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Blockchain as
Gosplan 2.0
IZABELLA KAMINSKA
WITH AN INTRODUCTION BY SIMON DENNY
 The emergence of Bitcoin and the fast-evolving debate around
cryptocurrencies has shifted many times in reach and focus since the mythic
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“Satoshi Nakamoto” birthed the world’s most popular alternative digital
currency system in 2009. What first seemed like a proposal for a money
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payment method operating beyond national borders and banking sector
control has now revealed itself to be the spark of inspiration for other
alternative structures, networks, and systems beyond simply money and trade.
For many entrepreneurs, journalists, thinkers, and artists, the blockchain has
inspired strong conclusions about the evolution of economic liberalism and the
future of nation states, oversight, planning, regulation, autonomy, governance,
and other fundamental topics. The idea that computer code could replace laws
through an incorruptible distributed network that everybody and nobody owns
is a powerful idea. It has been a great model for dreaming dreams and telling a
diverse and divergent set of new (and not so new) stories about how the world
might organize in the future. Izabella Kaminska’s writing on the Financial Times
blog Alphaville, often focusing on stand-out companies and visionaries like 21
Inc and Balaji Srinivasan, demonstrated to me the power of these stories. In the
context of my presentation at the 9th Berlin Biennale for Contemporary Art,
Blockchain Visionaries (2016) which aims to capture the essence of some of
these inspiring stories, I am very happy to have her critical thoughts on the
blockchain. She is one of the powerful voices that has contributed to this
project of gathering and framing the promise and depth of the story of the
blockchain.

Simon Denny, Berlin 2016

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In the 1965 film Alphaville, French-Swiss New Wave director Jean-Luc Godard
depicts a city-state governed to the extreme by cold-hearted logic and
rational technique.

In Alphaville, there is no why, there is just consequence. There is no future or

past either, only present time. Emotion, failure, vagary are all banned. As is
contradiction, poetry, and love.

The technocratic dictatorship’s objective instead is to achieve the perfect

organizational system. Alpha 60—the city’s central memory and processing
system—represents the primordial role such an intelligence might play in a
logic organization like Alphaville. A Gosplan 2.0, if you will (for those familiar
with the history of the Soviet state planning committee).

All day long Alpha 60 sets itself problems, many of which are too complex for
humans to understand.
 When confronted by the lyrical minded Lemmy Caution, an undercover agent
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from the humanistic outlands, Alpha 60 declares to him that “the natural
ambitionDof
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any organization is to plan all its actions. In a word, to minimize
unknown quantities.” Essentially, to derisk.

Alpha 60’s chief engineer tells Caution this is the reason no one ever says
“why” in Alphaville, just “because.” “In the life of individuals, as in the life of
nations, all is linked, all is consequence,” he explains.

Caution, who aims to undermine Alpha 60’s influence on the citizens of

Alphaville with poetry and paradox replies defiantly: “I shall fight so that failure
is possible.”

Unlike the residents of Alphaville, Caution understands that the

essence of man is love, faith, courage, and tenderness. He looks upon
the Alphaville citizens as slaves of probabilities. A technocratic ideal
not dissimilar to that of termites and ants.

That was the blockchain as it

was then. But to explain what
the blockchain has now
become is a far more tangled
story to tell.

Oh to know what the mind of Jean-Luc Godard would have made of modern
attempts to birth Alpha 60 by way of the brutal linked-up logic of something
more commonly known as the blockchain.

What is the blockchain? These days it’s not that easy to define. But the
parallels with Alpha 60 are not insignificant.

In its initial incarnation it was the term ascribed to the distributed

ledger technology—or computer protocol—which powered the virtual
 currency Bitcoin and which created a means for the network to
synthesize
NEWS VISIT
trust.
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In the beginning
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this was supposed to be a democratic system. Anyone could
take part. All one had to do was download the rules of engagement and start
contributing processing power to the network. The true state of accounts
would then be ascertained by the gauging of public opinion through regular
network plebiscites.

Except . . . in an environment where voters were purposefully left unregistered

for anonymity reasons, there also needed to be a mechanism to control for
vote-rigging or system gaming.

With Bitcoin, the solution came by way of a skin in the game process called
“proof of work.” If you wanted your vote to count, you first had to contribute
real-world energy to solving impossibly difficult cryptographic puzzles. This
was tantamount to your down payment. Voters —also known as miners—
were incentivized to crack these puzzles in the hope of winning claims upon
the network, more commonly known as Bitcoins. To prevent a single entity
from corrupting the system with multiple votes, the rules of engagement
ensured that the puzzle would get harder—requiring more energy to be
expended—the more miners there were. Only if the real-world value of the
Bitcoin prize compensated for a miner’s energy costs would a profit be
assured for the miner.

In any case, the ledger—now held on the drives of all voting participants—
captured a regular snapshot of where exactly value resided in the network
and how much. And since the outcome of each vote was sealed into the
former, and so forth, the resulting “chain” of transaction “blocks” was deemed
an immutable public database—as pure and justified a version of present
value as there ever was.
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That was the blockchain as it was then. But to explain what the blockchain
has now become is a far more tangled story to tell.

What we know for certain is that powerful interests are keen to leverage the
potential of a database system which, like Alpha 60, depends on brute force
logic rather than subjective assessment to quantify what value really is. The
real question is: for what purpose? And cui bono from experimental
blockchain projects such as Ethereum, 21 Inc, or Digital Asset Holdings that
celebrate a system which never forgets? To understand this, we, like Lemmy
Caution must account for the relevant and subjective history of finance
Caution, must account for the relevant and subjective history of finance.

First off,V I finance

NEWS SIT
is and always
ABOUT
has beenPthe
PA R T I C I PA N T S
story ofF Eeconomic
ROGRAM AR OF CONTENT
allocation, wealth rationing, and command economics. If markets are a
P voting
RESS machine
DE for the goods and services of society, finance is the
thing which determines who gets to vote and why.

Less frequently observed is that finance is also the story of scaling, netting,
and trust.

To wit, consider the two classic options diners might encounter at the end of a
group meal out. Option one: each participant settles his or her share of the bill
with the waitstaff directly—a process which can be lengthy, arduous, and
frustratingly acrimonious—or option two, one of the group pays up on
everyone’s behalf on the mutual agreement he or she will be paid back at a
later time (accounting for any additional offsetting debts incurred in the
meantime). You know the score . . . “It’s okay, I’ll get this one, because I owe
you from the last time we went out.”

The former amounts to something known in banking circles as a gross

settlement system, while the latter illustrates something more akin to a netting
process.

Suffice to say, the latter is evidently quicker and more efficient on all fronts.
Yet, it’s also more risky to the payer, who might have to wait a long time before
being paid back, if at all.

Hence, payment systems depending on netting processes invite credit risk

into the system. Those which don’t, boot efficiency (and scaling opportunity)
out.

Taking risk on society’s behalf and managing it accordingly, however, is the

way financial intermediators justify their existence. When done right, banks
downsize these risks by vetting the networks they operate in (knowing their
customers, their reputations, and how they are likely to behave) or by
diversifying and scaling the ebb and flow of payments to ensure they’re never
so one-sided that they are left exposed. When done wrong, they misassess
behaviors and invite the sort of systemic imbalances which spur financial
crises and panics.

In that respect, banks balance the system’s need—for the purpose of

economic planning—to assume that certain behaviors are set in stone
 economic planning to assume that certain behaviors are set in stone
against society’s desire to operate in a free system in which anyone can
Nchange
EWS Vtheir
I S I T mind.
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Only when
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we understand that the right to change our minds, to act
irrationally, to behave selfishly, or even to think paradoxically is the risk in the
system, do we understand to what extent a financial network that eliminates
all risk is also one that annihilates our liberty and our right to make mistakes at
all.

The current system is fragile,

inefficient, and impossible to
scale, all the more so because
of its overreliance on liquid
collateral (which is limited).

Quid pro quo, the more the banking system nets and scales, the more it
exposes itself to the risk of some people not behaving as anticipated. Equally,
the less the banking system nets and scales, the smaller the risk, but also the
less efficient the system and the greater the opportunity cost of not putting
idle capacity to work. This undermines the very point of financial
intermediation in the first place.

Hence the holy grail for bankers was always a system which could reduce risk
by tracking value from point, to point, to point—in the style of a waiter taking
payments from diners sequentially—without giving up on the efficiency of a
netting process.

Not until the arrival of super fast computer processors in 1980s, which sped
up the waiter’s ability to take payments sequentially, could bankers finally
realize that dream.

And it might have worked too, had the flow of payments in the economy been
entirely predictable and synchronized, and had the roll out of computer-
based processing systems not been so far spread that the relative
based processing systems not been so far spread that the relative
advantages for the banking sector were minimized.
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With regards to the non-synchronicity issue, this was always a well-

P understood
RESS D E risk inherent to a gross settlement system—linked to the fact that

a system which doesn’t tolerate credit, nuance, or risk must inevitably depend
on the absolutism of cause and effect.

Except, in a world of limited liquid funds that means any delay, jam, or gridlock
in the transmission process, no matter how small—say because one of your
fellow diners underestimated the size of the bill by just 10 pence—causes the
entire payment flow to grind to a halt until the deficit is topped up.
Furthermore, that’s irrespective of whether or not the deficit has landed in the
lap of a property millionaire. What matters is simply the size of the liquid fund
pool relative to the incurred obligations, which have to be cleared before the
rest of the party can move on.

Hence—to prevent these sorts of delays from freezing the payments network

—central banks decided they would issue liquidity on tap to whomever
demanded it, if this person had the necessary collateral. Our proxy (the
distressed diner), in other words, would only have to show the central bank his
property documentation, and his 10-pence-shortage would be waved
through on the understanding that the shortfall was only temporary and
would soon be settled with incoming funds from elsewhere. If this were not
the case, the central bank would then have the right to the pledged collateral
(i.e. the property), which it could seize and liquidate in the worst-case
scenario.

Yet rather than eliminate or control the risk as hoped, all the regime really did
was transform credit risk into collateral risk, with banks incentivized to
overvalue assets that could source them liquidity at zero cost to the bank. We
all know how that led to the global financial crisis of 2008. What’s less well-
known is how banks, totally unsure of the economy’s capacity to service
monetary claims, turned towards independently verifying the receipts and
outlays in the system themselves and hoarding liquidity until they could be
sure it was really theirs to have.
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Cue the financial system’s obsession with blockchain.

The current system is fragile, inefficient, and impossible to scale, all the
more so because of its overreliance on liquid collateral (which is
limited). It’s also incredibly expensive, because banks can’t trust
 anyone but themselves to verify and monitor the network, meaning a
major doubling up of work (previously happily shared) and the
NEWS VISIT ABOUT PA R T I C I PA N T S PROGRAM FEAR OF CONTENT
incredible hoarding of idle spare liquidity on the off chance that the
sums might be wrong.
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Meanwhile, going back to a netting process seems far too risky for a system
which has grown used to the infallibility of real-time settlement. Small wonder
that blockchain’s suggestion we can have it all suddenly looks exceptionally
appealing—all the more so if it promises to reduce the risk of collateral
overvaluation as well.

In that regard there are three core stories here:

One is the story of Balaji Srinivasan from the venture capital firm Andreessen
Horowitz and the start-up 21 Inc and their belief that Bitcoin as it stands can
replace the dollar as an international value benchmark, providing it becomes
the key unit of account for micropayments in the global internet-based
economy.

What this vision neglects is Bitcoin’s inherent unscalability due to an

overreliance on extremely energy-intensive processes as well as its tendency
to shift power away from publicly accountable financial institutions over to
entirely unaccountable and anonymous oligarchic groups. In a world where
a vision such as 21 Inc’s dominates, there would be no scale or
economic efficiency. There would arguably only be the opposite:
network fragmentation, non-cooperation, and economic contraction.
All the more so, as long as the chasm between the value of micropayments in
the digital world and the value of large payments in the real world remain as
large as it is now.

The second is the belief that a private blockchain cartel has the power
to achieve the level of synchronicity, standardization, security, and
scale needed to keep operating within the current “de-risked” gross
system, albeit without the same back-office expenditure burden or
liquidity constraints which come with it. That is the story of Blythe
Masters—a woman known for having already de-risked the credit market
with the invention of the credit default swap—and her company Digital Asset
Holdings.

What this vision ignores, however, is that it’s not at all clear whether private
blockchains can improve on the costs or efficiencies of the current system
 blockchains can improve on the costs or efficiencies of the current system.
Nor is there any reason to believe a blockchain will be any more successful at
Nintroducing
EWS V I S I Ta single rule
ABOU T kitP AofR Tindustry
I C I P A N T Sstandards
PROGRAthan
M regulators
F E A R O F C Oor
NTENT

governments have been to date. To the contrary, there’s every risk we end up
with a system
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of competing cartel networks that can’t get along. Or on the off
chance that they do, even in such a highly standardized, synchronized, and
interoperable an environment, the predictability of the system exposes it to
entirely new types of cyber security risk, which have not yet been conceived
or accounted for by anyone. Last, it underestimates the challenge of
capturing the entire financial system in one transparent ledger by ignoring the
continuing incentive for parallel “off grid” banking networks to spring up in
informal environments (like babysitting clubs) and in jurisdictions which offer
safe harbor to dark networks and the black market.

What all three arguably miss is

that social systems will always
and forever respond
impulsively and unpredictably
if their right to act irrationally
is suppressed.

The third story is based on the belief that adding Turing completeness
to an economized version of a blockchain—which by and large
resembles the prevailing gross value settlement system albeit with
lower barriers to entry—can create an immutable record of pre-agreed
commands, which given the right to self-execute without exception can
organize society on fair and equal grounds. That is the story of the boy
genius Vitalik Buterin and the smart-contract project Ethereum that he
advocates.

What it neglects, however, is that contract creation, whether smart or not, is

entirely removed from the question of contract compliance or enforcement,
for which legal process determines course Also overlooked is the propensity
 for which legal process determines course. Also overlooked is the propensity
for contracts to misbehave on oh-so-many grounds, from outright cross
Ncontradiction
EWS V I S I T andA Bpoor
O U T drafting
P A R T I Cto the
I PA N T Soverreliance
P R O G R A Mon the
F E Aletter,
R O F Cnot
O N Tthe
E N T spirit,

of the law. Further neglected are our human capacity to change our minds,
cases in Dwhich
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laws or agreements to be overruled on public interest grounds,
or rare occasions in which individuals to find justifiable grounds to negate
terms. And that’s without accounting for the risk of totally unpredictable
events like natural disasters, wars, or fraud to unhinge economic allocation in
a system which tolerates no mistakes, second guesses, or contract breaks.

What all three have in common, as a consequence, is the erstwhile belief that
if the ghost in the machine is shackled down—and thereby reduced to an
entirely predictable element—all risk can be removed from the system, and
this will eventually open the door to untold economic prosperity. What all
three arguably miss is that social systems will always and forever respond
impulsively and unpredictably if their right to act irrationally is suppressed.

Indeed, as Lemmy Caution might point out, there’s not much point in
economic prosperity, if the cost of the cornucopia is a world in which society
is never permitted to act illogically at all.

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