City-State Competition on the Digital Plane

Key Points

  • “[digital systems of government] decide on the rules over the system, rather than within the system”
  • “There are parallels between what digital and material forms of government can do”
  • “Forward looking companies can optimize their digital footprints to lower expenses and shape the operating environment in Web 3.0”
http://www.cointelegraph.com

An enduring topic of conversation in America’s tribal political climate is the net migration pattern of citizens from liberally governed states to conservatively governed ones. Broadly speaking, this is attributable to conservative states having lower population density, lower cost of living, business friendly public policy, robust law enforcement, and much more. Additionally, this has been exacerbated by modern workplace initiatives and technology which have empowered people with more freedom to maneuver their lives as they see fit. While this topic is highly complex and nuanced, it does serve as a recent reminder that governing bodies can influence populations into and out of their jurisdiction. So, could a similar situation occur on the internet or digital plane of existence? I believe that it can and will have significant impacts to businesses’ operations on Web 3.0.  

These digital systems of government preside over blockchain ecosystems and the token holders that operate within them. They decide on the rules over the system, rather than within the system. In more familiar terms, they decide on how a parking violation is enforced, rather than what constitutes a parking violation. The purpose of this delineation is the blockchain can continue to dynamically evolve long after its developers have moved on to other projects or died. Interestingly enough, this bears a striking similarity to the U.S. Constitution and the intent behind its creation. Now this begs the question, what about the decision of what constitutes a parking violation? Put simply, this decision is made when a blockchain’s software is being written. Therefore, whenever the blockchain’s processes are violated or compromised, “the law” so to speak has been broken. Explaining this concept further is beyond the scope of this article, however to illustrate how decisions are made on Polkadot observe the infographic below.

http://www.polkadot.network

Now that the intent of blockchain ecosystem governance is understood, this leads to what it can actually do. A few categories are:

  • Economic/Fiscal Policy- includes a financial incentive system for participants in the ecosystem as well as how the ecosystem’s token currency is minted or destroyed, commonly referred to as “tokenomics
  • Military/Law Enforcement Policy- includes the consensus algorithm to ensure the network remains safe from internal or external threats; slashing or negative reinforcement to punish those who disobey the consensus algorithm
  • Social Policy- includes spending the ecosystem’s token currency held in its treasury to help fund a project that provides a common good such as a software developer kit or seed funding for a new blockchain

Clearly there are parallels between what digital and material forms of government can do. Therefore, both are subject to similar repercussions if they fail to govern in a manner that is beneficial towards their constituents.

However, these constituents are not similar. In the case of Polkadot, only token holders can cast token-weighted votes. For instance, an individual with 50 DOT and an individual with 100 DOT can both vote. However, the individual with 100 DOT has twice the voting power of the individual with 50 DOT. Additionally, the longer a token holder is willing to make their token balance illiquid the greater their vote’s value becomes. Ultimately, the rationale is similar to that of a corporate shareholder election in which those who have the most capital to lose receive the greatest share of representation. The result is a digital state whose constituents’ switching costs are proportionate to their power within it. As for a material state’s constituents, they more likely will have higher switching costs relative to their digital peers due to transfers of hard assets and the time necessary to complete them. A household’s relocation to another residence is one of many examples. Yet, domestic migration remains a growing concern for states like NY, IL, and CA. One should expect similar trends to form in the digital plane at a more rapid rate as blockchain ecosystems mature. This is due to lower switching costs and high velocity of information.

Over the last few years in the United States there have been highly consequential decisions made by some of the country’s largest corporations in terms of where to locate polarizing business infrastructure. Amazon’s HQ2 is one such example in which the firm decided to establish its second headquarters in Arlington, VA after having second thoughts about a potential NYC locale. The decision cost New York state 25,000 jobs and hundreds of millions of dollars in new investments. The underpinnings of this decision for Amazon were political in nature which stated:

“a number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward with the project we and many others envisioned in Long Island City.”

Based upon my prior points, it is reasonable to predict that similar outcomes could take place between businesses and blockchain ecosystems such as Polkadot or its near peer competitor Cosmos. If a company is operating within one of these ecosystems it is implied that they maintain a token balance for the purposes of utility and representation. Therefore, it is incumbent upon executive leadership and their supporting teams to understand and engage with these ecosystems. The alternative to this would be to hire a third-party advisor that specializes in blockchain governance and/or a particular blockchain ecosystem similar to today’s political risk analysis or political advisory firms. In doing so, forward looking companies can optimize their digital footprints to lower expenses and shape the operating environment in Web 3.0.

Bustle Rack

http://www.twitter.com/Snowden

http://www.medium.com/coinshares    

http://www.deeper.network

http://www.parachains.info/#projects

http://www.gemini.com/credit-card

https://launchpad.seedify.fund/

6 comments

  1. Nice post that connects to your presentation, but adds considerably more value. We’ll be reading about Estonia and blockchain later in the semester.

  2. Great write-up, Chris! You bring up some really interesting details that you alluded to in your presentation. I’m especially interested in how the companies themselves running on web 3.0 could potentially handle their responsibility to contribute and support the blockchain’s governance, as major token holders. Do you see a major market for 3rd party blockchain governance advisors? That path seems likely for some major companies/websites who don’t necessarily have too much stake in how the infrastructure is regulated, whereas I’m sure companies like Facebook would want full control over their say in the web’s governance. I am also a bit skeptical of how much sway a major corporation could have on web 3.0 due to the sheer amount of tokens they will most likely own for their space within the digital plane, compared to individuals wanting a say in how certain regulations are handled… With the current process we at least have the government to “supposedly” speak for the people when voting on regulations surrounding major corporations. Unless I’m misunderstanding this new platform, wouldn’t companies like Facebook theoretically have much more power act as they see fit, due to their abundance of tokens (therefore votes) they’d possess to run their system on Polkadot?

    1. Blockchain governance advisory firms will have a niche market I think. They will be more important for web 2.0 incumbents since they are accustomed to the legacy internet and most likely have less tech savy executives relative to organic web 3.0 companies.

      To your point on FB, remember that a token holder’s vote is contingent upon both token balance AND the time they are willing to “lock up” their tokens if they win the vote. Additionally, there are currently 100 parachains planned for the DOT ecosystem. I think these two aspects of governance are enough to give FB second thoughts about becoming the ecosystem hegemon. Not to mention that most parties involved with crypto likely have an unfavorable opinion of FB. There are many other aspects of DOT’s governance that I haven’t mentioned that create additional roadblocks to this scenario occurring. So for now, I have decided it is too nascent to spend considerable time predicting. My opinion is that companies like FB would never put themselves in a situation where they are giving up sovereignty to join an ecosystem and would rather make their own.

  3. I found this topic super interesting in your presentation, so glad to see the deep dive here! This concept is deeply rooted in society, so it makes sense that the same principles of government we see in the US could be applied to the blockchain. This also however makes it susceptible to the many of the same challenges we face in government as well

  4. Chris, thank you for adding more color to your previous presentation. This inspired me to do my own research and I think I’m finally beginning to understand the concept. In a way, Polkadot will act as a market place or unifying destination for certain chains (for example, ones that are focused on securing a supply chain so you understand where your beans are sourced from, with others that would allow you to pay for those beans using a typical cryptocurrency) If I’m totally off on that explanation please correct me or guide me.

    1. “unifying destination for certain chains” exactly, well done!

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