Episode 38 – Blockchain – A Win-Win Design
GM, frens. Yes, as you can tell, I’m in jail. It turns out that my beard had a highly illegal design and INTERPOL, after watching the entire series of School of Block, finally decided to break down the door and take me into custody.
But now I have a dilemma. A PRISONER’S DILEMMA.
- In order to get out, I have to work out whether to CO-OPERATE or BETRAY… THIS WRETCHED LAG.
All I can say is that it’s a good thing I just swotted up on my GAME THEORY.
Because the driving mechanisms of the place I come from – the high octane, all action world of CRYPTO – are fundamentally dictated by it.
Only in CRYPTO, the genius is there’s only ONE CHOICE that works – and that’s CO-OPERATION.
Why does this matter? Why should you care? Why could this… just maybe, change the world?
Let me stitch up this hapless crim, BUST OUT OF JAIL, and I’ll show you why.
Welcome to School of Block.
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You. Me. People everywhere. What do they want? Generally speaking what’s BEST FOR THEM. Are they fussed about what’s best for ANYONE ELSE? Not so much.
So how have societies managed historically to deal with this problem? What do they do to make sure we don’t just run round robbing and pillaging?
RULES. Otherwise known as LAWS. You can do THIS. But you most definitely can’t do THAT. By setting out a range of restrictions and punitive measures over the centuries they’ve broadly kept society in check.
But is this TOP DOWN COERCION really the best way? Is a ZERO SUM game the only way we can play this?
And by ZERO SUM, we mean that if you add what I HAVE to what YOU HAVE, it has to equal ZERO. So more for me means less for you, and vice versa.
Generally speaking this is the way the traditional model works. If you get the promotion at work, I don’t. If I sell 5 bananas, that’s 5 fewer customers for you to sell to.
But why can’t we all be winners? Why do there have to be losers?
That’s a very good question. But not one that the web 2.0 data giants (yes, for the avoidance of doubt I’m talking about our old friends Google and Facebook) have managed to answer.
Who’s the one making money out of your web searches, or your posts, or your likes, views and shares? It most certainly isn’t you. There is a fundamental MISALIGNMENT of incentives between the platform and the users.
THE ARRIVAL OF BITCOIN
In 2009 Bitcoin burst into this topsy turvy traditional world, with the wondrous innovation that is and was the WORLD’S FIRST WORKING BLOCKCHAIN. We introduced just what a blockchain is back in Episode 7, and why the solution for the Byzantine generals problem was key.
Bringing the Byzantine generals together was instrumental in turning the traditional economic and social system on its head.
Now suddenly we have BOTTOM UP INCENTIVES rather than TOP DOWN COERCION. Blockchain brought the CARROT to a world that had too long lived by the STICK.
Now user incentives were ALIGNED and the zero-sum game consigned to the scrap heap. MORE for ME also means MORE for YOU. This, without a hint of a clickbaity title, changes everything.
But how did it do it? Well, Satoshi’s creation of the PROOF OF WORK system is what enables successful CONSENSUS amongst miners – or Byzantine generals, rewarding them in the process.
Indeed, the reward of newly minted coins and transaction fees is an incentive scheme that aligns the actions of miners with the security of the network.
And that all comes about through HASHRATE, which is the total computational power an individual miner has. Each miner is incentivised to have as high a hashrate as possible, as it increases their likelihood of validating blocks and then earning block rewards and transaction fees.
And when all miners are incentivised as such, it has the secondary benefit of increasing the amount of energy it would take a ROGUE PLAYER to spend in order to alter past blocks and thus ‘hack’ the blockchain.
Even if you owned 51% of the hash power, how much energy would you need to spend to change history?
It’s not just about security either, more hash power works well for everyone. From mining incentives to the price of bitcoin itself..
Let’s say you’re a miner and suddenly more miners start mining. More competition is bad, right? Not in this case. Because these extra miners further secure the network, and the Bitcoin you’ve previously earned as rewards is thus more secure and valuable.
Let’s say you don’t actually mine bitcoin but run a node. Why would you do that if you’re not earning rewards? Because the node itself contributes to the security and value of the ecosystem and thus to the value of the asset you’re holding.
Everyone is rewarded for what they give to the ecosystem.
In each of these cases we can see how the individual incentives align with the greater community to create a fundamentally meritocratic and democratic system.
And it’s not just the basic design of blockchain that utilises WIN-WIN game theory. DEFI moves the game on.
Certain protocols adjust the YIELD dynamically depending on the available liquidity. So if there’s LESS liquidity, it’s less secure but the yields are HIGHER – rewarding you for taking that risk. And vice versa – so the incentives are always aligned.
DAOs, SOCIAL AND NFTS
The arrival of second and third generation blockchains – discussed in episode 36 – have taken this one step further. Decentralized Autonomous Organisations, Social Tokens and NFTs have added a CULTURAL LAYER to these financial incentives.
Look at the LOOT owners who’ve come together to develop a GAME based on the NFTs they own.
Or the BORED APES. Any additional intellectual or artistic contribution from any given APE, drives up the value of ALL apes. So more for ME also equals more for EVERYONE ELSE. These aligned incentives is one of the key reasons why the BORED APES have been so successful and the floor price is enough to buy, well, a LAMBO.
And DAO members everywhere who can vote on the decisions their organisation takes, in a completely transparent, democratic process.
The VALUE of each of these projects is derived from the COMMUNITY. The ARTISTIC and INTELLECTUAL contributions of its members.
The positive acts of ANY GIVEN INDIVIDUAL increases the value of the GROUP. Again, the INCENTIVES are ALIGNED.
Take a look at FWB, first mentioned in episode 22 – the value of the tokens shot up in value because the individuals in it contributed to the success of the entire project.
Or MakerDAO – an organisation dedicated to the management of the DEFI protocol Maker. The success of the project has led to over FOUR HUNDRED platforms integrating the DAI currency with BILLIONS of dollars of assets locked in the protocol.
It is of course worth being aware though, that scammers can leverage these human tendencies to launch ever more sophisticated grifts.
We’ve covered some of their tricksy behaviour back in Episodes 17 and 24. Be aware there is such a thing as a fake NFT, and if you want to know what a RUG PULL looks like, then, well, it’s something like this:
Although, if we’re being honest, the fact the token was called SQUID GAME should perhaps have given some of the people who bought in pause for thought.
One of the most revolutionary qualities of blockchain isn’t the fact you can now buy and spend magical internet money, it’s the way it turns established economic and societal systems on their heads.
We’re only just starting to see the effects of this with the development of second and third generation blockchains, but make no mistake – in a few years time the impact is going to be huge.
As our digital lives bleed inexorably into the metaverse, we’re going to be faced with a choice about where we spend that time, energy and money.
And as blockchain enables bottom up metaverses owned by the people who use them, our opportunities for financial freedom will increase exponentially. As long as we choose wisely.
Finding a way to encourage humans to work TOGETHER, rather than against each other, is perhaps blockchain’s biggest achievement.
We’ve spent so long expecting that advancing our own interests will stitch someone else up that it’s ingrained in our psyches, as shown in the way the PRISONERS DILEMMA resonates with us.
The thing is though, WIN-WIN isn’t just an idealist’s dream – with blockchain, it’s a reality.
You’ve been watching School of Block, presented by Ledger and the Defiant, demystifying decentralisation, one block at a time. Don’t forget to subscribe, drop us a like if that’s what you’re into, and as always – here’s to your financial freedom.