Blog 5 - P2P business, Ostroms rules and smart contracts.
Some authors argue that implications of blockchain technology will be most greatly experienced as a revolution of institutions and governance rather than a transformation of money or as a new technology that transforms the economics of information. Whilst they hypothesize and demonstrate that the actual structure of the rules that govern block chains are in themselves similar to the principles identified by Ostrom (Davidson, De Filippi & Potts, 2017), they do not explore the application of these rules for use by P2P businesses. Others hypothesizes on specific use cases such as the issuance of cooperative shares and/or membership rights on block chains and speculates about “a city network of informal street vendors run a collective mutual insurance pool between themselves using only their smartphones to interact with a distributed ledger system, with no central financial institution involved “. However, although this author notes the potential to use of blockchain to build cooperative social and economic finance, he concedes that it is still not clear how such organizations will operate on blockchain technology (Scott, 2016).
Our hypothesis is that blockchains allow the scaling of Ostrom's design principles and hence enable P2P business models to out compete with corporations and we are seeking to identify practical means of implementing these.
So where do we start ? Can we code all of Ostroms rules on a blockchain or just some of them ? Is it theoretically possible to code some but not practical or worth the effort ? Does there already exist blockchain solutions for some of them ? Are some already inherent in blockchains themselves and therefore there is no need to consider how blockchain can be used to implement them ? Considering our goal is create a practical and worthwhile implementations, should we take a broad brush approach on all of them, or drill down into one or more specific ones and leave the others ?
To begin, let's have a look at Ostroms rules from our own knowledge of developments on blockchain tech and use this to inform future research:
Rule 1. Define clear group boundaries.
Many blockchains, such as Ethereum, allow the issuance of tokens that can be used to represent membership and therefore define the boundaries of the group. Furthermore tokens can also be issued that represent the common asset(s) that the group maintains. So it appears that there is already blockchain solutions that implement this rule.
Rule 2. Match rules governing use of common goods to local needs and conditions.
One of Blockchains great functionalities is smart contracts which enable the implementation of incorruptible rules that cannot be changed without the majority (or greater) number of stakeholders agreeing to the change. It is therefore arguable that this rule is natively implemented in all blockchains and that this characteristic will somewhat automatically flow through to any P2P organisation that exists on a blockchain..
Rule 3. Ensure that those affected by the rules can participate in modifying the rules.
Another characteristic of blockchains is fast decision making with low overhead. Theoretically, Members of the group can interactively propose guidelines and actions and vote on all proposals, thus determining their own rules and adapting them in a quick manner. However a review of some of the more prominent blockchains show that the implementation of this rule is problematic at best.
The Bitcoin blockchain, which uses an informal decentralised model for the implementation of changes to its protocol has been through a significant period of political turmoil due to the inability of its community to come to a consensus on changes. Additionally the DASH cryptocurrency, which is more recent blockchain that has implemented a formalised method of agreeing to proposed changes based on achieving a significant majority of votes cast, has experienced voter apathy. Arguably this has allowed self serving interests to pass proposals that benefit themselves to the detriment of the value of the common assets. As it appears that blockchains offer promise in successfully implementing this rule but have not yet done so this author will further investigate the potential to code this rule on blockchains in a future blog.
Rule 4. Make sure the rule-making rights of community members are respected by outside authorities.
Blockchains by their very nature are sensitive resistant and this rule would be inherited by any P2P business implemented on a blockchain.
Rule 5. Develop a system, carried out by community members, for monitoring members’ behavior.
As the interaction with common assets on public blockchains are completely transparent to all members and tools are widely available to monitor activity it is arguable that this rule is partially satisfied by existing characteristics of blockchain. However, the challenge for P2P organisations operating on blockchains is that they do not operate in the real world, that is they rely on trusted third parties to input off chain information. Presently social media provides a mechanism for members to obtain information as to other members behaviour, however the accuracy of this moderated content relies on the trust of third parties, is subject to politicization, and as the inputting of this information into blockchains is done by humans it is therefore subject to error.
While some blockchains have attempted to implement decentralized oracle networks to overcome these issues for things such as cryptocurrency prices, there is little evidence of the use of this by on chain organisations.
Rule 6. Use graduated sanctions for rule violators.
Although some of the most recent blockchains, such as Tezos, have inherently built in mechanisms that financially punish community members that attempt to violate the blockchains protocol rules, this author is not aware of any discussions or implementations of these mechanisms that may be leveraged by commons assets represented on a blockchain. As such further research will be undertaken.
Rule 7. Provide accessible, low-cost means for dispute resolution.
Although it does not appear so at first glance, our legacy financial platforms do not actually transfer value as we transfer information, but rather transfer IOUs are sent and received that we accept because of the trust that we place in the institutions that operate the platforms. One of the significant advantages of blockchain technology is that the actual value being transacted between two parties exists on the blockchain, and this allows smart contracts to escrow value and automate partial or whole releases of value based on inputs received. Although this feature of blockchain technology is relatively easy to exploit, there has been limited use of it by on chain organisations. The author will further investigate the reasons why in future blogs.
Rule 8. Build responsibility for governing the common resource in nested tiers from the lowest level up to the entire interconnected system.
Andreas antonopoulos argues that the Bitcoin protocol in itself - which is arguably a P2P business - has seven interconnected communities that protect it and grow its value via their responsibilities. As such it is arguable that this rule is inherent in the design of blockchains themselves. Additionally, as Ethereum has demonstrated with its 1000s of tokens, many of which use nested Smart contracts, it is further arguable that P2P business operating on a blockchain satisfy this rule via their organisational design.
We will take a more in depth look at the use of blockchain technology to satisfy Ostroms rules in future blogs.