A Post-Capitalist Critique of Cryptoeconomics

Proposing a departure from prevailing cryptoeconomic theories that govern blockchain ecosystems, this series aims to establish a novel framework for decentralized consensus protocols.

1. Market Incentives and Adverse Effects

Cryptoeconomics is the use of game theory, cryptographic proofs, and computer science to guarantee future economic outcomes. Most of the top protocols in the blockchain ecosystem, such as Bitcoin, Ethereum, and others, apply cryptoeconomics, for example in describing the fault tolerance of a protocol through the , which is a problem, but also when incentivizing the systems, such as proof-of-work mining rewards, proof-of-stake validator rewards, and making it very costly to perform attacks against the networks, eg 51% attacks.

The problem with cryptoeconomics today is that it has been used to theorize protocol development and user experiences in ways that assume that people are profit-maximizing individualists and that, by seeking their self-interest, this behavior is rational. For example, individual stakes 32 ETH to become a validator, and there are validator rewards -- which is why anyone would become a validator -- and they are expected to behave accordingly (eg not maliciously) otherwise they face penalties and their ETH is slashed.

In this cryptoeconomics, self-interest is the invisible hand that makes everyone behave according to the rules of the game, but there are adverse effects. For example, when trading crypto pairs it is natural to buy cheap and sell dear for as low as personal risk as possible. This helps enable perverse market incentives where opportunities for and  generate externalities and occur at the expense of the rest of network and community wellbeing. For example, the Flashbots team revealed that 'maximal extracted value'(MEV) accounted for through exploiting MEV frontrunning, arbitrage, and other strategies.

2. Token Economics and Profit-Driven Abstraction

Another example is “Token economics”, which is a form of cryptoeconomics that abstracts away protocol considerations, and is driven by the desire to tokenize everything. Distributed ledger technologies and decentralized consensus protocols are too important for people and the planet to leave to the interests of self-interest and profit maximization. An intervention is needed to promote an alternative so that protocols and applications can be built which promote better values.

3. Capitalist Framework and Bias in Development

That the assumptions underlying today's cryptoeconomics have biased the evolution of distributed ledger technology and decentralized consensus protocols towards self-interest and profit maximization is no surprise. This is consistent in a society based on capitalism and markets where buyers and sellers fleece one another to gain wealth and power while the vast majority struggle to survive.

The profit-maximizing individualist, today's proponent of cryptoeconomics, might roll their eyes before countering that the individual's struggle for personal wealth has reduced poverty overall and so profit maximization has done more good than harm. This is a basic liberal view consistent with social contract theory.

For example, John Rawls' theory of justice envisioned a just outcome being one that raised the position of those least well-off in society to one that is better. He did so through a where an individual is asked to imagine the principles they would use to guide a basic structure of society, without knowing ahead of time what position they would hold in that society. The choice is made behind a “veil of ignorance” which prevents them from knowing their own race, class, gender, ability or decision-making status and also without knowing anyone else's.

The idea is for an individual to imagine guiding principles for a just society. But this is not enough. That's because in Rawls' formulation, you can both improve the position of those least well off in society and -- at the same time -- increase the gap between the rich and poor, the powerful and the powerless, etc. and that is why self-seeking profit maximization is a poor argument for making societies more equal.

4. Toward a Post-Capitalist Cryptoeconomics

The goal of a new post-capitalist cryptoeconomics is to increase the wellbeing of those less well-off and minimize the gap between rich and poor, the powerful and powerless, incentivized overall to drive society towards solidarity, classless, self-managing, directly democratic, and diverse outcomes.

The post-capitalist cryptoeconomics spelled out in this series does not believe you can use game theory to program people or their behavior. That's because this theory abandons the outdated assumption that people are , the profit-maximizing individualist that haunts the crypto scene today. Instead, this effort aims to apply game theory, cryptography, and computer science to promote different values, however gently and non-deterministically, with an understanding that we cannot force people to behave the way we may want to. The forthcoming segments in this series will explore these issues in more detail.

delegat0x is a libertarian anti-capitalist R&D Engineer in the crypto space. They write about the intersections between philosophy, politics, media, alternatives to capitalism, social movements and collective autonomy.