Understanding Crypto 15: Prof. Vili Lehdonvirta: Cryptocracy: The Obfuscation of Power

September 9, 2022 Guest User

Vili Lehdonvirta is Professor of Economic Sociology and Digital Social Research at the Oxford Internet Institute, University of Oxford. He is the author of "Cloud Empires: How Digital Platforms Are Overtaking the State and How We Can Regain Control" (MIT Press, 2022) and "Virtual Economies: Design and Analysis" (MIT Press, 2014).

He has served on the European Commission’s Expert Group on the Online Platform Economy and the High-Level Expert Group on Digital Transformation and EU Labour Markets. Vili was born in Finland and previously worked at the London School of Economics, the University of Tokyo, and the Helsinki Institute for Information Technology. Before his academic career he worked as a software developer and dabbled in tech entrepreneurship.

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Today, we speak to Vili Lehdonvirta, Professor of Economics, Sociology, and Digital Social Research at the Oxford Internet Institute at the University of Oxford. Professor Lehdonvirta is a social scientist whose research focuses on ways digital technologies are reshaping the organization of economies, including their associated social effects. He is also the author of two books, Cloud Empires and Virtual Economies, which provide readers with an in-depth look into the power that crypto platforms hold and a well-rounded characterization of digital markets. In this episode, we talk about the ideological underpinnings of crypto and the role of governance in making cryptocurrencies possible. We discuss the role of states in scaling markets, how states and platform companies differ, the impacts of smart contracts on governance issues, and how control and power are centralized within crypto markets, as well as the social implications of blockchain technology. Listeners will also learn about past controversies within the crypto space, why people are still needed within crypto, and the blockchain paradox, plus more!

Key Points From This Episode:

We start by learning about John Perry Barlow’s vision for cyberspace. [0:05:06]
Find out about the role that states play in markets. [0:07:03]
How markets function at scale if the state is not involved. [0:07:55]
Professor Lehdonvirta’s view on whether governance may precede markets. [0:08:59]
The role massive platform companies play in today’s economy. [0:09:44]
Ways in which states and platform companies differ. [0:10:42]
Why he thinks public blockchain technology has garnered so much attention. [0:11:27]
An explanation of the influence John Perry Barlow’s vision had on cryptocurrencies. [0:13:04]
Learn what a Kleroterion is and the role it played in Athenian democracy. [0:14:01]
Professor Lehdonvirta shares what it means to ‘trust in the code.’ [0:17:05]
An outline of the new properties smart contracts created. [0:18:59]
Social and economic implications of unstoppable censorship-resistant contracts. [0:21:08]
A brief rundown of how impactful smart contracts have been. [0:22:27]
How the trustless and unstoppable claims of cryptocurrencies and DAOs were affected by the DAO story. [0:24:20]
Whether the Bitcoin block-size conflict affected the perception of crypto as a trustless system. [0:28:17]
We find out the current size of the Bitcoin development team. [0:31:05]
Other examples of human discretion affecting the direction of Bitcoin. [0:31:46]
Professor Lehdonvirta explains the strategies used to preserve trustlessness after the human interventions took place. [0:35:16]
Details about an important strategy: the appeal to technical expertise. [0:38:53]
Find out if the ability to fork blockchain networks restores trustless claims of crypto. [0:39:42]
Whether users of a blockchain network, who are not miners, can influence crypto markets. [0:45:02]
Professor Lehdonvirta’s opinion on who has the most control over cryptocurrency networks. [0:49:35]
Hear what aspect of Athenian democracy Nakamoto failed to replicate. [0:54:26]
We learn what the blockchain paradox is (also known as the governance paradox). [0:56:50]
Find out if Professor Lehdonvirta thinks technology changes the fundamental aspects which shape how societies are organized. [01:00:11]
Find out if blockchain has eliminated the need for nation-states. [01:02:11]
What cryptocurrencies have accomplished since their inception. [01:03:40]

Read the Transcript:

Ben Felix: This is a limited series of The Rational Reminder podcast, a weekly reality check on sensible investing and financial decision making focused on cryptocurrencies. We're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to episode 15 of this series. This week we have a very clear, thoughtful, great speaker in Vili Lehdonvirta. Incredible. I learned so much from this and he helped assemble so many of the pieces I think that I've been struggling with. Vili's a Professor of Economic Sociology and Digital Social Research at the Oxford Internet Institute at University of Oxford. But Ben, you want to kick off this intro with a story.

Ben Felix: The story's not too crazy. I found a paper by Vili and a co-author named Gili Vidan and it was great paper. It's called, Mine the gap: Bitcoin and the maintenance of trustlessness. Fascinating. It's basically about the human interventions that have allowed Bitcoin to persist, the human interventions that have happened behind the scenes and how those have been necessary for Bitcoin to persist. And then they talk about the discussive strategies that were used in communicating what had happened in a way that didn't take away the trustless perception of Bitcoin. It's just a fascinating paper, fascinating concept. I read that. And then as we tend to do got in touch with Vili, because thought he might be an interesting podcast guest.

The timing ended up being nice because he had a book that was unpublished at the time, but he had a book coming out on platform technologies and how they've affected society. He talks about cryptocurrencies in the book. Anyway, I got in touch with him and said, listen, I read your paper, I'd love have you our podcast. He was like, well, here's an advanced copy of my book, maybe we can talk about that too. I was like, perfect, good timing. The book is Cloud Empires: How digital platforms are overtaking the state and how we can regain control, from MIT press. It is published, I think in September is when it's supposed to be coming out. It's an excellent book. But I think like you said, Cameron, it connects so many of the dots that were previously left unconnected in my mind, just in terms of how to think about cryptocurrency and blockchain.

I think the cleanest example of that, of the connecting the dots is that Vili talks about how cryptocurrencies and the design that Satoshi Nakamoto had for them, solves administration of rules, but it does not solve the making of rules. And you can't have a functioning economic system without the ability to do both of those things. And because in the case of cryptocurrencies, there is just no system for how the rules are made and changed other than maybe informal agreements and things like that. You end up with what Vili calls a cryptocracy, where power centralizes in places that you can't necessarily see or identify. So the rules end up being made by some party with limited or no accountability to the users of the network, to the people who are involved. Anyways, I think that's pretty profound.

Cameron Passmore: He talked about how the world is changing so much that to have rules like this that aren't as flexible as might be needed in an ever changing world. I thought his discussion around, we have global challenges that are very hard to solve with state networks, which I thought that was interesting. Climate change, that's a good one. Right? Very, very interesting.

Ben Felix: You can't have static rules. That's one of the other things that he talked about. In the example of Bitcoin, for there to be rules that never change, you're implicitly making an assumption that the world is never going to change. For the desired outcome based on the original design of Bitcoin, in the example, you may no longer get that desired outcome when the world around you changes, which requires governance. It requires changes to the rules of the network, but it's not clear who gets to make those rules and who gets to even enforce the rules in some cases. It's just an interesting situation in cryptocurrencies where it's not clear who has control and who ultimately has the most influence, but there are a lot of people economically who are being affected by these systems, which makes I think a pretty important thing to talk about.

Cameron Passmore: I agree. He also published the book, Virtual Economies: Design and Analysis, and he's authored and co-authored over 30 peer review articles published in journals, such as Socio-Economic Review, Sociology and Journal of Management.

Ben Felix: I think that's a good enough introduction. It can't possibly be better than the conversation that we just had with Vili. We'll go ahead with the conversation.

Cameron Passmore: All right. Here's our conversation with Vili Lehdonvirta.

Vili Lehdonvirta, welcome to The Rational Reminder podcast.

Thank you very much, Ben. Glad to be here.

Awesome. Vili, to start off, what was John Perry Barlow's vision for cyberspace?

Sure. John Perry Barlow in the 90s, the cold war was just ending and humanity almost got destroyed by nuclear weapons. So John Perry Barlow was one of many people who thought that humanity really ought to be able to do better and come up with a form of essentially social organization that doesn't rely on states to protect us, because states besides protecting us they can also destroy us. He went looking for that social order on the internet. He thought that there could be an internet society, a cyber society that was based not on state authority and laws and bureaucracy, but on reciprocity and reputation on individual responsibility as the means to achieve social order.

Why wasn't his vision realized?

Well, maybe it was for a while. In the 1980s, for instance, I studied these early online marketplaces, the Usenet marketplace, and there basically contracts were enforced by people just relying on each other to do the right thing, just like in a rural village, if you don't honor your promises, then you get ostracized out of the community. And this is how it worked in these electronic communities. But then as the internet began to grow in the 1990s, we had the boom of commercial internet service providers and suddenly millions of people pouring into these communities. And they grew from being just communities into boom towns and eventually mega cities. And the village style reciprocity and being kind to your neighbors just wasn't enough anymore to maintain social order. Basically things fell apart. The Usenet marketplace was taken over by scammers and spammers, and this happened many times over.

Maybe to abstract from that. What role does states play in markets?

Ultimately states underpin markets by enforcing contracts and property rights. Most of the time we don't need to appeal to the state to enforce a contract, people just honor their promises, and most of the time would be too expensive anyway in terms of the transaction costs to go to court over every possible little deal. But ultimately states are what underpins social order in modern society. And so Barlow was hoping that this could be, and other cyber libertarians were hoping that on the internet, we could forego states and state authority as underpiners of economic activity. And instead more into this more personal responsibility based system. And that way also avoid the problem of states and other formal institutions, which is that they can also abuse that authority.

How do markets tend to function at scale in the absence of a state?

Well, they don't, that's the problem. If you look at essentially economic history, the growth of these large scale impersonal markets that characterize modern society is also the story of the growth of the state and its ability to use laws and bureaucracy and regulations and different kinds of institutions to provide those underpinnings. We see, for instance, in medieval times, there are examples of long distance trade conducted by medieval merchants, and that is underpinned to a large extent by personal reputation, by networks of merchants knowing each other. But ultimately those never could grow very big because once it grows too large, then the information costs start getting bigger and it just doesn't work anymore. Order falls apart.

Interesting. I remember reading David Graver's book, and one of the things that struck me in there was, I think he mentions that states or at least governance may proceed markets. Do you have a view on that?

Certainly hierarchical order and empires, Sumerian empires, they proceed markets for sure. But markets as a form of economic organization were really niche in the sidelines for most of human history. Most of human history, economic organization was based on hierarchy and customary obligations and rights. And even in medieval times, markets were really this side show for wealthy people to get their hands on some exotic items. And only towards modernity in this early modernity until we start seeing that emergence large scale markets for corn and that sort of tuff.

Interesting. What role are the massive platform companies playing in today's economy?

Today my argument is that, and basically that's one of the main arguments of my book Cloud Empires, is that digital platforms have now assumed the role that state used to have in terms of underpinning economic activity in digital markets, especially markets that are transnational in nature. Because the state as a territorial form of social organization by definition has a lot of trouble underpinning exchange that crosses boundaries. As you know there's a big cost to cross board a trade. And so what platforms are able to do is that they're able to create these institutional environments on the internet, where you're trading under a single set of rules with people from different countries, whether it's an online labor market like Upwork or an eCommerce market like Amazon Marketplace or anything else.

Interesting. How are states and platform companies different?

Well, the crucial difference is that state jurisdiction is territorial. So states, there's other international, also other forms of justifications for states to extend the jurisdiction. But the main idea is that states exercise jurisdiction within their territories and about a hundred kilometers up, depending on which state you ask. Whereas platforms of jurisdiction, quote unquote, is based on membership. It's personal jurisdiction. People can be anywhere in the world if they choose to subject themselves to jurisdiction of a particular platform empire.

From this perspective of economic organization, why do you think public blockchain technology has garnered so much attention?

I've been following blockchain for a long time. I started following Bitcoin in 2010 when I met one of the original developers. And the whole idea why blockchain technologies and cryptocurrencies attracted so much attention and the imaginations of so many people I think is because they promise to fundamentally change this tenent of economic organization that I've outlined, which is that for large scale markets, for a large scale economic activity, you really need to have this authority to underpin the activity, to enforce the contracts, to protect the property right. And blockchain proponents basically say, we can replace that authority with this network, with this distributed network that is going to cryptographically or crypto economically guarantee the execution of contracts or the protection of property rights.

And why this is revolutionary as a claim, is because that means you would get the benefits of formerly institutions, the benefits of that authority, which is underpinning that activity, but without the downside of the potential for abuse. You would solve the millennia old problem of political science, which is that authorities protect us, but who will protect us from the authorities? Here you have a form of order that guaranteed not to overstep its boundaries.

So interesting.

Can you talk about how John Perry Barlow's vision that we talked about earlier influenced cryptocurrencies?

Barlow belonged to a movement that has at least later being characterized as cyber libertarianism, and the idea being that let's use technology to create a libertarian social order where we don't need to rely on the state or any other form of authority. And cryptocurrencies emerged from this related movement or school of thought, which is variously known as crypto anarchism or cypherpunks. And they are, in some ways they're like a flavor of cyber libertarianism, in the sense that they're also trying to create a social order that without state or the large corporate authorities, but they're trying to do that specifically with cryptographic technology.

What is a kleroterion and what role did it play in Athenian democracy?

Okay. In Cloud Empires, I love to do this thing where basically I pick something from the ancient or medieval world and show that it's essentially a precursor to something that's now happening in the internet economy, basically to show that after all there's very little that's new under the sun. Kleroterion is really one of my favorite example, because it's an ancient machine for decentralizing government power. In practical terms it's a big rectangular slab of stone. It's about the height of a man. And under the face of that stone, you have carved this fine matrix of slots, hundreds of slots arranged into rows and columns. And into each of the slots every morning, citizens, so this is happening in ancient Athens around 300, 400 BC, around the kleroterion each morning, citizens gather and they put tokens. Each person has a token possibly made of brass, representing them.

They stick it into one of the slots in the machine. And then when things click into action, there's a mechanism that starts releasing black and white balls made of ivory, randomly. And if a white ball hits or basically lands next to your token, that means you, congratulations, you're now a government official for the day. And if a black ball lands on your token, then sorry, you're out for today. And this way basically ancient Athenians, they randomly distributed government position. Certain roles were reallocated every 24 hours and some other roles on a slightly longer cycle.

And the analogy of course here is to blockchain and specifically to the proof of work algorithm, which in a very similar way, the idea is, let's choose randomly who is the administrator responsible for verifying the last 10 minutes worth of transactions and compiling them into a block, a record that can then be appended into the official record. There's a very strong analogy there I think.

In both cases, we're putting our trust in the algorithm as opposed to in people?

That's right. Because the idea is when you distribute the power so thinly across the population, nobody gains really enough power to really abuse it. But together the algorithm ensures that things hold together and you still have that capable administration and those property rights are protected, but no individual official has enough power in their hands to actually abuse that position.

On that thought, continuing that thought, what does it mean to trust in code?

So Satoshi Nakamoto who was the pseudonymous creator of Bitcoin, he talked a lot about how the problem with conventional money and conventional financial systems was the fact that you needed to trust a lot of people. So you needed to trust the central bank, not to debase the currency. You need to trust payment platforms like PayPal to actually carry out your transaction. There were around the time he was writing 2008, 2009, there were good examples why you shouldn't necessarily trust these parties always. The world was just reeling from the financial crisis. There were a lot of people thinking, okay, the financial system, the people in the financial system, they're not really trustworthy. They're not worth our trust. They've actually abused that trust because they've sold us products they knew were not backed by sufficient collateral. And they've pulled all these nasty moves.

PayPal was infamous for freezing on occasion merchants accounts and then giving them no recourse essentially. And so Nakamoto was arguing that the problem in all of this is we have to trust these people. And that's analogous too what I said before, is basically the ancient problem of political science. Authorities protect us, but who will protect us from the authorities? The financial system and PayPal, they protect our money, but who will protect our money from them? And so trust in code was the idea that, well, what if we replace these human authorities with a system in which the protection is instead, essentially carried out by an incorruptible algorithm, the piece of code, which doesn't afford any human actor enough power to actually abuse that power. Instead of having to trust that humans, we're now trusting code.

What new properties did smart contracts create?

Smart contracts are contracts that are executed by program code instead of being executed by lawyers or bureaucracies or court or something like that. That in itself is not super revolutionary because we have a program code executing contracts. We've had that for a long time. If you order something from Amazon and it's delivered later, it's not like there's some human administrator they're looking at your order and going like, now we should really ship this to Vili now, because now the books come into your warehouse. Now there is an algorithm that checks, there's books in our warehouse. Great. Now dispatch it to Vili. And the same in payroll, corporate payroll. Right? Every month, there is an algorithm that sends out payments. Very few cases is that done by hand.

That in itself is not particularly revolutionary. What is claimed to be revolutionary is how smart contract systems based on blockchain technology like Ethereum, in those the execution of the smart contract is not done by code running on the server administered by a company which could choose to unilaterally change that code so that it no longer does what it was supposed to do. Instead it's executed by a blockchain network, which works according to these same principles, whether it's from analogy, it's usually a proof of work algorithm, that ensures that basically the smart contract gets executed exactly as written and nothing else. And you don't have to take the system administrators word for that.

You have cryptographic or at least crypto economic guarantees that this will actually be the case. So again, the idea is that this eliminates the need to trust humans to solve the ancient problem of political science. We get the benefits of authority, benefits of somebody really enforcing our contracts and property rights, but without the risk of abuse.

What do you think are the social and economic implications of unstoppable censorship resistant contracts?

Well, if that was possible, it would be pretty crazy, because in economic history, we've had essentially the entire history of human economies is state authority or hierarchical authority, makes large scale markets possible. But then it also means that now these authorities have a lot of power, so it's sort or you win some you loser some. And then suddenly you have this promise of asymmetrical promise that no, we can organize these economies and markets on a massive scale, but we don't need to trust anyone to do that. That could have massive implications. Now it would enable the creation of markets outside of human control, outside political control, and that would have all kinds of ramifications, good and bad I think, to the extent that we think that the government intervention is sometimes very important and necessary, even for reasons of equity or redistribution, for instance.

Then this crypto economy, if it took off, it would exclude that possibility. And it would be a fulfillment of the cyber libertarian and crypto anarchist dream of social order based really just on the individual responsibility and without any form of state or other authority.

In practice, how impactful have smart contracts been?

Initially the Ethereum smart contracts, most of the applications were just different forms of gambling and whether explicit gambling or implicit, something that is sold as a real investment scheme, but in the end turns to be Ponzi scheme or something like that. The actual applications were not particularly impressive. But then you started getting some people thinking, okay, how can you use this for something more productive? One of the most exciting project was called the DAO, the distributed autonomous organization. Right? And it was essentially like an investor managed fund, an investment fund. So bunch of people pull their money in and then they vote on what they want to invest that money on, and then any profits they get to take out, they can vote to then take out of the system.

Except that it wasn't registered as a corporate entity under the laws of any state anywhere. It was all based on smart contracts running on the Ethereum platform. All the corporate governance, the investing into it, paying out the proceeds, all of that was based on smart contracts, running the voting procedure was based on smart contracts. So very impressive idea of let's create this free floating investment fund that's not dependent on the laws of any state.

It was a cool idea. I think they raised a ton more capital than they even expected to.

That's right. If I remember correctly about 150 million worth of Ethereum, and it was a huge chunk of all the Ethereum and circulation at the time.

It's a crazy story.

Sorry of Ether, Ethereum's virtual currency.

In the end, how were the trustless and unstoppable claims of cryptocurrencies and DAOs affected by the DAO story?

What happened with the DAO, right? Was somebody figured out that there was a bug in the code. And despite the fact that it was audited, they audited the code and it was open source, but somebody figured out there's a bug. And they used that bug to start siphoning money out of the fund. Right? And they managed to get away with around a third of the money invested into the fund. And then when people got very upset about this and they started calling for something to be done, there's been attack, there's been hack, we've been hacked, we've been robbed. And an anonymous message appeared claiming to be from the attacker, quote unquote, which said, well, I'm very disappointed that you would characterize this as an attack, because actually I was just following the rules of the smart contract.

You had written into that smart contract the possibility for me to withdraw a third of your funds. And the fact that it's there into contract means that it's legit and that's what you intended, wasn't it? Because they even had the founders of this, the DAO, they stated on the website, they had a human readable version of the rules of this fund, right? But it said that, well, this is just for illustration in case there is any conflict between what's set here in the human readable version and the actual code, the smart contract, the smart contract prevails. That's the ultimate authoritative expression of the rules of our fund. So the so-called attacker was in fact from the point of view of the smart contracts and from the point of view of the Ethereum smart contracts platform, just following the rules of the system and making use of an ability of a feature that was built into the system.

If somebody thinks it's a bug, that's just in the eyes of the beholder, there's no objective way of saying that's a bug rather than a feature. But so what happened was, this argument did not win the day. Right? Long story short, Vitalik Buterin, child genius co-founder of Ethereum, he stepped in and basically used his authority to, I'm cutting a lot of corners here, but used his authority and trust that he had to basically say, okay, we're going to roll back the system a bit. And they essentially rolled back things. They changed the code in such a way that the attacker was dispossessed. Their funds were confiscated and the funds were returned to the original owners.

And this was very, very controversial and caused a big fuss, because suddenly it showed that, no, this was not unstoppable incorruptible code, because Ethereum's website said this is unstoppable, incorruptible code, that no possibility of downtime, no possibility of any humans intervening in this process, this is all algorithmic and trust the code, not the people and so on. And then suddenly when things go wrong, then a person steps in and says, actually-

Trust the people.

Right. It was very controversial because it showed all of that rhetoric to be a sham, but they had to do it because basically the whole platform would've been in trouble because so much of Ether, the currency unit circulating and the platform was tied up into that one single project at the time. So they then subsequently removed the words unstoppable code from the website, and they started focusing more on the idea of smart contract platform that is managed responsibly.

Wow. Did the Bitcoin size conflict of, I think 2015 to 2017, did that have a similar effect on crypto's perception of trustlessness?

For some people, yeah. Bitcoin has had multiple moments like this, to that in my opinion, demonstrate that it's likewise ultimately still underpinned by human trust. And we haven't solved that ancient political problem in any way. For instance, in 2018, a bug was discovered in Bitcoin core, the core code, that was so bad that it would've allowed an attacker to create Bitcoins out of thin air. And when the developers discovered this, they didn't actually tell anyone, but instead they quickly put together a patch that fixed the bug and then they just told people, hey, would you mind installing this patch because we just need a maintenance update? And everyone trusts the core development team. So yeah, whatever. Okay, sure. We'll update our software. And then when everyone had updated them, they're like, phew, okay, now we can tell you, this was really bad. This could have really messed things up.

And so essentially the community is relying, is trusting the core developers to do the right thing and not for instance abuse that insider knowledge to their own benefit. But the Bitcoin community they've adopted this. There is no such thing as the Bitcoin community and there's different sub communities and subcultures, but a dominant idea among a large chunk of Bitcoin people today is this idea that Bitcoin's rules are now set. We're not going to change any of those rules anymore. Because as you mentioned, there was this debate, this blockchain size debate, where people were debating, which direction should the system take essentially. And different interests favor different directions. And in the end, the status quo prevail. Let's not change anything. That prevailed.

And so they've got this idea that, well, it's not governed by humans because we're not going to make any changes. So that's not governing. Because we're just going to keep things the same. And that's not an argument entirely without merit, but the trouble with that is sometimes you're forced to make changes because the world around you changes. Either you discover a bug or the systems around you change, the interface is change. Now you have to update. Quantum computing comes along, you have to change your cryptographic algorithm. And sometimes those changes, they involve trade ops. There's multiple alternative ways of solving the problem. And they each have their different pros and cons. And which option you choose, that's a political choice, because it favors some interests at the expense of others.

How big is the Bitcoin core development team now, do you know?

To be honest, I don't know. I haven't followed because they're not particularly prominent now because they're very much focusing on not doing anything.

Interesting.

That's the point. Right? I don't know. But it's something around five to 10 people.

It's a small group. I had understood. I can't remember who I heard that from, but the group had been shrinking for a while.

And it was never really bigger than that. I think probably at its peak, it was like 10 people. Of course there are other developers that maybe contributing, but these are the people who have right access to the repository.

Fascinating. Have there been other cases of human discretion affecting the direction of Bitcoin?

Well, yeah, many times. For instance, in some ways precipitated the whole block size debate was back in, I don't know, was this 2011 or something like that, very early on, somebody started spamming the Bitcoin network with lots of transactions. And trouble with that is if the blocks get filled up with, or rather actually I think the concern at that time was the size of the blockchain started growing a lot. It's many gigabytes. It might be a problem storing it for some nodes that want to at that time at least nodes to mind, Bitcoin or functions nodes in the network. Details a little bit hazy. But anyway, something like this happens, spanning happened. Satoshi Nakamoto, who was still the developer at that time, he decided let's put in a temporary, well, this debate, whether it was intended to be temporary, but I think a temporary, like an upper limit.

He just put a variable or a constant, which they're like max block size was one megabyte, just an arbitrary number, but just put that so that there's an upper limit that one block can take. That way the cha, but then when Bitcoin started seeing some actual use and traction, then the number of transactions got high enough that that wasn't enough anymore to record all the transactions that happen in a 10 minute span of time. Because one block is appended to the chain, approximately every 10 minutes. Within that maximum block size set by Nakamoto, you could only fit about three or four transactions per second, which if you compare it with, as frequently compared with Visa, which supposedly processes some of like three, 4,000 transactions a second and has peak capacity of 56,000 transactions a second.

So then three to four transactions is really, really slow, really small capacity. Right? You probably couldn't even run a big supermarket with that number of transactions per second, let alone a city or a global economy. Because it's supposed to become this global currency. And so this was an example of a human decision that was just made that had then massive implications later on. And so later debate then ensued when people started to have to wait for hours to get their transactions confirmed because the network was congested, and debate ensued as to, okay, should we increase that? That variable that Nakamoto put in there, why don't we put another number?

He just pluck the number out of generic. He just put one megabyte, why don't we put 20 megabytes? And why don't we put eight megabytes? A debate ensued around this. That was the block size debate.

I think I've even read that the limit on the number of Bitcoins, the 21 million was also pretty arbitrary by Nakamoto.

And there was debate as to whether that was the correct number and how it should go. But then I remember reading, I think there was in a Bitcoin talk forum or something, 10 years ago, somebody was saying, we shouldn't change this aspect of the system because otherwise if people realize that the 21 million Bitcoin limit is likewise arbitrary and subject to human decision making, then that undermines the claim of this being digital gold and hard currency.

I want to ask about, you had a 2018 paper that looked at these issues, the instances of human intervention in Bitcoin. What were the discussive strategies that were used to preserve that idea of trustlessness after these human interventions took place?

Right. Right. This was a study I did with Gili Vidan, she is a PhD candidate at Harvard. And now the history of technology, I think she's maybe finishing just now. Maybe she even just finished her PhD. The puzzle we were looking at was, to us it seemed very clear that there was this massive gap between the trustlessness narrative and the trusting code versus the number of people you actually have to trust at various points in the system. We've just been talking about the network itself, but then there's all these exchanges that you have to use. And all these other institutions that you in practice you must interact with if you're going to participate in the economy. And so there's this massive gap between promise and reality, and yet the show goes on. It's like we are shouting from the rooftops, it's not true. The promise, it's a false. The cake is a lie.

But nobody seems to care. They're just like, well, we're just going to keep doing what we're always been doing. We were like, why is this happening? How is this possible? And essentially what we found in this study was that it's because the trustlessness, the idea of trustlessness, it's not just a technical achievement, in fact, it's not a technical achievement as we've pointed out, it has not succeeded as a technical. It's a discussive achievement, it's a triumph of a rhetoric, and there were four discussive strategies. And I think the most important one really is this framing of any gaps between promise and reality is temporary bugs that will be solved by the next version. Or if not, that, then the version after that. Right?

Don't worry, the next version will fix this. You say, but this is not trustless. I have to trust you. Don't worry because it's just work in progress. Next version or maybe the one after that, we will roll out a feature that gets rid of this. And then if you ask like, well, how do we know this is going to happen? Well, because this is trustless technology. It has to be in the end. We know we'll get there. And that's where it starts to, I don't like these comparisons to religion too much, but that's where it starts to become a matter of faith, when you say, if you just hold true to the promise, accept the prophet's teaching, keep your faith, stay true to the project, in the end you shall arrive in the promise plan.

There's going to be difficulties. There's going to be temptations in the way, but if you just hold onto your Bitcoin and preferably buy some more of it, eventually we will arrive in the promised land of trustlessness where nobody can deprive you of your property anymore.

Fascinating.

This is the most important strategy. Then one other strategy worth mentioning is this idea of assuming that everyone, every actor in the system, in the network, their behavior conforms to a model of irrational economic decision maker. Because if you do that, then you can demonstrate, you can give a crypto economic proof that the system, that there certain guarantees that the miners are not going to undermine the system because it would go against their self-interest to undermine, to bite the hand that feeds them, so to say. But the trouble is of course, and the rational economic decision maker, that's just an approximation. It's a model that we use in science to abstract things, but that's not always how people behave.

Then you also get all kinds of weird strategic behaviors or irrational behaviors, or you get an attacker that has a different payoff function because they're not just operating within the rules of the network.

Can you speak to the appeal to technical expertise, which is one of the other strategies?

Sure. Sure. One of the strategies is, yeah, it's field to technical expertise, which, well, it is what it says. It says, if you are criticizing this, it's because you don't understand it sufficiently. Listen to these people who have the true knowledge and who are the technical experts. And if you ask, well, how do I know who has the true knowledge? Well, you know it, because they believe in the system. If you don't believe in it, that means that you are not sufficiently informed yet. This is what you get on Twitter all the time. If you point to any problems, people will say you don't get it. You don't understand crypto, that's your problem.

I wanted to ask about that one because it's everywhere. It's so common.

Does the ability to fork blockchain networks restore the trustless or democratic claims of crypto?

That's a really good question. In open source software in general, there's this idea, open source has this image that's very egalitarian, democratic, open, literally. Open to participate, it's not a hierarchy. But then if you look at actual open source project, they're very hierarchically. You've got Linux tool heading the Linux kernel project, and he's known to be a very traditional leader in the sense that at least he was, that he was swearing at his subordinates a lot and keeping tight reigns and things. And the fact that allows projects like this nevertheless to be conceived of this very egalitarian and democratic, is the possibility of a fork that open source software forwards, which is that you take the software and make a duplicate of it and start developing it in your own direction if you don't agree with the leadership of the project.

In principle, this could be done with crypto projects as well, since usually they are open source software. If you don't agree with the rules of the system, let's say this block size debate, you don't agree with the core group's decision, just make your own fork and implement a different direction there, a different set of rules. Or if you don't like the 21 million Bitcoin limit, just make your fork, and that way you are not beholden to any ruler. Even if trust in humans has not been eliminated by cryptocurrencies, trust in any particular human is, as you can always just fork it. There's two problems with this. The first problem is that people can't just individually choose which network they want to belong to. They have to take the choices of others into account also if they are to continue transacting with those others.

This is an example of what in social science we call, a collective choice problem. You and everyone you transact with, they have to choose this system under which you want to transact together. Because if you just leave the system and go into your own thing, then you're alone there, and now you can't do any of those things that you wanted to use the system to do. And so humans actually have to choose collectively the rules that we follow. The way to do that is essentially governance institutions, it's political institutions, it's voting and all this sort of stuff, how we make collective decisions, collective decision making. Markets, which means individual choice are bad at solving collective choice problems. Precisely because these externalities.

Everyone in a network, it doesn't need to be a blockchain network, could be a giant platform like Amazon, stuff that I talk about a lot in the Cloud Empires book, everyone could be hating the rules of that system, and yet that system, that platform could still win because each of them individually if they chose to leave the platform, they would face a massive switching cost, because they're leaving behind all those potential connections, all those network effects. For the switch from let's say Amazon marketplace to an alternative marketplace with rules that are preferable to the people, for that to successfully happen, people would actually have to all move together. And to be able to coordinate their actions like that, they need some governance institutions.

And that's the same thing in a crypto, in a blockchain network. If you don't like the rules, system, you can't just individually fork it and leave. You need to coordinate. And coordination needs governance institutions. So that's the first reason why forks are not an alternative to governance institutions, and there can be a compliment, but not an alternative. The second issue which you don't have with a lot of other open source software, but which you do have with blockchain, is that once it's no longer just some experimental shit coin, once it's a real production system that's being used to record property rights in wealth, in stocks or NFTs, non fungible tokens, pictures of apes, whatever people consider valuable, then what happens if you fork it?

The network splits, now you've got two parallel copies of the record. Right? Here on this original chain, I own some stock. I own some tokenized stock or pictures of apes or something like that. And now it's forked and now I own it here and here. Here I sell it to Ben, here I don't. So now we've got conflicting records of who owns these things. There's only one of that asset. There's only one of that company, but now there's two owners. And the technology provides no answer as to which of those records is the authoritative one. Humans have to decide that. And that's a matter for governance. Fork in itself, it just leads to chaos.

Wow. That's like a supercharged example of the enforcement problem, I guess. Right? Enforcing off chain stuff.

Absolutely.

It's crazy to think about. To what extent can users of a blockchain network who are not miners influence crypto markets?

This is a very complicated and contentious also issue. Formally speaking, if you look at Nakamoto's design, and what he wrote in his original Bitcoin white paper, the miners vote with their CPU power. They vote over which set of rules they consider legitimate. They ratify any rule changes proposed by developers. And that was the end of the story for a long time. But then long story short, users have found ways of, for instance, pressuring the miners, organizing and threatening to just not go with the miner's version. Basically long story short, politics has emerged and it's very complicated and contentious. There's different interest groups. There's different power blocks. It's all very opaque. There is all these social media accounts pushing different narratives and you never know who's funding which one.

There's all these crypto media which is owned by different exchanges and different companies. There's this whole political economy is what we would call it. There's good things about this political economy as well. So ordinary users can have some power. They can participate in those debates, but it's not like a political economy in which the rules are transparent or well laid out or in any way fair at all. It's largely an oligarchy where those with the means to make decisions. So long story short, users are not entirely without some means to try to influence things in a crypto economy, but they are disempowered in formal terms, but also informational terms. Because the ordinary person just has no idea what is going on the background and the negotiations between these power blocks.

That clears a lot of things up for me because we've had other guests who come from a computer science background and they've said that the miners are the only ones that can control the network. And when we've published those episodes, we've had comments saying like, that's wrong, it's the nodes, the nodes control the network.

This the controversy basically. There was this thing called user activated software in Bitcoin, which this is one episode in the block size wars. Because the miners were basically a blocking change and a bunch of non miner users. They said, we are going to adopt this protocol change anyway. And it was extremely unclear what would actually happen, because basically the network would splinter at that point, you'd have two Bitcoins and it would be unclear which one actually wins. And it never reached the end game. And then the showdown never came, because to simplify things a lot, this user activated software, even the possibility of that happening that kicked certain things into action and then a certain solution or certain outcome was reached.

And so we don't ultimately know what would've happened, but the fact that the mere threat of that was enough to affect things at least a little bit in a certain direction, I think shows that users are not without some power. But when I say users, I mean the people advocating for the user activated software fork. They were still powerful people with big social media followings. They were just not the miners. If you decided, Ben, you don't like the rules of Bitcoin and you own some Bitcoin, you are a user, so you want to have a voice, you want to make a difference, I don't think your Ben activated soft fork is unfortunately going to have any impact whatsoever on the rules or the politics.

Right. I need to have my million Twitter followers or whatever.

Well, actually, maybe, yeah, sorry, I'm talking to a social media influencer here, because you're like a literal podcaster. Maybe you could have, I can't, I can't, but maybe you actually could. Because if you started really turn your podcast into a campaign for some particular thing, then maybe you could change things.

There you go, Ben.

Our audience wouldn't accept that. They'd be like the nodes rejecting the miners in that case, I think.

Do you have a view on who practically speaking does have the most control over cryptocurrency networks?

The thing is, the cryptocurrency network itself in the case of especially Bitcoin has become irrelevant in many ways. Because like I said, they eventually managed to increase the practical block size a little bit, so you can fit something like, I don't know, seven transactions per second there now. But still it's nowhere near enough to actually do anything that Bitcoin does today. So the vast majority of people who hold Bitcoin, they don't actually hold the keys to their Bitcoin. Right? They deposit Bitcoins in an exchange or wallet provider, something like Coinbase or Binance. They access their Bitcoins, just like people access online banking. And when they transact, usually their transactions never touch the blockchain, because there just isn't enough space in the blockchain for them.

The transactions are cleared in the internal systems of this handful of large corporations. And the Bitcoin network in so far as it is used, it is used by these large corporations as a sort of interbank settlement network. And also then there are some people who are using it for smaller transactions as well. So really the economic activity denominated in Bitcoin has moved away from the blockchain itself, which has become almost like all the politics around the blockchains, like a side show now. What really matters is what the CEOs of a handful really of large corporations that control exchanges in mining and these are a billion dollar businesses, multi-billion dollar businesses. They hold most of the power in my assessment.

Interesting. I talked to somebody else a while ago about this, when we got pushback on the miners controlling the network and they gave me the same answer that it's ultimately the exchanges. And if there was a fork, the exchanges effectively get to dictate which chain is going to be the one everybody migrates to.

Exactly. Yeah. Because the millions of Binance users, they don't follow this thing. They don't follow what's happening in the back end. They're just going to use whatever Binance says is Bitcoin. If there's two forks, because that's something you can't duplicate, you can duplicate the blockchain, but you can't duplicate the name. There can only be one that's called Bitcoin. Right? And in both, when we've had two forks, there was the Bitcoin, Bitcoin cash split, and the exchanges decided after there was some exchanges, they weren't sure which of these changes they were going to give the original ticker symbol, BTC. All right? But they eventually settled on the core, not the cash and this made a huge difference. Right?

And in the case of Ethereum, so I told you about, and I tell this whole story in Cloud Empires in a lot more vivid detail, but after the DAO hack, when basically Buterin stepped in and said, let's roll things back. Some people said, let's not because come on, that invalidates the whole idea of immutable code. And they said, screw you. We're going our own way. We are forking Ethereum. Well, guess which one gets to be called Ethereum, Buterin new version, because he changed the rules. So he actually created a new version that's not the original one. And then these other people, they actually kept the old version, the unchanged one.

In terms of continuity, I think it would've been more accurate to describe these dissidents version as Ethereum and then the Buterin version should be called managed Ethereum or something like that. You see what I mean? Right? But that's not what happened because there is an Ethereum Foundation which owns the trademark to Ethereum. And so ultimately they could just use the force of law to say, no, we are called Ethereum, you go and pick yourselves a new name. I don't believe in this case it went that far to the lawyer level, the dissidents named their fork, Ethereum classic, and went their own way.

Crazy. And that's a trademark that exists.

That's marginally. Ethereum is a trademark owned by the Ethereum Foundation. And the foundation is controlled by its bunch of people, including Vitalik Buterin. And so you don't get to call things. They get to decide what is called Ethereum.

Based on the off chain legal system though.

That's right.

Put a fine point on it. Yes. We talked earlier about the kleroterion. What aspect of getting democracy did Nakamoto fail to replicate?

The kleroterion was a way of decentralizing government administration, and administration means the application and enforcement of rules. But the other side of the Athenian democratic coin, so to say, is legislation, the making of those rules. And the Athenians had figured out systems for decentralizing both. Right? They had systems for kleroterion, was for decentralizing the actual application and enforcement of those rules. And then they had a different set of institutions for decentralizing the making of those rules. Essentially they had public assemblies where people would come together and vote on things and shout a lot and various different things happened.

Nakamoto, he only duplicated the decentralization of administration part. He built a kleroterion out of code, but he didn't build anything comparable to the decentralization of legislation, the rule making. That part was left, it's just a gap. There was nothing for it. Developers who came later, Gavin Andresen, he put in place a software development process, which you could say is in some ways almost like the constitution in the sense, but in a very, very loose sense, in the sense that it defined a process through which the rules could be changed, was a very abstract, very brief document.

But beyond that, and it's a very simple thing. It just says, okay, people can propose things, and then the core developers think it makes sense, we'll implement the change after there's been some debate about it. But that's it. There's no formal institutions, there's no accepted decision making procedure that everyone considers legitimate and binding on themselves. And as a result, when a conflict like the block size debate erupts, there's no way of resolving it peacefully. Because like I said, there is no way of making a collective decision that everyone agrees. They'll just say, no, you are wrong, we don't accept your position.

Can you talk about the blockchain paradox, which is I think related to what you were just saying?

I think it's now known as the governance paradox. I gave this talk in The Alan Turing Institute in 2016, where I came up with this. Basically the idea is like, okay, first of all you'd still have to solve this problem of governance somehow or governance, I use the term governance here to mean essentially what I just described is legislation, the making of those rules, who gets to make them and are the makers accountable to the people or not. If we accept that we haven't solved that problem, that we haven't solved the issue problem of political science, we haven't actually built a trustless system, there's still humans involved. Okay. So now assume you then manage, you do then build a nice governance system. You agree that, well, we should have voting somehow and you agree who is eligible to vote and they can elect the board of governors or something, or there's some a procedure for that somehow.

Great. So now you can govern your blockchain in a way that makes sure that it's accountable to the people. Question, what do you need blockchain technology for anymore at that point? Why not just have your system run on an ordinary server and have that governance system govern that server? Because you've just agreed that now you have governance system that holds things accountable to the people. What do you need this complex technology for at that point? Let's say you're in a zero trust environment, you can't trust administrators, the server administrators, you're afraid the server administrators are not going to implement the rules or something like that. Maybe some cryptographic guarantees might help there.

But even in a blockchain system, we can't cryptographically compel the core developers to do exactly what they promised to do or what they're asked to do or what community decides them to do. And this is something that the on chain governance systems continuously run into. Because people did start taking the governance problem seriously, outside Bitcoin. Right? People came up with all these projects where somehow people, they get governance tokens, and then they can vote on proposals. But sometimes you find that, okay, well now the community vote a proposal and developers just say, I can't be bothered or it can be done. Maybe it really can't be done, but there's no cryptographic on chain way to actually the developers to do that.

And so blockchain doesn't actually solve that part either. The blockchain paradox is, once you solve the governance problem of blockchain, what do you need blockchain for anymore? That's the paradox. It's a provocation. I get email all the time telling me they solved the paradox and nobody has so far in my opinion.

That's so interesting. You talked earlier about how you need governance, whether you like it or not, because the world changes. Even if you don't want to change, the world changes around you.

You can get away for a while with not changing things, just hands off, let it just continue in the same direction. It just continues the same. It's going to hit a wall eventually, unless you correct course, because there's things in the real world that get in the way. And then if you have to decide, are we going to go around this objective this way or that way? And that's a political decision.

Wow. On that basis, do you think technology changes the fundamental social and economic forces that shape how societies are organized?

No. In some ways that's Cloud Empires main takeaway, that actually with all this technology and after 20 years of moving fast and breaking things, we've just managed to essentially reimplement the same social order that we already had instead of legal code and some of it is program code. And instead of government administrators, some of it is miners and customer support people in corporations. But the basic form of it, which is a formal authority that runs a bureaucracy, that enforces rules to maintain social order, scale and make it possible for people to trade with people they don't know in a massive scale, the fundamentals of that haven't changed.

What has changed though, is the fact that now there are not territorial nation states that are doing this enforcement, they are informal institutions. In a lot of cases they are large technology companies. And that is a very major change in many ways, or they are in the case of blockchain systems it's a bit hard to tell who is actually in charge. Right? That's one of my conclusions in Cloud Empires, is that Nakamoto failed to eliminate trust and authorities from the system, but he managed to obscure who the authorities are and who we are actually trusting. Most people just don't even know anymore. And I call that cryptocracy, right? Because in Greek, crypto means hidden, cracy is power, rule. He wanted to avoid autocracy and he didn't want to go for democracy. So he ended up creating a cryptocracy. We just don't know who is in charge anymore.

That's so good. So has blockchain supplanted the need for nation states?

Not blockchain, but if you take blockchain and mainly these large corporations then that actually run most of the crypto economy, all of that together, they perform some of the core functions of the nation states today in terms of protecting property rights in certain forms of property. But the trouble is most of the blockchain systems they are not really used for trade and productive economic activity, they are used for speculation for get rich schemes and for investment schemes in which no actual value is created. It's just really distributed. People are buying tokens in the hopes of being able to later offload them to someone for an even higher price. There is no dividends being paid.

There were some so-called staking rewards being paid, but those were essentially based on that Ponzi type logic, which has now become apparent to hopefully even to the investors in those schemes. There are other Cloud Empires like the Amazon empire, in which the rulers are easier to discern. It's not a cryptocracy, it's an autocracy, with a CEO on top. And their systems are used for productive activities like trade.

What do you think ultimately cryptocurrencies have accomplished since their, I guess, inception as at least an idea in 2008?

Well, I think they've managed to accomplish this altercation of power. So instead of making power accountable, they've managed to office gate who actually has it. And in that sense maybe make power even less accountable, creating the cryptocracy instead of returning democracy to finance. They've also succeeded to redistribute a lot of actual money from a bunch of late comers to a bunch of early movers. They've had this effect of centralizing actual currency from a large number of people to a slightly smaller number of people. But I think it's also fair to say that they've opened up what we sometimes call sociological imaginaries, right? People are imagining different ways, radically different ways of organizing society.

And even if not, all of those visions are ever realizable, Cloud Empires is a story of many such high visions running into fundamental social and economic forces that in fact constrain what sorts of futures are possible for us humans. Even if those visions can't all be realized, and I think dreaming and thinking big is still valuable. I don't think as humanity we've reached the apex of evolution in terms of social organization, that this system based on carving up the surface of our planet into these mutually exclusive zones, and then saying, you have control over this one, you have control over that one. I don't think that's necessarily the end of our experiments to figure out how we govern ourselves as a species.

And we know the limits of that system are showing. Right? We have global problems like climate change that face collective action problems in a world divided up into mutually exclusive chunks. And once again, hot war has returned in massive scale into Europe. And war is something which between nation states.

Unreal. In our research on this topic, I think that's generally been my takeaway too, that it's making people rethink what is possible from the perspective of organization and economics, but it's not necessarily actually accomplishing anything new.

I think that's accurate. But another outcome might be that people appreciate our current forms of organization more. They realize actually we thought we could just obsolete government so easily, turns out we can't. Maybe we ought to focus our energies on making our government better and more accountable.

Awesome. All right, Vili, that was our last question. This has been a fantastic conversation. Thanks so much for joining us.

Thank you so much. I think this was a really exciting conversation. You guys are really thinking about big things. And I do have to say, I am slightly surprised, we managed to cover so much ground in this time.

Great to meet you, Vili. Thanks for your time.

Thank you so much for your time.

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