Cryptoeconomics as a Limitation on Governance

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* Article: Cryptoeconomics as a Limitation on Governance. By Nathan Schneider.


Contextual Quote


"What became of trust? De Filippi et al. (2020) conclude that while the distributed-ledger technology underlying Bitcoin and its progeny has not fully escaped trust, it has produced a new kind of “confidence machine. ”The partial shift from trust to confidence transfers governance burdens from people to technical systems, inviting that renaissance in designs for systems of governance."

- Nathan Schneider and Primavera De Filippi [1]


"The economics in cryptoeconomics raises a particular set of anxieties. Critics have long warned against the expansion of economic logics, crowding out space for vigorous politics in public life. From the Zapatista insurgents of southern Mexico (Hayden, 2002) to political theorists like William Davies(2014) and Wendy Brown (2015), the “neoliberal” aspiration for economics to guide all aspects of society represents a threat to democratic governance and human personhood itself."

- Nathan Schneider [2]



"Governance practices in distributed-ledger systems have grown increasingly diverse and diffuse, while retaining a commitment to cryptoeconomics — the use of economic incentives to guide user behavior, in tandem with cryptographic technology. In the space of a few years, cryptoeconomics has introduced advances in techniques for self-governance. But reliance on cryptoeconomics also introduces limitations on governance possibilities. Drawing on earlier critiques of how economic logics can erode democracy, this paper identifies specific limitations that cryptoeconomic governance faces. It contends that, to overcome these limitations, designers should envelop cryptoeconomics within a logic of politics capable of seeing beyond economic metrics for human flourishing and the common good."


"I offer an analysis informed by snowball-sampled, unstructured interviews with participants in thirteen governance-related cryptoeconomic projects;1quotations from them are used with subsequent permission. I also took part in participant observation with several “decentralized autonomous organizations” (DAOs) during the rise and fall of the 2020–2021 bull market, which saw historic highs in the value of leading cryptocurrencies. Drawing on these encounters, in what follows, I survey the emerging promise that cryptoeconomics presents, followed by an analysis of what appear to be its emerging limitations. Finally, I outline suppositions about how cryptoeconomics might mature by incorporating logics of politics in which economics serves as ameans more than an end, where the range of motion available in governance is as wide as possible. I hope that these observations can inform both future practice and empirical research; if cryptoeconomics is running up against its limits, future scholarship and entrepreneurship alike should take care not to be constrained by it. I land on an argument that is both normative and predictive."


What is Cryptoeconomics ?

Nathan Schneider:

"Governance options fall away when institutions seek to diminish the space of trust? What does the machine fail to measure? These questions are especially urgent to the extent that distributed ledger technology represents a kind of prefigurative politics (Leach, 2013), as many practitioners seek to replace the institutional infrastructure of political and economic life(Dicker, 2021; Faustino, 2019; Swartz, 2017). If blockchains and their ilk are the germ of a future society, or at least some important subset of it, what kind of society will they germinate? I refer to the logic that undergirds Bitcoin, derivative blockchains, and other distributed-ledger technologies with a colloquialism among practitioners, cryptoeconomics. The industry publication Coin Desk defines this “crucial concept” as “an area of applied cryptography that takes economic incentives and economic theory into account” — neither abstract cryptography nor economics but a practical fusion of the two.


A growing body of analysis interprets cryptoeconomics and its associated technologies as engines of commoning, in the spirit of Elinor Ostrom (Cila et al., 2020; Fritsch et al., 2021; Reijers et al., 2016; Rozas etal., 2021, 2018). There is much to commend this approach, as participant-governed blockchains do seem to resemble common-pool resources. Yet there are respects in which cryptoeconomics also resembles an opposite of the commons: the enclosure, in which what was once held in common become subdivided into ownable, tradeable assets (Federici, 2004). Under cryptoeconomics, things previously difficult or impossible to buy or sell, from cryptographic computing power to real estate in digital games, have become the basis of markets. Notably, cryptoeconomic markets depend on some sort of artificial scarcity, such as Nakamoto’s limit on supply at 21 million bitcoins. More invasive forms of enclosure and scarcity could follow. In the past, major advances in commodification produced markets for enslaving human beings and conquering the once-common lands of indigenous peoples. Such comparisons might seem alarmist if cryptoeconomic enthusiasts were not setting their world-transforming sights so high."