more challenging.
Much of our interaction with each other is already mix of cultural norms and automated incentives. We use NFC tap and go with our Visa cards because although it's less private, and more expensive than cash, it’s convenient. We thank the cashier because politeness is culturally important.
Within companies, incentives are still often based on human intuition. Bonus structures are changed and tweaked by central management, a promotion may be based on perceived merit or friendship.
Bonuses and Deductions
I have a retail store and we pay our sales staff every 2 weeks. They are aware of their daily targets and other bonuses but it doesn’t have the same effect as seeing money go straight into your account in real-time. 21.co have started the beginnings of this with their incentivised micro-tasks and mailing lists.
Conversely, if I steer the company towards unprofitability (or some other unwise move), I could pre-agree with my employees that my bonus will be deducted. I could also make it difficult for me to ‘hard fork’ to a new company in such challenging times. I suspect employees would appreciate this shared risk and transparency.
Balaji Srinivasan discussed recently how we could soon have 1000 times the amount of daily payments we currently do. Whereas a few decades ago we could identify all the communications (phone, letter, conversations) we had in a day, that is now impossible. Similarly you can look at your bank account today and identify your daily transactions, in 10 years time, 1000’s of micropayments may make that impossible.
This exchange of value on a small scale could produce the correct nudges, not only to make economic behaviour more efficient but to incentivise broadly positive behaviour. This is not without its challenges. If the value of small transaction is unclear it creates mental transaction costs.
Micropayments could improve socially scalable fairness, but we may also need other technologies that aren’t obvious yet. A smart contract that updates incentive models based on changes to the overall structure of the organisation might one day be commonplace.
There are currently weak incentives to treat people politely or be objectively correct on social media platforms. Tristan Harris highlights the lack of a code of ethics as the source of this problem. When advertising drives incentives, persuading you to spend more time on screen at all costs is the net result. If outrage and narcissism are the best drivers of this, then so be it. We can see the beginnings of an attempt to solve this with yours.org and steem.it. Whether this system of attention incentives catches on remains to be seen.
In a complex system, top down central changes have wide ranging, unforeseeable effects. The Fed rate changes are as a good example of this. The second and third order effects of major, system wide incentives take a while to come to the surface. Starting smaller, with a simple set of aligned interests, seems like the best way to test organisational incentives on a micro level.
The DAO launch was an attempt to automate investment, based on some pre-aligned, theoretically immutable goals. Although it failed, we will likely see many more, hopefully more carefully audited, attempts at this. Automated incentives will gradually move up the stack. Initially just aligning narrow fields of interest. Eventually creating an ecosystem of pre-agreed incentive structures.
This road will likely be paved with bubbles and crashes, scams and heavy handed regulation. To think otherwise is to ignore the long history of cyclical euphoria. Calling bubbles has become so commonplace, as to insulate people from when one actually occurs. Much like political discourse on social media, it is increasingly hard to tell the wood from the trees.
The US Constitution is arguably one of the most effective incentive structures ever created. It enabled a shared vision of the future, that created unprecedented wealth and prosperity for the US. It was a shared narrative, enforced by law. As we move towards a more decentralised, web based future, can we gradually automate similar rules? Could we automatically penalise political actors who don't balance their budgets and reward those who do? If the Sovereign Individual Thesis is correct, and governments increasingly compete for citizens, this could well become a reality. I will explore this idea further in a later post.
Bitcoin is often touted as a trustless system. More experienced participants understand that it is a system of trust minimisation that may or may not be the final word on optimal socially scalable fairness. I think Chris Burniske has hit on the best metaphor with ‘Driver Assistance Systems’. Cryptocurrencies may ultimately help us to get to our desired destination by ensuring that we avoid some of our own unconscious mistakes on the way. In Nick Szabo’s words, it may help us ‘overcome the shortcomings in human minds’. We are most likely at the testing seatbelts stage of development though. A fully functioning autopilot is a while away yet.
Thanks to @jimmysong for feedback on this.