Tokenised decentralisation

The incorporation of financial incentives into the Bitcoin security model turned out to be hugely generative and with Ethereum sparked a ‘tokenisation’ of decentralised protocols, which conversely opened these up for economic dynamics and unforeseen complications. Tokenisation, on the one hand, presented an opportunity to articulate decentralised information and communication systems that might be sustained by new kinds of business models, thereby posing both a technical and economic challenge to existing surveillance- based infrastructures of the internet (Zuboff, 2015). On the other hand, it presented two major challenges: tokenisation also introduced new kinds of complexity deep into protocol designs in ways that exceed purely technical concerns, opening these up for all the complexities of economics and finance – and on a more fundamental level, token creation brought with it the tools for engineering scarcity in the otherwise infinitely replicable digital space. The latter in the meantime also caused a change in the economic ideas and assumptions of peer-to-peer decentralised technologies in which property and defining access conditions became a main focus. Where Bitcoin had been an application-specific proposal for a payment system,

Ethereum generalised tokens into a form of ‘fuel’, a substrate for running any kind of decentralised application, cryptocurrency, platform or organisation. Economic concepts entered into the toolbox of decentralised systems engineers, opening up new areas of computational research. Here I discuss these two implications of tokenisation as a further extension of a blockchain sensibility, namely the complexities in field of cryptoeconomics and a shift in political economic sensibility within the development of decentralised systems before concluding the chapter.

The complexity: cryptoeconomics

I think of cryptoeconomics as a methodology for building systems that try to guarantee certain kinds of information security properties.

– Vitalik Buterin, Ethereum126

The reason we are talking about incentivisation is that this ethos that seems so amazing wont work unless the cryptoeconomics incentivisation piece works, right. The idea is not good enough unless everybody says actually that is a good deal for me and we want to tune the system so that everyone will think that it is a good deal to participate and at the end of the day the overall group is better off.

– Jon Choi, in December 2017 presentation on Cryptoeceonomics and Casper127

The incorporation of tokens and economic incentives as an integral part of the Bitcoin protocol design gave rise to what is called cryptoeconomics. Expanding on the concept of Bitcoin mining rewards and their security function – making it more profitable to contribute to the network than attack it – this budding interdisciplinary field is concerned specifically with designing incentives in such a way to ensure the secure running of decentralised systems. As Choi explains above, the main idea is to align the economic interests of an individual node/contributor with that of the system, drawing on and operationalising concepts from economics, game theory, cryptography and mathematics (such as probability). The incorporation of economic concepts into security modelling and decentralised protocol design is becoming an area of research and development in its own right across computer sciences departments and in the fields of information security and cryptography (Buterin, 2014; Garay, Kiayias and Leonardos, 2015; Kiayias, 2015; Bano et al., 2017; Choi, 2017; Ethereum Foundation, 2017), beginning from the seemingly simple solution in Bitcoin, incentivising contribution in the network by rewarding bitcoin miners, incentive design and the ambition of aligning the behaviour of individuals with that of the system quickly becomes very complex.

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See https://youtu.be/pKqdjaH1dRo 1:46 - 1:56 127

Figure 8. ‘Miners just follow the money, and they will definitely not attack the source of their income’. Tweet by DigiEconomist 14 Oct 2017.

This tweet is typical of the ways in which game theory is drawn on in order to assess what kinds of behaviours might happen in the system given certain conditions. The argument is that although bitcoin mining has become centralised, if miners were to take advantage of this, they would face a backlash from those expecting Bitcoin to be decentralised, who would then leave the network in favour of a different cryptocurrency, resulting in fewer transactions and a lower bitcoin value. Incentives are here mobilised in order to guarantee a (commercial) concern for the legitimacy of one’s actions in a game theoretical speculation on the behaviour of miners. In other words, the security model in cryptoeconomic designs attempt to take into account various kinds of incentives or disincentives for behaving in certain ways.

Cryptoeconomics is a field concerned with the design of systems whereby certain behaviours are made desirable through rewards, undesirable through punishments or impossible through code and cryptography. It is, in a sense, a complex endeavour of shaping a landscape of possible and desirable actions, indeed an attempt at a form of protocological control rather than disciplinary control (see 4.1 and Galloway, 2004). Ethereum and blockchain more generally are intended to be net neutral, meaning the infrastructure is open for anyone to use and participate in. The protocol is, in this sense, understood to be politically neutral, instead providing a substrate for any kind of protocol, currency or governance system to be built. This means that cryptoeconomics and incentive design tend to be discussed and addressed purely as security questions – how to prevent or discourage ‘malicious’ behaviour and encourage ‘honest’ behaviour. Security concerns are considered neutral concerns, pertaining primarily to the survival, benefit and coherence of the system itself. But in open, decentralised protocols, the question of what is beneficial or not, what might be considered ‘malicious’ or ‘honest’ behaviour can be contentious, and the question of who gets to decide this even more so. For example, it’s up for debate whether a given action might be considered an ‘attack’ on the

system, or simply another understanding of how the system should work, and even more importantly, where the limits to such considerations might lie – and at what point cryptoeconomic designs begin to resemble attempts at large scale behavioural engineering. This raises the question of protocol governance; who gets to write the rules of the system and who gets to design the landscape (see Chapter 6).

A second complication in the field of cryptoeconomics is the implication of incorporating the full range of economic dynamics into the protocol design and security model. The concept in Bitcoin was to incentivise mining in the network, such that this task would be more attractive and profitable than attacking the network. But this seemingly simple idea quickly becomes quite complex in attempts at measuring or assessing. Even calculating the profitability of mining involves a number of more or less understood variables: the cost in terms of energy consumption and hardware which needs to be weighed against the potential for reward in terms of the likelihood of computing the nonce for a block, which gets further complicated by the competition with other miners and the addition of mining pools, ASICS and so on. Calculators have been cobbled together in order to be able to determine the profitability of mining.128 That covers just the economic complexity of just one actor, namely the miner – which in turn needs to be understood in relation to the broader economic dynamics such as exchange rates, concentration of wealth amongst so-called ‘whales’ potentially manipulating the markets, the overall money supply and so on in order to achieve an understanding of the full security implications. In such conditions, it becomes very complex to model with any accuracy whether and when it is more profitable to contribute to the system than attack it, raising the question of what economic incentives really do in decentralised protocols and might contribute to in the long run.

Once there is economic value in the network, generalising the incentive to contribute, it conversely also generalises the incentives to attack the system and has become an intensive area of modelling, testing, research and development, in order to anticipate attacks. In Ethereum, research is focused in particular on the security issues of shifting from the Bitcoin proof-of-work consensus algorithm to what is called proof-of-stake. Proof-of-stake employs the idea of placing an economic ‘stake’, and the threat of losing that stake, to secure the intentions of nodes in the network instead of mining. The Ethereum project has (as of 2019) two different pathways for moving from a proof-of-work to a proof-of-stake consensus algorithm, one that is developing an interim step in which a proof-of-stake layer will be added on top of the existing proof-of-work-based network, and another that would be a direct transition to proof-of-stake. The change is far from simple, as the individual behaviours in relation to new economic conditions need to be carefully modelled, and the effects of these on

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See for example https://www.cryptocompare.com/mining/calculator/btc and

the overall system need to be assessed and calculated to arrive at any idea of the security properties or potential attack vectors involved. Researchers and developers working on this transition fully acknowledge that significant assumptions have to be made and that the system tends to get very complex, evident here in Ethereum developer Floersch’s explanation of the new protocol called the ‘Casper’ version of proof-of-stake:

We have this complex behaviour emerging from really simple economic rules, right, and this actually not specific to Casper by any means, this is any protocol that we are messing around with economics we are going to have people spending their lives trying to break it, there is crazy stuff happening, so we need better tools for evaluating these economic incentives. If we don’t’ actually have the right methodologies for coming up with these kind of attacks that we might face we are not going to be able to properly defend our protocol.

– Karl Floersch on Casper and proof-of-stake, 2017129

Economic incentives, then, both increase the incentives for attack and vastly expands the potential attack surface. (This contradiction, whereby economic incentives are supposed to solve security problems but in the meantime significantly increase the attack surface is resolved somewhat in a similar manner as control, discussed in the second half of chapter 4, through the idea of complex behaviour and emergence). What Floersch means by people ‘spending their lives trying to break it’ is that when there is economics involved and money is at risk, the system is likely to have a lot of attacks. Indeed, as he also states, the field quickly becomes very complex. To give an example of this, in the proposed Casper (what became known as Casper FFG, (Buterin and Griffith, 2017), the idea is that the proof-of-stake layer will have a ‘checkpoint’ every 50 blocks with the underlying proof-of-work blockchain. At this checkpoint, validators put ether into a Smart Contract, verifying a given state in the network. If there are two conflicting states at the checkpoint, a third of deposits will be slashed as a punishment for the delay in finalising a state in the network. This is one of the so-called ‘slashing conditions’ that outline what behaviours are not permitted and therefore would result in funds being destroyed. In the case of conflicting states, the economic penalty increases the longer it takes to finalise a state, and conversely, when a state is arrived at, validators receive a reward. It is worth considering a few of the economic and behavioural calculations that would need to happen in order to understand the potential outcomes of this system: whether the loss of a third of funds is enough of a deterrent to prevent attacks; whether the punishment is too much so that it deters ‘honest nodes’ from wanting to be validators; whether conflicting states will occur frequently, causing so many funds to be slashed that it affects the overall money supply; whether money supply affects the value of the token on exchanges; to what extent this affects the uses of the system for applications built on top of it;

whether creating deliberately conflicting states at a checkpoint will be used as a potential attack; whether attackers are willing to burn funds to do so, draining the economy and preventing finalised states; whether ‘honest’ nodes would pledge a willingness to burn a similar amount in a public contract to continue securing the network regardless; whether people using the system would be satisfied with such an assurance; whether other options, like redistributing the funds to honest nodes rather than slashing (and burning) it is viable and economically possible.

This seemingly simple idea – to use the economic self-interest of actors in the network to ensure that it is more lucrative for them to contribute rather than attack the system – very quickly becomes quite complex as the tokens that are used as incentives enter into further economic dynamics. It is a field with plenty of new ideas of how to apply economic concepts to computational security, but with systemic ramifications that are not very well understood yet. Navigating economic decisions in protocol design have so far been considered primarily for network security questions and incentives as a form of behavioural engineering for security purposes. This helps to delineate some core priorities and primary concerns in design considerations that might otherwise be hard to contain. And yet the impact of these decisions cannot be simply isolated network security concerns; a cryptoeconomic design decision is simultaneously an economic, monetary and financial decision that will also affect the price of running Smart Contracts and dApps (decentralised applications), and therefore immediately impacts and shapes the potential business models that might come out of these designs. These complexities are no less than the grappling and expansion of a blockchain sensibility, operationalising other fields and dynamics in the process.

The change: from pirates to police

Finally, I would like to suggest another, rarely commented on consequence of tokenisation, namely a shift in the economic aims and ideas prevalent in blockchain notions of decentraliation. Early generations of decentralised technologies from the late ‘80s through to the early ‘00s employed decentralisation as a strategy to make a given system resilient against potential legal persecution. In peer-to-peer network culture at the time, a critique of intellectual property circulated based on the idea of digital copies as next to zero cost and infinite, and therefore naturally abundant (cf. Arvanitakis and Fredriksson 2016). File-sharing communities resisted digital rights management technologies as an artificial imposition of scarcity on information, knowledge and digital goods, epitomised in the slogan ‘information wants to be free’. The infinite replicability of ‘the digital’ formed the intellectual justification for file-sharing and digital piracy. Networks were spaces of free flows of abundant knowledge and information, entailing multiple pathways that would circumvent any attempt at blockage or control. Because code, information and knowledge have no inherent scarcity, there had been

an underlying critique of, in particular, intellectual property rights and any attempt at forcing scarcity on abundant resources. Bitcoin marked a significant shift in this history of peer-to- peer network politics, a shift to an economic position that could be said to be the exact inverse – concerned with the expansion of what might be deemed property, building some of the most fine-grained IP management systems aimed at immediate and ‘unmediated’ policing of property rights (see for example Mattereum and Slock.it).130 131 Through Bitcoin, cryptography went from being a tool to ensure privacy to determining ownership more broadly. For the purposes of establishing a peer-to-peer payment system, this was necessary in order to prevent infinite replication of token records, thereby rendering the payment system meaningless. But in the meantime it has had major implications across several different scales and has significantly changed the very culture and assumptions of peer-to-peer in ways that have not been sufficiently acknowledged and understood. When Ethereum platformised and generalised aspects of the Bitcoin protocol, the ability to determine ownership and access control was an engrained logic and set of use-cases. Smart Contracts could become the means for fine-grained control of access to uniquely defined digital objects, determined in a ledger. The proposition of replacing aspects of payment systems, contracts, identity registration and legal enforcement with a decentralised version of these has drawn those who might previously have been critical of the very techniques of such state and economic institutions into their reinforcement in and through digital technologies (Käll, 2018; Manski and Manski, 2018).

There are nevertheless important legacies from earlier generations of peer-to-peer with an affinity to open sharing of especially knowledge: educational material and code tends to be open and shared widely, and there is a culture of leaking if relevant information is being withheld. So while Ethereum and blockchain assemblages are rarely critical of questions of private and intellectual property rights or capitalism more broadly, these sensibilities and their encoding in protocols and architectures pose some complications for what are called surveillance-based business models (Zuboff, 2015). Herein lies the potential for disruption that can in part be traced back to the political sensibilities of earlier decentralised systems. For example, most major blockchains are fully public, what has since been called ‘unpermissioned blockchains’, meaning one does not need special credentials or permissions to take part in the network and browse the data. This poses a problem for many types of business that would rather keep most of their operations and agreements relatively private.

Such approaches to decentralisation and openness are justified through network security issues and privacy concerns rather than a consideration of the socio-political effects of different property regimes. In the meantime, so-called permissioned layers have been added

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so that new types of privacy arrangements can be established (cf. Didil, 2017). These layers add the potential for fine-grained management of privacy and transparency that would be better suited to existing business needs. In order to facilitate research and development for how Ethereum might be useful for businesses and industry, the Enterprise Ethereum Alliance was formed, with nearly 500 companies and institutions as members, ranging from tech companies like Microsoft, to Antibiotic research UK, Credit Suisse to the Government of Andhra Pradesh in South India, Singapore University of Social Sciences, Santander, BP, Shell, American Family Insurance and many more, including blockchain start-ups and