Blockchain Distributed Governance

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This is a cross-post from the blog of the Centre for the Study of Governance & Society at King’s College London.

Over the last two decades online services have transformed from a product of a multitude of enterprises to being dominated by a handful of corporate-owned platforms such as Apple, Microsoft, Facebook, Google and Amazon. They specialize in connecting media producers to users. These are often mutual interactions with users both producing and consuming content. These platforms play an increasing role governing commercial exchange, as well as civil discussion, with plausibly pernicious implications for liberal democracy. As I propose in a recent paper ‘Markets for Rules’, blockchains offer a promising solution to this danger by helping to displace corporate ownership in favor of common platforms sustained by users themselves.

Corporate concentration has produced enormous efficiencies and innovations, improving user experiences and boosting investment in hardware and infrastructure. But it has also had several bad consequences. These enterprises face extremely low marginal costs and network effects whereby additional users add value to an existing user-base. Some of these effects are explained by these platforms’ business models of collecting personal data to target advertising more effectively at customers. The more interactions on a single platform users have with each other, the more useful the data for advertisers. The result is overwhelming returns to scale and a winner-takes-all competition for profits.

This has troubling implications for economic inequality, especially if we end up with a handful of corporations taking a bite out of every conceivable transaction. Of greater concern is the way owners exert control over who can join and what people are allowed to do on their platforms. Content producers can be demonetized or banned, effectively denying them access to a user-base or revenue. Online sellers can find themselves frozen out of a platform payment system without legal remedies. Controversial or unpopular producers survive at the whim of executives or, at best, a patchily enforced official policy.

This reliance on private governance is a problem for consumers, producers and ultimately citizens. But it is also a challenge for executives who find themselves mediating acrimonious personal disputes and political debate. With all the data in the world, they struggle to judge consistently what belongs on their platforms. The fact that these corporations have ended up functioning as unofficial censors and wielders of sanctions has led some commentators to propose regulating these platforms as public utilities or, more radically, nationalizing them so that access to them is decided democratically. These solutions have their own perils because any centralized system of monopoly control, whatever the underlying democratic credentials, can produce authoritarian outcomes. Liberal democracies up until now have been sustained by an independent civil society constituted by overlapping and competing spheres of governance, not the monopoly of either democratic or corporate government.

The prosecution of the CEO and founders of Backpage, who failed to exclude sex workers from their platform, illustrates the reliance of these private enterprises on government support on controversial policy issues even in relatively free societies. The combination of privately-developed data-collecting networks with over-arching state control is arguably reaching a nadir in China which is rolling out an unaccountable surveillance system of ‘social credit’ that can identify political dissidents and automatically exclude them from significant spheres of civil society.

Is there a way that blockchains can help navigate around the centralising and authoritarian impetus of technology-facilitated governance? Blockchains emerged from two pre-existing technologies – public ledgers and asymmetric cryptography – to produce a way of sharing data across a network that is resistant to manipulation by unauthorized actors. Initially conceived as offering alternatives to state-backed currencies, blockchains are now used to build decentralized autonomous organizations (DAOs) and dapps (decentralized apps). They can supply similar functions as corporate platforms but without an overall owner.

These systems are sustained by rewarding network participants with tokens (through completing intensive computing processes called mining). Tokens are convertible into ordinary currency, albeit currently at volatile rates. The entrepreneurs that build these platforms typically reward themselves and investors a large stake in those tokens but once the network is launched, they do not have control over how it is utilized. The rules of each network are self-enforcing. These rules can be changed, either through the original (or new) developers launching a rule-set that others may choose to switch over to (a fork). Alternatively, the rule-sets might contain provision for amendment. Such amendment schemes are, of course, open to manipulation as is the case for all political processes. Nevertheless, what these schemes offer is a way of interacting and exchanging at large distances without an overarching ruler. Instead, conduct is permitted on the basis of fixed rules enforced mechanically by people’s decisions to participate in the system. One way of looking at these schemes is that they have decentralized properties of communal norms, combined with the possibility of more deliberate design and experimentation of more formal rules and institutions. I call this common government.

The implications of this new technology and kind of governance might turn out to be very far-reaching, approaching that of the development of the Internet itself or even the printing press. But what could it mean for familiar Internet platforms in the medium-term? First, participating in mutual platforms might better align the incentives of users and platform designers. Right now, platform owners rely on squeezing as much data out of users as possible in order to sell it on to advertisers and to sell additional services. Mutual platforms, without responsibilities to shareholders, can experiment with different funding models. Individual users might elect to sell access to their profile to advertisers but the data itself can be made more secure as it will be a property of an encrypted network rather than a profile stored in a central private database. Privacy can be better assured than private management with public regulation.

Second, the networks can be more robust both to natural and political perturbations. Under decentralized protocols, ordinary users help store and serve content to each other. With the addition of blockchains, these users can be compensated for making their idle computer resources available for network use. This means that data doesn’t have to travel so far as is currently the case from host to user and the network as a whole can better cope with outages from particular nodes without data loss. Without a central controller, there is no particular agent that a government can coerce or punish for allowing specific interactions over a platform. Governments would then face the more difficult choice of permitting or prohibiting Internet communications altogether. It is thus more robust against arbitrary government censorship and manipulation of trade.

The relationship between users on a platform is mutual. The relationship between users and platform owners, however, is presently hierarchical – a private dynamic that government agencies can exploit. What blockchains may eventually permit is the provision of relatively efficient networks reliant neither on a single public agency nor private owner.

Learn more about Nick’s work here.

Britain’s Pornographer and Puritan Coalition

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Brexit isn’t the only ridiculous thing happening in the United Kingdom. In April, the British government is rolling out statutory adult verification for pornography websites and content platforms. This requires all adult content providers to have proof of age or identity for all their users, whether a passport or a credit card (or more ludicrously a ‘porn pass’ that Brits wishing to browse anonymously will have to buy from local newsagents). The government plans to require internet service providers to block pornography websites that are not in compliance with adult verification once the system is in place. For those with university institutional access, Pandora Blake has written a timely explanation and critique published in Porn Studies: ‘Age verification for online porn: more harm than good?’.

Technical challenges with rolling out the system have led the dominant pornography search platform owner, MindGeek, to develop proprietary solution, AgeID, in cooperation with regulators. This cooperation between the dominant commercial pornography platform supplier and a Conservative government publicly intent on restricting access to pornography might appear surprising. However, it can be explained by a particular pattern of regulatory capture identified in public choice theory as a Bootlegger and Baptist coalition. Bruce Yandle observed that throughout the 20th century, evangelical Christians in the United States agitated for local restrictions on the sale of alcohol with the avowed aim of reducing consumption but with the secondary effect of increasing demand for alcohol for illegal bootleggers. Hence both interest groups, apparently opposed in moral principle came to benefit in practice. We now have a classic British case study. In this case, MindGeek is not acting as a literal bootlegger. It intends to be fully legally compliant with the filtering regime. However, the law will block all non-compliant competitors without a comparable verification system. They can gain a competitive advantage with a proprietary technical solution to the barrier introduced by the government.

Introducing identity verification systems has high fixed costs and low marginal costs. It is costly to develop or implement but easy to scale once integrated. The larger the pornography enterprise, the more easily these costs can be absorbed without the risk that it will not be worthwhile to serve the British market. For many smaller international pornography websites, without in-house legal advice or technical expertise, it might prove uneconomical to serve British users directly. So MindGeek’s platforms could become the least-cost legal gatekeeper between small enterprises producing pornographic content and the British public. The government is raising transaction costs to accessing pornography in a way that impacts larger and smaller platforms asymmetrically and favors one dominant platform in particular.

Both the premise of this policy and its likely impact on the market for pornography is unpromising. At its most benign, this could be a characterized as a ‘nudge’ against the consumption of pornography and reducing access of inappropriate content to minors. But these limited benefits have costs for both producers and consumers. On the consumption side, it increases risks to data security and privacy because it will plausibly tie records of pornographic access to verified identities, with a clear likelihood of being to infer an individual’s sexuality from private browsing. This could represent a particular vulnerability for LGBTQ identifying individuals who live in communities where there is still stigma attached to minority sexual orientations.

On the supplier side, it takes what already appears to be a market with strong tendencies towards a winner-takes-all model, and then augments it so that a dominant platform has a legally enforceable competitive advantage over potential rivals in the market. Ultimately, it threatens to further strengthen the bargaining position of a single corporate pornography platform against the sex workers who supply their content.

Nightcap

  1. How Eric Hobsbawm remained a lifelong communist Richard Davenport-Hines, Spectator
  2. Chris Dillow’s favourite economics papers Chris Dillow, Stumbling & Mumbling
  3. The dark individualism of Watchmen Titus Techera, Law & Liberty
  4. The miracle we all take for granted Marian Tupy, CapX

A Short Note on “Net Neutrality” Regulation

Rick Weber has a good note lashing out against net neutrality regulation. The crux of his argument is that there are serious costs to consumers in terms of getting content slower to enforced net neutrality. But even if we ignore his argument, what if regulation isn’t even necessary to preserve the benefits of net neutrality (even though there really never was net neutrality as proponents imagine it to begin with, and it has nothing to do with fast lanes but with how content providers need to go through a few ISPS)? In fact, there is evidence that the “fast lane” model that net neutrality advocates imagine would

In fact, there is evidence that the “fast lane” model that net neutrality advocates imagine would happen in the absence of regulatory intervention is not actually profitable for ISPs to pursue, and has failed in the past. As Timothy Lee wrote for the Cato Institute back in 2008:

The fundamental difficulty with the “fast lane” strategy is that a network owner pursuing such a strategy would be effectively foregoing the enormous value of the unfiltered content and applications that comes “for free” with unfiltered Internet access. The unfiltered internet already offers breathtaking variety of innovative content and application, and there is every reason to expect things to get even better as the availabe bandwidth continues to increase. Those ISPs that continue to provide their users with faster, unfiltered access to the Internet will be able to offer all of this content to their customers, enhancing the value of their pipe at no additional cost to themselves.

In contrast, ISPs that chose not to upgrade their customers’ Internet access but instead devote more bandwidth to a proprietary “walled garden” of affiliated content and applications will have to actively recruit each application or content provider that participates in the “fast lane” program. In fact, this is precisely the strategy that AOL undertook in the 1990s. AOL was initially a propriety online service, charged by the hour, that allowed its users to access AOL-affiliated online content. Over time, AOL gradually made it easier for customers to access content on the Internet so that, by the end of the 1990s, it was viewed as an Internet Service Provider that happened to offer some propriety applications and content as well. The fundamental problem requiring AOL to change was that content available on the Internet grew so rapidly that AOL (and other proprietary services like Compuserve) couldn’t keep up. AOL finally threw in the towel in 2006, announcing that the proprietary services that had once formed the core of its online offerings would become just another ad-supported web-site. A “walled garden/slow lane” strategy has already proven unprofitable in the market place. Regulations prohibiting such a business model would be suprlusage.

It looks like it might be the case that Title II-style regulation is a solution in search of a problem. Add to it the potential for ISPs and large companies to lobby regulators to erect other barriers to entry to stop new competitors, like what happened with telecommunications companies under Title II and railroad companies under the Interstate Commerce Commission, and the drawbacks of pure net neutrality Rick pointed out, and it looks like a really bad policy indeed.

Net neutrality? Mail neutrality?

“Net neutrality,” you surely know, is the notion that all internet traffic ought to be treated equally. All it takes is that one little word, “equal,” to send hoards of left-wing morons to the barricades. For those who care to think through the issue, I offer the following.

If net neutrality is a good idea, so is “mail neutrality.” The Post Office should treat all mail equally. No more Priority Mail, not even First Class Mail. Just mail.  No more commuter express lanes on the freeways.  No priority for anybody, anywhere.

Data sent over the internet, or any local network for that matter, is divided into packets which have header information indicating the destination of the packet followed by a block of bytes that is the digital form of the data, whether text, audio, or video; web traffic, email, or ftp. As far as I know there is no provision in the ethernet protocol for priority information, but that isn’t necessary to prioritize packets.

Why should they be prioritized? Because different kinds of traffic have different natural degrees of urgency. email messages are not terribly urgent, but packets of video are, because if the those packets don’t keep coming at a steady pace, the result is irritating pauses and that little spinning circular thingy. If consumers of video want good service, they should pay for it. If email users who are in no hurry are willing to wait a bit and pay less, that’s good too. Markets generally tend to segment in this fashion. Starbucks doesn’t practice coffee neutrality. They offer fancy drinks to those willing to pay for them and plain coffee for those of us who just want the caffeine.

What rules should be set for internet providers? None, except common law prohibition and prosecution of theft and fraud. Let the service providers set their own policies for use of their private property.  In the interests of their bottom line, they will seek out practices that best serve their customers.  The crucial requirement is that politicians and bureaucrats be kept away.

The Internet Needs a Multitude of Firm Guiding Hands Like I Need….

The Internet is an American invention depending on a specifically American vision of society. It was built with American seed money. It represents the best about the way we used to do things: Tell the folks what you want; spring a little money on them; most of it produces nothing; some of it turns out to be the very best investment of the century, perhaps even the best investment in history. Let it run itself as much as possible. Refrain from giving it a captain.

Other countries are utterly incapable of doing anything like this. How do I know? None but one even tried, France. Its government-managed (Post Office owned) Minitel was even accessible to the general public earlier than the Internet. The French closed it about two years ago. It had ceased to serve any purpose side-by-side with the Internet. That was as clear a case of competition between two ways of doing things as might be devised in a real scientific experiment.

The French Minitel (which I used) did good service for many years as an electronic phone book and address finder and it housed a prodigious amount of porn. I almost forgot: It was also a prime venue for prostitutional dates. In spite of these attractions, it was to the Internet as Wisconsin blue cheese is to real, cave-aged French Roquefort (not the stuff they put on your salad, the $26/lb stuff). The main fault in this comparison, of course, is that American cheese makers can only improve their act. Non-Americans are not going to catch up on items such as the Internet because they lack the vision thing.

Other countries claim that they have a right to co-manage the Internet because their citizens use it. That’s it! So, if I clear a path in the bushes for my own use and I let the nice guy next door use it, and also the child molester two houses down, it’s not my path anymore?

Note that this sharing in the name of the often-poisonous concept of sovereignty need not happen, even by their own argument. Other countries’ governments can always block it if they wish. They can and do occasionally deny access to their citizens and take the blow-back. In many countries, the blow-back is also indirectly a blow for freedom.

Letting other countries have a say over the management of the Internet is likely to produce no improvement that I can think of. (But I keep an open mind; please, instruct me.) It’s extremely likely to facilitate despotism in many countries. Try a mental experiment: What’s Vladimir Putin, or the Chinese Mafia masquerading as people’s party going to contribute? The tyrants simply want to do their best to close the windows that let in any fresh air at all.

In other parts of the world, the desire for partial control of the Internet is motivated by cultural jealousy. That would be the case in France, in Spain and in much of Latin America, also to an extent, in China. But governments in those countries don’t need more power over the Internet to combat their citizens’ regrettable proclivity to listen to American music and to buy primarily tickets for American movies (in spite of prodigious government subsidies for the national cinema in France and in Spain). They already have full power to put anything they want on the Internet. I mean loads of bad French movies, even erotic movies where the naked women are pointedly vaguely repulsive. (See my piece “French Movies, Sex, and the Welfare State” [and also “Can Protectionism Ever Be Respectable?” (pdf) in the Independent Review – bc]). The Spaniards are free to place on the Net four or five Spanish-made movies each year and even to try and charge admission. And the government of the so-called “People”, so called “Republic ” of China is always welcome to transmit live on its blog the full sessions of the Plenum of the Chinese Communist Party, for the pleasure of all.

There are plenty of ways with the existing Internet arrangements to combat the poison of American Cultural Imperialism. Best of luck to them. (For God’s sake, with a handful of major exceptions, even our disasters are better than theirs!)

You can count on the fingers of one hand the number of countries where moderate government involvement and decentralization are understood by any significant fraction of the populace. Others don’t know how to do anything decentralized, won’t know for years or centuries.

The worst case scenario is also the most likely, I think: Following the Obama administration’s capitulation, the Internet will end up being “managed” by a UN-like international body run by faceless, brain-dead bureaucrats.

What bothers me in yet this other American retreat at the hands of the Obama administration is its sheer mindlessness, its obvious abandonment of common sense. Contrary to may other conservatives, I don’t think Mr Obama is evil. He is acting pretty much as you would expect from a man who had never accomplished anything in his life before becoming president. I said this during his first campaign in 2008 (but I am too lazy to look for the relevant link . I said it many other times since, including this one).

It’s not that President Obama is bad or even stupid; the problem is that he is ignorant and lazy, including intellectually lazy. And he and his wife sure like their vacations at public expense.

Yeah, I must be a racist: “lazy” is just another racial stereotype, after all. See if I care!

And I am a little ashamed of the dig about the presidential family vacations. I mean his wife was severely deprived for 250 years; she is only catching up. He was not that deprived himself though. His name indicates a coastal origin among the slaving tribes on his father’s side. On his mother’s side he comes from reformed and moderate hippie stock. Hippie like me.

Around the Web

  1. The media’s shooting bias. An excellent take on the hypocrisy of the media. (read David Henderson’s take, too)
  2. Conservation Native American style (grab a cup of coffee)
  3. The mission to decentralize the internet; interesting argument, though I don’t think the internet is as centralized as the author makes it out to be.
  4. Doug Bandow on North Korea’s ongoing purges
  5. Blast from the past: What did Marxism look like in Mozambique in the 1980s?