Is Crypto the Ultimate Universal Coordination Mechanism?
How do we solve the biggest challenges facing humanity? From environmental degradation to chronic diseases, the crisis of trust in institutions, food and water security, and so on, the main limiting factor is not the lack of resources or people to solve these problems, but the lack of an effective Universal Coordination Mechanism (UCM) to align people’s incentives at the largest scale toward solutions.
Let’s take a look at our most powerful UCMs and see why crypto may be the ultimate UCM to align people’s actions for a higher purpose.
Genetic Code
We share the first universal coordination mechanism with all other living organisms on the planet: the genetic code. Our genes have the evolutionary imperative to propagate themselves through time and, to do so, they work in combination with other genes to form the machinery of the cell. The genetic code in our cells performs one of the most incredible coordination feats in existence — tens of trillions of cells act in perfect alignment to animate the human body, doing so continuously and over the course of decades!
But as we look beyond the individual — to the nuclear family, extended family, social group, wider community, and so on — the level of gene-based coordination decreases dramatically. While the behavior of simpler organisms can be encoded in the genetic code, for organisms capable of forming complex social organizations, genes can only do so much. We need to communicate with each other for large-scale coordination, and this is where language comes in.
Language
What sets humans apart from other living organisms is our capacity for complex symbolic language. Language allows us to coordinate activity far beyond the limits of our bodies. Bringing people together for a common purpose could be something as simple as “Let’s meet for coffee.”
But language, particularly in the form of stories, has a far greater potential. Depending on how compelling the story is (“We hold these truths to be self-evident…” or “In the beginning, God created the heavens and the earth…” for instance), it can coordinate the actions of millions, or even billions, of people over the course of centuries.
Bringing people together for a common purpose is actually the easier part. The question is, how do you maintain people’s alignment over time? No matter how great the purpose is, if people do not benefit from it or if their material needs are not met, they will become misaligned with the purpose.
Money
The universal coordination mechanism we have for material resources is money. Think about the magnitude of coordination needed to create something like a smartphone. You need software and hardware designers, engineers, assembly line workers, component manufacturers, and so on, all playing a role in the process. As we go through the supply chain, components may have subcomponents, all of which need to be designed, engineered, and sourced. Materials for these need to be extracted and refined. The factories themselves and all their machinery need to be set up. Industrial processes need to be researched and developed. Workers need to be educated and trained, and so on and so forth.
If we take into account everyone taking part in the process, there may be hundreds of thousands of people involved. And while some of these people may be doing their job because of some higher purpose, many of them do so because the money they get from the job lets them feed their families and gives them access to resources.
This is how money, acting from the bottom up as a medium of exchange, coordinates the formation of complex networks in society. It incentivizes people to acquire skills, be productive and entrepreneurial, while at the same time promoting the efficient allocation of scarce resources.
But money by itself has its limitations: it does not work for public goods and it creates negative externalities. While money is an excellent UCM for scarce resources and for the production of consumer goods and services, paradoxically, it does not work for those things that can be made abundant — for public goods — as those cannot have an exchange value in the marketplace.
And because the medium of exchange operates between a buyer and a seller, any negative externalities from the production process, such as deforestation, obesity, or pollution, are not accounted for.
The mechanism, based on competition over scarce resources, also cannot align people for the public interest. Any decision made for the public interest, even if it is beneficial and uncontroversial, will always harm some people financially. For example, if the decision is to invest in curing a disease, the workers and investors in the pharmaceutical companies that treat the disease would be financially impacted by a cure.
Government
Since the market doesn’t promote public interest or address negative externalities, we must rely on another UCM: government. Government is supposed to represent the “will of the people” and promote the public interest. In many ways, it complements the market by funding public projects and dealing with negative externalities.
But government is an inefficient UCM. It can easily allocate gigantic sums of money for public projects, but there is no effective incentive structure to select the most impactful projects or ensure efficient spending. Government regulations often align with plutocratic interests, and its actions often benefit politicians rather than serving the public interest.
Crypto
This is where crypto comes in. Blockchain technology has the potential to be a UCM for both scarce and abundant resources, aligning people for the public interest while also serving as money. This allows crypto to effectively fund public goods based on impact and address the problem of negative externalities, making it a superior UCM compared to money and government.
Although current protocols are not yet at this level, they are already acting as proto-UCMs. In crypto protocols, “miners” or “validators” are issued a pre-programmed amount of the protocol’s native currency in exchange for providing network security as they add new transaction blocks to the blockchain. The two most popular blockchain protocols, Bitcoin and Ethereum, have already funded network security to the tune of nearly a trillion dollars.
So, we already have a coordination mechanism that can fund a public good and act as a medium of exchange. We can take the concept to the next level by having a consensus mechanism that issues funding for generalized public goods at a variable rate, based on the economic impact of those goods, instead of having a mechanism that only issues pre-programmed funds for one type of public good.
Here we have a novel price mechanism that works for public goods and maintains an equilibrium between inflation and economic growth. Everyone in the ecosystem benefits from maximizing the production of public goods, but at the same time, issuing new currency devalues everyone’s existing currency holdings. To maintain the value of the currency, everyone in the ecosystem would want to issue exactly the amount of currency equal to the economic impact of the public good.
Overvaluing the public good would result in currency devaluation and users selling their currency as it loses value. Undervaluing the public good would result in fewer public goods produced in the future, which would negatively impact the value of the currency over time. When the economic impact of the public good is valued accurately, the value of the currency is maintained since the new currency issued is offset by the economic impact resulting from the public good.
So we can have a self-correcting price mechanism that allows funding of public goods based on their impact while maintaining the alignment of everyone in the ecosystem, without the need for a central authority.
The evaluation of the economic impact may be complicated and has to be done in a transparent and credible way. But the fact that everyone in the ecosystem is aligned on making sure the goods’ impact is evaluated accurately means that a Proof-of-Impact consensus mechanism will not only be effective but will also be actively developed by the wider community to produce ever more accurate results.
We have a sense of how a crypto UCM can work for abundant goods, but what about the market’s negative externalities? A crypto UCM can fund public goods and assign non-transferable tokens representing the value a contributor provided to the ecosystem. This allows a system where merit is more important than just having capital. If individuals or businesses create negative externalities, on the other hand, they can lose non-transferable tokens or even be at a deficit.
Why would such a mechanism work and not result in bad actors trying to unfairly punish their competitors? Just like for public goods, since everyone in the ecosystem is aligned around the public interest, everyone would want individuals and businesses to be treated fairly. Otherwise users would simply leave the ecosystem, which would devalue everyone’s holdings. Knowing the system is fair would therefore incentivize individuals and businesses to mitigate any negative externalities their products create.
With crypto as a universal coordination mechanism that works for both scarce and abundant goods, we can effectively address the big challenges we face today, from curing diseases to dealing with the ecological crisis. And we can do so with billions of people contributing to the public good while being rewarded fairly in return.
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