Towards blockchain 3.0 – Codifying Ostrom principles on blockchain to end the tragedy of the commons

Abstract

This blog is concerned with utilising blockchain technology to code commons governance design principles for the purpose of operating scalable and efficient peer to peer businesses as decentralized autonomous organizations (DAO). In the course of investigation, it utilizes Ostrom principles as a means of analyzing existing blockchains, identifies gaps in the current platforms capabilities and proposes a potential path to resolve these.

Introduction

The world has enjoyed an explosion of wealth over the last 200 years that has been largely driven by the rise of corporations who can better scale than the preceding predominant business models. The corporation’s fractional ownership model allows capital to be raised for large scale projects that governments, sole proprietors and commons business model cannot afford and this scaling better enables the development of specialized skills and provides economic efficiencies. Complex projects, high skills and cheaper products are significant factors in our societies wealth.

Along with an inability to scale and thus a comparative lack of production of these factors, both commons business models such, as co-operatives, have struggled to produce the same levels of wealth as corporations. This is due to the usual situation where individuals acting independently and according to their own short term self-interest, behave contrary to the common good of all users including their own. Hardin termed this phenomenon “the tragedy of the commons”(Hardin 1968).

Despite some clear social and economic benefits of commons businesses, including shared risks, reduced operating expenses, and more engaged stakeholders (Leathers 2006), conventional wisdom says that avoiding the tragedy of the commons and achieving economies of scale is best achieved through corporations that hold private property rights (Hardin 1968).

When combined, two relatively recent developments challenge this wisdom and provide the potential to drive mass human abundance at the same level as have corporations and stock markets over the last 200 years.

  1. 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  1. In 2008 Satoshi Nakamoto invented the cryptocurrency bitcoin and its primary innovation, blockchain technology.

Blockchain allows cooperative production whilst economically incentivizing participants to enforce scalable decentralized governance. Blockchains require no central source of trust as rules are embedded in smart contracts that are cryptographically and economically secured(Davidson, De Filippi et al. 2018).

Blockchain allows Ostrom principles to scale beyond the limits of human personal relationships, enabling the creation and operation of efficient DAOs that bypass todays rent taking institutions and redistribute the rewards of economic efficiencies to those who use its services.

The crypto economy or analogue economy

In considering the mechanisms used to ensure the design of a DAO includes Ostrom principles it is important to consider whether the DAO will operate primarily within the crypto economy of if it will have significant interfaces with the analogue (traditional) economy. Interfaces with the analogue economy introduce significant complexity into the design of DAOs and ensuring these also incorporate Ostrom principles is challenging. Scott theorized of a DAO where “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” (Scott 2016). This theoretical DAO would require a mechanism of knowing when an insurable event has occurred and arguably this interface would also need to be aligned with Ostrom’s rules for the entire DAO to be aligned and ultimately successful. Without this, members could game the system for their own benefit. In comparison, subjective operational inputs into bitcoin are restricted to only those that can affect the member that provides the input and as such non alignment of these interfaces with Ostrom’s rules does not affect the overall alignment or success of bitcoin. As a largely self-contained ecosystem, the design of bitcoin only needs to be concerned with itself.

Blockchain 1.0

DAOs that are programed within the fabric layer of blockchains are often categorized as Blockchain 1.0 platforms and these are primarily fo