Finders, keepers. But the interesting part is what comes after. Photo by Hitoshi Namura on Unsplash
Imagine, if you will, a seafaring crew of bold, enterprising founders with a harebrained scheme. They intend to set sail and find an unclaimed, uninhabited island deep in international waters, and to establish a sovereign society beyond the reach of any existing sovereign power. They have an equally harebrained business model in mind: they’ll happily take custody of whatever assets anyone, anywhere wants to give them for safekeeping, no questions asked, in exchange for a modest fee. There is one catch: those assets must be held in the island’s local currency.1
For sake of argument, imagine that our intrepid crew sets sail and, after a long journey and due hardship and adventure, finds their long-sought island and sets up a colony there. They discover that there is a certain mineral on this island that can be mined, one that isn’t found in a meaningful quantity anywhere else. It has no intrinsic value, no industrial or decorative use, and the supply of this mineral is, for all intents and purposes, inexhaustible. The founders, moreover, have the ability to perfectly control how much of it is mined and at what pace. Let us call this mineral gil, and let us imagine that the founders decide to turn it into coins and use it as local currency on the island.
With these basic plot elements established, let us place before our intrepid founders a dilemma. In order for their business model to work, they need to invite other people to join them on the island. They need other people to invest not only time and energy in traveling to the island, but also their hard-earned wealth.
Feeling a bit lonely after an initial orgy of sunbathing and feasting on young coconuts, the founders decide to grow their society and economy by marketing the island to the rest of the world. They duly send forth missionaries, and in due time, lured by promises of untold wealth, self-sovereignty, and a bottomless supply of coconuts, other adventurous souls begin to arrive.
While their self-declared currency had no value off-island in the beginning, over time, as word of the island and its services begins to spread, a market for gil begins to develop in other places. Some folks in faraway places convert their hard-earned (and, often enough, illegally earned) dollars and yuan into gil and send it to the island for safekeeping, far from prying eyes.
As demand increases and the value of gil begins to rise, the founders find that they have a windfall. All of a sudden, they can use the previously worthless gil that they’re mining to hire more people to come work on the island. They can also purchase commodities from off-island, which begin to arrive and increase the quality of life on the island, kicking off a positive feedback loop. As gil continues to gain currency in foreign markets, more people come to the island of their own accord, spurring yet more demand and wider use of the currency.
Intrepid new arrivals build ever-larger coconut farms, and everything is hunky-dory for some time. The nascent culture on the island begins to flourish. Soon enough, however, the founders face another challenge. The growing population of islanders increasingly views the founders with distrust, and indeed with malice, as they see the founders becoming wealthier while the quality of life for the rest of the island’s population stagnates. The founders must decide whether to share their mining proceeds with the rest of the island’s population, and if so, how.
This fundamental and difficult choice is faced by founders not only of island havens and blockchains, but of enterprises large and small and, indeed, of human societies of all shapes and sizes. It raises some basic but difficult questions such as, to whom does the island’s wealth belong? To any student of real-world politics and economics, such questions are particularly poignant and meaningful.
For fun, try putting yourself in the shoes of our founders. How much of the island’s bounty should you share? To what extent should you allow ordinary islanders to enjoy the fruits of wealth generation? Now try putting yourself in the shoes of an islander. How much of a share of the wealth should you and your fellow islanders demand? And what should you do if the founders refuse your demand? Should you leave the island, sell whatever gil you’ve collected, and seek your fortune elsewhere, perhaps on another island with friendlier policies? Should you stay and continue to build anyway? Or should you increase your negotiating power by joining forces with other islanders and threaten to overthrow the founders and install a system of government with more egalitarian economic policies?
While these things are easy to speculate about in a detached way, bear in mind that such a decision involves a transfer not only of wealth but also of power and influence away from a small elite. There is a reason that, historically, such transfers are rare, and when they do happen, it tends to be by force.
While this allegory may seem a little contrived—blockchains are built, not discovered, after all—I believe it captures the economic realities and the difficult questions faced by blockchain project teams quite well. Joint stock corporations, of course, have been carrying out projects of this scale for centuries. Setting up a new sovereign currency doesn’t happen much these days, mostly because nation states tend not to like competing currencies, but Bitcoin worked around this problem with decentralization. In its wake, hundreds of small-scale, novel “economy in a box” experiments are now happening at the breakneck pace of digital innovation. In other words, you no longer need to find a sovereign island in order to create a new economy!
As I reflected on this analogy, I realized that our intrepid founders have, broadly speaking, three paths they can choose among.
Path one: common good
Path one is the most egalitarian. On this path, the founders declare that mining of gil is totally open and permissionless: anyone with the requisite skill, equipment, and wherewithal is welcome to mine as much as they can. Of course, the founders have a gigantic head start in mining. One can hardly blame them, though, as they got there first and there was no competition at the time. At least everyone plays by the same set of rules. The implicit understanding of path one is that gil is a bounty to be shared by any and all who make the arduous journey to the island: a common good.
Path two: feudalism
Path two is precisely the opposite: authoritarian and feudal. On this path, the founders decide that all of the gil that’s ever been or ever will be mined is theirs by rights and by fiat, since they discovered and laid claim to the island and they were the first to mine it. Others are welcome to come to the island, to live there and to transact, but in order to do so, they must purchase or earn gil from the founders, or from someone else willing to sell it to them. What’s more, before anyone else arrives, 100% of the island’s property is divided among the founders, their friends, and whoever else happens to be there at the time. New arrivals not only need to acquire gil, they must also acquire a plot of land on the estate of one of these new feudal lords. Once these tasks are accomplished, they are welcome to participate fully in the island’s economy—as long as they stay on their lord’s good side, that is.
Path three: the middle path
Path three is a hybrid path. On this path, reasonably-minded founders recognize that, on the one hand, they (and their investors) have earned some substantial portion of the island’s riches as a reward for the risk they took in finding the island, building the mines, and establishing a new society. On the other hand, they also recognize that some portion of the island’s riches should be reserved for the other islanders. This includes future arrivals, since they will be contributing meaningfully to the island’s economy by building the necessary infrastructure, bringing others to the island, etc. There are, of course, many such islands in the world, all competing to attract residents with different economic and social policies. So the founders opt for a middle course: they allow any islander to mine gil but tax the mining proceeds so that some percentage of all of the gil that’s ever mined flows back to the founders.
It should be clear that each of these scenarios describes one or more major blockchain projects.2 The first path, of course, is Bitcoin: totally permissionless, zero premine, no investors to reward. The project’s “founders” did mine a lot of bitcoin themselves, but they can hardly be blamed. Bitcoin has been permissionless since genesis and anyone fortunate enough to know about it and savvy enough to care could have mined it, too, by following the same rules.
The third path is the hybrid category. It includes all projects that have a greater-than-zero, less-than-100% premine. Ethereum is one well-known example of such a project. Its founders decided to premine and sell approximately 70% of the ether outstanding today in a fundraising presale. (That figure is quite high by today’s standards, as many recent projects are in the 20-30% range.)
And the second path corresponds to a project such as Urbit or Decentraland (neither of which is its own blockchain but both of which are fundamentally property registries built on Ethereum). In both projects all of the property that shall ever exist in perpetuity is held by the founders or was distributed or sold to early team members, investors, supporters, and “several people who were simply in the right place at the right time,” as Urbit puts it. This amounts to a 100% premine.3
Both networks are governed by their respective communities, so in theory, either could vote to issue new property at any time, a possibility that Urbit calls “improbable” because it “would run counter to the economic incentives of Urbit address space owners.” In other words, like elites and property owners the world over, Urbit’s would-be neo-feudal aristocrats are opposed to new construction because it would dilute the value of their property.
I have several issues with this sort of economics.
This sounds a lot like Bay Area NIMBYism, if you ask me. It permanently divides society into two classes, landholders and rentiers, “haves” and “have-nots,” those with explicit, entrenched privilege and power and those without. It’s like playing a game of Monopoly where all of the properties, houses, and hotels have already been distributed. It’s a bit terrifying to think that we’d want to recreate this social dynamic on the blockchain, especially before even, you know, having any real apps or users. 🤷♂️
These networks are plutocracies in the sense that they are governed, in practice or in theory, by their tokenholders: one token, one vote. As a result, by premining all tokens in the beginning, the founders are not only claiming all of the network’s wealth for themselves, they are also explicitly claiming all of its power, and making it close to impossible for someone who arrives later to participate meaningfully in governance. Contrast this to, say, a democracy, where the son or daughter of an immigrant, born many generations after the country was founded, can attain the highest office in the land.
It makes permissionless participation impossible. You start at the mercy of the network and its existing stakeholders, and if none of them choose to sell you a stake, or if you don’t happen to already have crypto assets or a credit card to buy them, you’re just out of luck. An oft-overlooked fact about permissionless networks like Bitcoin is that it was precisely the permissionless nature of the network that attracted its earliest stakeholders: the fact that any savvy seventeen-year-old with an Internet connection could just start mining.
The need for scarcity does not actually necessitate a premine. Both projects argue that property needs to be scarce in order to have value. This is true, but since the advent of Bitcoin we’ve known how to make property scarce in a decentralized, permissionless, credibly neutral, and perfectly controllable way, without the need for a centralized authority that owns everything.4
It presupposes that property needs to have liquid market value in order for people to do interesting things with it. This is probably not actually true, as evidenced by the fact that gamers invest lots of time and money into characters and objects in centralized games that they do not own and that cannot be sold or traded. There are many forms of value, and monetary value is only one such form. (This argument does happen to make it easier for the founders to raise money, of course.)
In spite of these objections, it is not the case that such a project—or, indeed, such a society—cannot function. Not by any means. If the founders and feudal lords are wise, they’ll make sure that just enough of the property in question is available for sale at a reasonable price on reasonably open markets so that new arrivals can purchase a “homestead” for, say, a few dollars. Oh, and wise feudal lords (Urbit calls them “sponsors,” which strikes me as creepy and vaguely Black Mirror-esque) will be very open-minded about whom they let colonize their sovereign lands. Rent will be free or cheap (until it isn’t). In this way, a thriving economy can, indeed, be bootstrapped. It’s far from egalitarian, but most human societies have functioned this way in practice throughout history.5
As the technology underlying blockchain becomes increasingly commoditized—indeed, Bitcoin, Urbit, Decentraland, and Ethereum are all 100% open source and permissively licensed—factors such as values and economic policies will become more important differentiators. There are in fact many sovereign “islands,” and while the oldest and most popular continue to make progress building “societies,” none have yet achieved mainstream recognition or adoption. This includes Bitcoin, in spite of its relatively egalitarian, stable economics, and Ethereum, which many Bitcoin purists view with scorn because of its aggressive premine.
One big reason blockchain has, by and large, failed to attract much ongoing attention is bad economics (and more generally bad governance). It’s not the only reason—things like poor usability matter a lot too—but it is one of the most important reasons. When a founding team decides to keep a disproportionately large percentage of future wealth, ownership, and influence for themselves and their friends, rather than sharing the love with later arrivals, they’ve poisoned the socio-economic well forever.
Sadly, this pattern of behavior has been all too common among blockchain projects. It smacks of self-righteousness, self-importance, hubris, and nepotism. These human traits and this way of doing business are of course very common in the world today, but in the blockchain space, which to me is about fairness, inclusivity, creating opportunity, and building a better system, they’re hypocritical. They have no place in a healthy, decentralized ecosystem and I, for one, would prefer to leave them in the off-chain world.
As long as blockchain projects put property rights on a pedestal, ahead of more humanistic ideas like identity, democracy, and self-expression, they will continue to be distasteful to many.6 They also seriously risk exacerbating existing disparities and propagating them far into the future by enshrining them in code and immutable data structures. No one wants to leave behind a world of broken incentives, cronyism, and insider trading only to join a brave new blockchain world where these same vices are even more common, where the only thing that has changed is the cast of selfish actors.
Enlightened founders will learn to save plenty of “dry powder,” in the form of a meaningful stake in wealth, ownership, and governance, to incentivize future community members to join, contribute, and stick around. They will install good governance policies such as accountability and transparency, to ensure that future generations of “islanders” have a role to play in governance and can participate in economic upside.
To be clear, they’re under no obligation to do so. A legitmate founder has absolutely earned a license to exclusive ownership and control of whatever they’ve founded. This point is not in debate. The question to such a founder is, why should the world care about your island if you’re not interested in inviting a broader array of stakeholders? In the twentieth century, the privately-held corporate empire was the norm. In the twenty-first, in the era of the blockchain, this model will be replaced by open networks with an order of magnitude more stakeholders. The future looks less like private fiefdoms and more like a system of common enterprise architected on rational, inclusive systems of incentives. Close-minded, backwards-looking founders will continue to see what they’re building as “my company.” Open-minded, forward-thinking founders will see the object of their work as “our network.” While we’re still figuring out this new model, now is a great time to take it out for a spin and see what it’s capable of. Open networks like Bitcoin and Ethereum, and open source projects more generally, have paved the way and shown us what’s possible.
There are many islands out there, some sunnier than others, some with better economic policies than others. Which one will you pick, and why? I urge you to look past charismatic founders and shiny new technology and consider first of all what a project stands for.
Special thanks to Tomer Afek and Yael Hoffman for invaluable pre-publication feedback and corrections.
They describe others things, like countries, too. As homework, can you name one country in the world today that works like each of these scenarios? ↩
In my allegory I referred to a perpetual tax rather than a premine. Economically speaking, these are the same thing. The island’s founders could have chosen not to allow others to mine until they themselves had mined some specific amount of gil, but a tax is simpler and probably easier to enforce. While neither is popular, people seem more allergic to the idea of a “tax.” ↩
Proof of Work mining is wasteful, but it has the advantage of being credibly neutral and therefore in a sense unimpeachable. It also has the nice property that miners need to continually sell what they’ve mined to cover their operational costs, which lets the market, rather than the founders, sort out distribution. If you find the electricity cost to be distasteful, there are now other permissionless algorithms that work according to the same principles but are much less wasteful. There is admittedly a difference between fungible assets such as bitcoin and non-fungible assets such as land, as the latter can be combined, built on top of, etc. For the record, however, it’s also possible to distribute non-fungible assets in an automated, decentralized, neutral way. ↩
That is, until decadence and inequality get out of hand and the downtrodden masses decide to revolt. There will doubtless be social uprisings and revolts in the digital era, but hopefully they will spill bits and not blood. ↩
I have nothing against property rights. They’re a necessary component of sound economic policy and lead to good things like allocative and investment efficiency. Where I take issue is how property is distributed in the first place, and with the idea that enforcement of strong property rights is an end in and of itself. The key difference between digital property and physical property is that we can have as much digital property as we want—if we can figure out how to distribute it. ↩