Cryptoeconomics 101
I have a short section on cryptoeconomics in my upcoming book, which I&#x27;ll post below (still developing, and still in draft). Unlike practically every other description of the &quot;field&quot;, I don&#x27;t take it for granted and don&#x27;t uncritically adopt it.
(Feedback always welcome!)<p>&lt;snip&gt;
The technological imperative of smart contacts and blockchain technology presupposes rational contracting, which leads to particular moral and epistemological positions. Early rationalizations of the moral and epistemological position of cryptographically-assured smart contracts can be found in Reagle (1996) and Szabo (1997). Since that time, several authors have further developed the concept, leading to what is today sometimes called “cryptoeconomics.” This emerging field deploys the technological affordances of (public key) cryptography: specifically, the ability to authenticate and verify parties; ensure non-repudiation of data; and in some cases, selectively reveal identities (as with blind signatures) (Chaum, 1982). Leveraging these cryptographic affordances, authors use the closely-related fields of rational choice theory and game theory to construct protocols and arrangements for creating social behaviours. In an early speech, Buterin suggests that, with cryptoeconomics, “as soon as you have a decentralized consensus framework that controls an internal asset and there is this valuation equilibrium where people care about it… the cryptosystem has the capability to have real world consequences…” (Vitalik Buterin: Cryptoeconomic Protocols In the Context of Wider Society, 2014). For instance, Buterin considers a number of rational choice strategies, including the prisoner’s dilemma, Nash equilibria, hawk&#x2F;dove games, markets, reputation, and an odd characterization of legal courts. Following Nick Szabo’s earlier discussion of smart contracts, Buterin focuses much of his discussion of cryptoeconomics on Schelling points.<p>Schelling points, or focal points, are a game theory concept developed by Thomas Schelling in his book The Strategy of Conflict (1960). The strategy allows two or more parties to reach agreement in an environment with little information and no possibility of communication. The key insight of Schelling’s theory is that coordination is easier when people’s attention is drawn to prominent or focal points. Schelling offers the example of two people in New York who need to meet in an undetermined location without having prior communication. According to Schelling, on game theory assumptions, each party will likely pick Grand Central Station because in a world in which many possibilities are equally likely, humans look for patterns or unusual focal points of reference. The assumption made by each party is that if I think Grand Central Station is a good meeting spot, the other person may think the same.<p>Similarly, in his descriptions of cryptoeconomics, Buterin offers the example of picking matching numbers from a list without coordination or communication (Vitalik Buterin: Cryptoeconomic Protocols In the Context of Wider Society, 2014). People will, according to the theory, look for something—anything—that makes one number stand out—perhaps an even number, or a number with many zeros, or a well-known lucky number. Thus, given the following numbers: 2349 65 22 100 932, both parties will likely choose “100.” In Western, decimal-based numeracy, 100 “stands out” from the rest of the numbers, and therefore, lacking any other way to coordinate, the rational choice is to assume a common set of beliefs with the person you are trying to coordinate with. Of course, these choices are culture and context specific. With numbers, other patterns might be significant (such as “lucky” numbers), and the same goes with meeting in New York: as times, people, and places change there might be other possible focal points—Times Square, One World Trade Center, Brooklyn Bridge, or the New York Public Library. In these scenarios, all available options might be “weak” focal points. Consider the following scenario where there might be only weak focal points: negotiations between a workers’ union and a business break down and cannot make progress. On the theory of Schelling points, this might be due to lack of strong focal points, in the sense of shared interests and values. Until some stronger focal point can be found, coordination will not be effective. On the other hand, some focal points are very “hard”—so hard that they curtail negotiation. For example, in most of the Western world, the price tag on a retail good is not usually an invitation to start haggling (Szabo, 1997). The stated price is a hard focal point that communicates the context and sometimes the parameters of the contract.<p>While the use of Schelling points is quite powerful and can be used to carefully navigate social contexts, it is not without issue. At its heart, like all rational choice and game theory strategies, a rational (or maximizing) actor is usually assumed, along with some kind of contractual framework  or rationality. Fundamentally, cryptoeconomics fails to fully recognize that actual societies are also the result of war, exploitation, racism, and patriarchy (Held, 1987, p. 113). Patriarchy is an especially important value to consider for cryptoeconomics, since complete freedom and equality—the ability to sincerely engage in contractual negotiations—is a uniquely male capacity in most modern contexts. Rational choice or game theory assumptions lead to a shallow view of human sociality, which is likely to produce bad ethics and&#x2F;or lead to significant errors in use and development (as with The DAO in 2016, see Chapter 8). One alternative to this kind of rationality, suggests Virginia Held, is to focus on “relations of concern and caring and empathy and trust” rather than a fiction about ideal contracts (Held, 1987, p. 125). Such a suggestion does not mean that we should dismiss the role of contracts in society (“smart” or otherwise), rather it implies that contracts themselves are embedded in social contexts.