In February of 2016, I wrote an essay concerning the nature and potential of Bitcoin. With now five years of water under the bridge, and the price of Bitcoin increasing a hundredfold, I figured it would be worth returning to the topic and reexamining the landscape. In the present essay, I broaden the scope to include the whole of the broader blockchain as a complex but coherent ecosystem.
In that essay, I proposed that the most meaningful aspect of the blockchain was that it introduced into the world a novel form of ‘collective coordination’ and, therefore, a novel form of ‘self organizing collective intelligence’ or SOCI. While this term, SOCI, is not particularly well defined and lacks a certain poetry, I will continue to use it until a better term comes along.
For those who are not clear on the concept of SOCI, I recommend reading the original essay, it is relatively short. But this gist is that a SOCI is best considered through the related lenses of evolution and complexity science as a form of “collective organism” that evolves in important senses “as a whole”. Perhaps most importantly, when we are considering the nature and future of a SOCI the proper inquiry is rarely “what it is” but “what it can become.” That is, who can it attract into its service; what new potentials are produced when these people are oriented into collaboration and competition with each-other; what are the implications of the feedback loops produced when the people and resources of a SOCI increase its attraction to other people and enhance the space of collaboration within its “boundaries” in a potential recursive explosion?
SOCI by their very nature grow in scale (i.e., number of people), kind (i.e., kinds of relationships and affordances) and in future potential. This recursive expansion can take an apparently minor and esoteric innovation like a technical solution to the byzantine generals problem and evolve over thirteen years into a global ecosystem commanding the attention and action of tens of millions of people across tens of thousands of distinct areas of interest commanding resources valued at more than two Trillion US dollars (and with no obvious end in sight).
In this essay, I want to reexamine the blockchain SOCI to consider its ultimate potential as well as some of the major strategic hills that it will encounter on its way towards that far horizon.
Major innovations in coordination are rare and often quite significant. Even relatively minor innovations in coordination tend to show up as a big deal in the historic record. The phalanx and the joint stock corporation, for example, were relatively minor innovations in coordination (the phalanx limited to the physical military domain and the joint stock corporation to the economic domain) and yet the former played a large role in the competitive survival and expansion of classical Greek civilization while the latter has sat firmly side by side with representative democracy and mathematical / empirical science as a building block in our post Enlightenment world.
On the other extreme, consider a truly major innovation in coordination like language. Language opened up the entire possibility space known as “culture” and ushered in the Anthropocene.
We can use these kinds of examples as a rough “measuring stick” when endeavoring to estimate the potential of the blockchain SOCI. It seems, to me at least, that the ultimate potential of the blockchain SOCI is somewhere between these two points. It is meaningfully more profound than, for example, the joint stock company. After all, the decentralized autonomous organization, which is plausibly an equivalent to the joint stock company in potential, is merely one aspect of the larger blockchain possibility.
I’d like to simply suppose that it is meaningfully less profound than language, but here I’m not quite as certain. I honestly don’t know how profound this thing ultimately will be. We are already witnessing foundational disruptions at the level of money and governance, but when you consider the possibility of the convergence of the Internet of Things and brain machine interface into the blockchain SOCI, the ultimate potential of this thing begins to look pretty daunting.
So keep this in mind when I say that, from my perspective, the potential of the blockchain SOCI is easily equal to the whole of the current $200 Trillion global economy. Consider this, if you were sitting in the 1500 with a global GDP around $500 Billion and someone told you about the joint stock company, representative democracy and empirical science, you might have been skeptical that this new world would not only come to completely absorb the old but would ultimately grow five hundred times beyond it over the coming centuries. Yet that is precisely what happened.
The potential of the blockchain SOCI is very plausibly larger than the innovations that drove the world out of the middle-ages. At the macro level, it is intrinsically global and able to coordinate nearly every human being (and machine) in the world at close to realtime. At the micro level, it is intrinsically computational and (therefore) can modulate coordination down to nearly arbitrarily fine grain in both space and time. And of course, across all of this it is intrinsically transparent and incorruptible - naturally oriented towards routing around middlemen and other forms of parasitism. This is a rather potent combination.
Frankly, to simply transition the current global economy to the blockchain would be a somewhat unimpressive success. Beyond that it is hard to say much that is not an exercise in hand-waving imagination. I, personally, don’t have a good sense of what it would really mean for the blockchain SOCI grow the “wealth” of the world five hundred times from here. What, precisely, does that even mean? A whole lot more than a car in every garage and a chicken in every pot. It starts to get very science fiction very fast. Of course, this can be as dystopian as it can be eutopian (and no, I did not mean Utopian).
To get a better and more concrete sense of this potential, lets drop down from orbit and dig into some of the big challenges soon to be “right in front” of the blockchain SOCI. Moving to this level of abstraction should help give a better feel of how SOCI work in general and the “texture” of the potential of this one as it grows into the future. So at this point in the story let’s take a look at what appear to be the next two or three major challenges facing the blockchain SOCI: global finance, the Nation State and multinational corporations.
The evolutionary growth trajectory of the blockchain SOCI proceeds by a series of expansion and contraction phases (or seasons). I’d like to briefly point out that this approach is very much a feature, not a bug. While “bubbles” and “busts” might increase the anxiety of HODLers and look like a bad mix of FOMO and hopium to outside observers, at a deeper level, it is highly analogous to the process by which any ecosystem develops complexity and (therefore) resilience. For example, back in the early days, a key problem for the blockchain SOCI was the linkage between legacy/fiat money and Bitcoin. One solution was the “exchange” and, specifically, the Mt Gox exchange. During the early growth phase (roughly from $100 to $1000 per Bitcoin), Mt Gox dominated the niche of “exchange”. But it was fragile and, ultimately, was hacked to the tune of what in 2021 is the equivalent of $20 Billion worth of Bitcoin. The collapse of Mt Gox was connected to the collapse of the price of Bitcoin back down to below $100. But it also was connected to a “Cambrian explosion” of exchanges all over the world. By the time that “Bitcoin winter” was over, the “exchange problem” was essentially a solved one with multiple different interlocking solutions. The ecosystem had become robust up to that particular level and the next growth phase was ready to begin.
The current (2020-2021) growth phase has largely been dominated by the emergence of “decentralized finance” or DeFi. In only this last year, DeFi has expanded 1000X from $40M “staked” in DeFi accounts to $52Bn or so staked (as of the time of this writing) with the number and variety of projects similarly proliferating. I expect that this growth phase will turn to Autumn soon enough and per ordinary business the blockchain will witness another bust into Winter.
But when the spring buds once again return, the battle between DeFi and “TradFi” (aka the totality of global finance) will begin in earnest. I currently expect that by roughly 2023 (and this is a *very* rough estimate), DeFi will have “won” although it likely will take the rest of decade (or longer) before the results of that victory will be fully realized out in the world. A bit like how when you are riding a roller coaster, the ride is “all downhill” when you’ve surmounted the highest point, but you’ve still got plenty of ups and downs to traverse before you get to the end.
Ok, WTF? Not only do I propose that DeFi is going to eat TradFi, but is going to do so in what is effectively the blink of an eye? How do I get to this perspective? After all, TradFi is in many ways the power of the world. It is reasonably fair to say that the “vampire squid” of global finance is the peak predator of the global economy and the puppet master of most of global politics (China perhaps being an exception). And while $52 Billion dollars is nothing to sneeze at, it is next to nothing compared to the $230 Trillion global equity and debt market. How in the world might this tiny upstart DeFi unseat the King of the hill in two short years?
Walking through this inquiry provides an opportunity to introduce a new concept (and another awkward term) that is very much a part of the SOCI story: the OODA loop. From my point of view, you can’t really understand SOCI unless and until you understand OODA. Particularly as we begin to move down the timeline and encounter some of the bigger strategic obstacles for the blockchain SOCI, we are really going to need this tool. So I’ll do my best to frame the OODA concept with both brevity and clarity and then use the TradFi/DeFi conflict as a case study. After that we will look at the next big set of hurdles for the blockchain SOCI: the Nation State and multi-national corporations. I’m kind of geeking out on this stuff so the following might be a bit tiresome. If so, you can skip it and jump to the next section.
The OODA (observe, orient, decide, act) loop framework was developed by Col. John Boyd largely to model the strategic relationship between contending agents in a (military) conflict. When generalized we can use the framework to consider the relationship between any given agent (for example a SOCI) and its entire context (including other potentially competing SOCI).
OODA is a sort of meta-cybernetic perspective that the capacity of any complex adaptive system (“agent”) to adapt to or successfully navigate its environment is governed by the rate (speed), bandwidth (quantity) and modality (quality) that it can move through a cycle from “observation” (perception, data) to “orientation” (sensemaking, information, knowledge) to “decision” (choicemaking, relevance) to “action” (expression, change) under specific energetic constraints.
For example, if you are learning how to surf, you are faced with the complex of challenges associated with balancing on a floating surfboard that is itself moving in time in highly complex relationship with the rapidly changing wave that you are trying to ride. To the degree that your OODA loop is “outside” the complexity of the task, some aspects of the task are happening “faster” than your ability to respond (to make changes yourself) and you lose control of the complexity (and fall off the board). To the degree that your OODA is “inside” the complexity of the task, you will be able to make the changes necessary to continue to “ride the wave” of complexity. You are able to meaningfully “steer” the relationship.
Typically, OODA is used in contexts where the most relevant aspect of a given context is another agent who is trying to change the context according to its preferences. Like say an enemy aircraft who is intending to shoot your aircraft down. If his OODA is inside yours, he is ultimately controlling the overall context of the situation. If you can’t find a way to get inside his OODA, you are going to lose.
The remaining two concepts that are needed to grasp the OODA frame for the purposes of this essay are “state, rate, evolution” and “fractal nesting”.
When considering whether a given agent can navigate its landscape, you need to look at the current state of the agents’ OODA in relationship with the landscape; the relative rate of change of the agent’s OODA in relationship with the landscape’s complexity and the evolutionary potential of the agent in relationship with the landscape.
For example, lets say that you are trying to solve a puzzle. First, either your current “state” of OODA is inside the complexity of the puzzle or it is not. If it is, then you will solve the puzzle. If it is not, then you will be frustrated. But, you are not a fixed object. Your competence in this context can change. Your OODA will change over time, while the puzzles’ complexity will not. It might be that in the first glance the puzzle was “too much” for, you but that eventually your OODA moved inside the puzzle and you solve it.
Now you are trying to surf again. In this case, the context itself is changing. While your competence might be growing, the relative complexity of the context is changing as well. Now you have to compare the rate of change of your OODA to the changing complexity of the context. If you are learning faster than the environment can throw bigger challenges at you, then you will catch up (or stay ahead) and stay firmly established “inside” and in control. If not, then you will fall behind and drop out of control (if you ever had it in the first place).
Finally, the question of evolutionary potential. This one is trickier. It has to do with “zero to one,” with step functions, phase changes and emergent capacities. Anyone who has juggled is familiar with the experience of going from “not being able to juggle” to “being able to juggle” in a fashion that is meaningfully “all at once”. Evolutionary potential captures surprise and unexpected turns. It might seem, for example, that your OODA loop is managing your context just fine - only to experience an evolutionary shift that completely changes the game. For example, consider an aquatic animal adapting the reducing changes in temperature. While a shift from 70 degree water to 40 degree water is real and requires some changes in the animal - that shift from 40 degree water to 30 degree ice is something else entirely. If a fish wants to keep up with this transition, it is going to need to move from variations on swimming to an entirely different competence (like walking or flying).
Finally, “fractal nesting”. This has to do with the reality that all OODA loops are made up of (smaller) OODA loops and are part of (larger) OODA loops in very complex ways. Your personal OODA loop for example, includes your visual system which is itself an OODA loop. Your visual system includes retinal cells which have their own OODA loops. If you try to juggle with a partner, the two of you form an OODA loop. The coordination and coherence of OODA across levels of scale is another crucial aspect to keep in mind. A chain is only as strong as its weakest link, and the old “sand in the eye” dirty trick in a fight is a recognition that targeting the eye OODA loop might be the best link to disrupt your opponents whole system.
Now we are ready to talk about the relationship between DeFi and TradFi and why I expect DeFi to eat TradFi’s lunch in a surprisingly swift fashion.
Finance is a particularly interesting domain because it is more or less strictly game theoretic. What I mean by that is that you can usefully assume that nearly all humans participating in TradFi orient their choices on the basis of what they perceive to be their personal financial best interests. While other values like loyalty and, I suppose, creative expression or social good might on occasion show up here, TradFi has made its bed precisely on converting all values into the simple equation of monetary return on investment. One works at Goldman Sachs in order to become rich. And, if there are other, better ways to accomplish this objective, nearly everyone at Goldman will smoothly “defect” without blinking an eye en route to that better path to personal enrichment.
We can look at the implications of this fact quantitively and qualitatively. Quantitatively, the amount of agentic intelligence that is attached to the TradFi SOCI can be fairly measured simply by the amount of money that is available to incentivize that intelligence. So, for example, the size of the TradFi bond and equity markets is roughly $231 Trillion. That is a lot of money to motivate a whole lot of people to give their time and attention to this SOCI. By comparison, the total “crypto market cap” of $2.4 Trillion doesn’t seem poised to punch back. But when you compare the rate of change, you start to see a different picture.
Since inception, the compound annual growth rate (CAGR) of the blockchain has consistently hit the absurdly high rate of nearly 200%. By comparison, global equity markets have grown at around 15% and bond markets only 5%. Now, to be sure, it would be rather surprising for the blockchain to keep up that pace but, just to compare, were it to do so, blockchain would blow past global equity markets sometime in 2026 and total equity and bond markets in the very next year.
Toe-to-toe, the state comparison leans hard toward TradFi, but that rate comparison! Will blockchain keep up something like this pace? Probably not - but it has been remarkably consistent for more than a decade now. Moreover, even if it slows down by half it still blows by equity markets by 2029.
How might this rate of change be achieved? Let’s look at it from the qualitative side. The amount of money available to incentivize agentic intelligence in TradFi right now is $231 Trillion. But the vast bulk of this money is captured by large, old bureaucratic organizations and, therefore, the bulk of the rewards of TradFi tend to be captured by the people who control those large, old bureaucratic organizations. Not, for example, the innovative, creative folks who actually create the most value. If you are a young, bright and motivated, you could go work for a big hedge fund or bank. And you could certainly make some nice dough. But, a lot of the value you create will be “taxed” by the organizational structure and distributed to a whole lot of people who aren’t you. By contrast, while the blockchain space might be a smaller pond, it is one that is fast growing, wide open - and all yours.
The game theory here starts to look pretty clear. Every year for the past decade or so, more and more of the “best and brightest” have chosen to defect on TradFi and throw their value creation capacity into the blockchain ring. This, of course, has two recursive feedback loops. As more of the best talent moves from TradFi to DeFi, the large old bureaucratic organizations become increasingly populated by what in Silicon Valley are called “B” and “C” tier players while the wild west of blockchain becomes the obvious gathering place for those elusive “A players”. This shift, of course, drives the growth of blockchain “up and to the right” and drives TradFi into the slog.
Notably, because the whole of TradFi has a sort of “vertical” structure where New York is at the top and the rest of the world is arranged in a hierarchy of extraction, the evaporation of talent from TradFi into DeFi should be globally differential. One would expect that periphery talent would defect into DeFi before “core” talent. This plays into the strength of the nature of the blockchain SOCI: while a young talent in Nigeria might in principle find her way to a big hedge fund in NYC, that is a long and dicey slog with a lot of extraction along the way. By contrast, she can simply “teleport” into DeFi from where she is and start to create value for herself on the basis of her own capacity and interest. And for every person that makes this move, the cultural and organizational infrastructure of DeFi becomes more realized in a sort of “capillary” fashion.
Thus, a fractally nested inside-out evaporation of TradFi into DeFi. A qualitative exodus of talent drives a quantitative expansion of wealth and a structural change in capacity; this in turn drives the qualitative exodus of talent in a virtuous cycle that could quickly drive the last nail in the coffin of the, frankly, already quite undead TradFi world.
Of course, surmounting the TradFi hurdle immediately invokes the next major obstacle to the evolution of the blockchain SOCI: the Nation State. The large old bureaucratic organizations of TradFi haven’t been “free market” orgs for a long time (if they ever were) and they certainly won’t go into the long dark night without fully deploying the powers of their hosts in their defense (aka “reasonable regulation”). While Nation States and the blockchain have been engaged in a power dance for a while, we can expect the next few years to really heat up.
At first glance, we might assume that Nation States will clearly be able to break the blockchain SOCI to their will. But when I use the OODA framework, I am not so sanguine. When it comes to power the Nation State is, of course, extraordinarily stronger than the loose flotilla of blockchain projects and DAOs. But again, rate, and in this case evolutionary potential.
Remember, the blockchain SOCI only really began to tackle the broader problem of “finance” in the past four years or so and in the past two it has begun to ramp. What will it look like when the attention of the blockchain SOCI begins to consider governance and “public goods” in earnest?
In March of this year, Vitalik Buterin (perhaps the best leading indicator of where the blockchain SOCI is heading) wrote a thought piece The Most Important Scarce Resource is Legitimacy where he meaningfully moved the blockchain contemplation of governance and power up a full notch in its evolutionary development. The race is now on.
If the last five years of political buffoonery and in particular the COVID crisis have shown us anything, it is that nearly every institution in the global political order is a very bad mix of incompetent and corrupt. This does not mean, of course, that the people inside these institutions are universally corrupt or incompetent (they are not), but it points to the same kind of dynamic flaw that we saw in TradFi.
Consider for example: the Nation State has largely been made the agent of other large organizations (TradFi and multi-national corporations being at the top of the stack). These organizations have been diligently finding ways to capture political and regulatory power by means of money for centuries. So far, so good, but these exploits are more or less completely available to the blockchain SOCI. How long, for example, before blockchain begins to innovate decentralized PACs and tokenized political campaigns in order to influence and nudge legislatures to shape and delay Nation State efforts? Or lobbying DAOs that learn how to shift the incentive structures of regulators into increasingly blockchain friendly positions?
Even as the OODA of TradFi becomes slower and dimmer under the influence of a “brain drain” to the blockchain, the control structures that it has developed to manage politics become open season for the blockchain OODA. This lesson was already learned in full by the technology titans. I remember well when Google discovered the necessity and utility of converting money into power on Capitol Hill. Blockchain might drop the ball on this innovation frontier, but I’d frankly be surprised if they do.
And if the blockchain SOCI is able to innovate new ways of influencing legacy Nation State power, we find ourselves once again under the influence of the golden rule: he who has the gold makes the rules. Remember the scene in Game of Thrones where the Stark sisters secretly turned the tables on Little Finger? That.
Then, of course, we come to the final frontier of strategic conflict between the Nation State and the blockchain: raw power. While the Nation State clearly has a monopoly on WWII style power, the barrel of a gun has long ago surrendered its supremacy in this fourth generation of warfare to other forms like information, narrative and cyber war. Here the balance of power isn’t vaguely obvious. For example, as public trust in journalism (aka clumsily obvious and increasingly histrionic propaganda) plummets past zero, the blockchain SOCI might represent the only plausible agent to repair collective sensemaking and, thereby, win the information war. And what would it take, really, for the blockchain SOCI to recruit the best cyber warriors in the world to its defense? Or, the most innovative members of the global intelligence apparatus - how about an anonymous airdrop of a 10X a full career’s worth of wealth in crypto to a critical mass of folks? The intelligence / defense apparatus of global Nation States is nearly as fragile to “fractal defection” as DeFi and legislatures. And if we want to look at the conflict from the other direction, precisely how useful is a tank division or an aircraft carrier wing against a global decentralized self-organizing collective intelligence? I hate to say it, but when it comes to straight up power, I’m not sure that I’d bet against the blockchain here either.
Of course, this entire innovation frontier is “too be seen” and the blockchain SOCI might fail to work its way through the puzzle. But if we imagine that CAGR keeping pace for only the next two years, there will be ten Trillion dollars of value held within the blockchain SOCI. That is substantially more than the total wealth of Russia and roughly on par with major Nation States like India and the Western European countries. One might imagine that somewhere in that crypto spring, the seeds of both legitimacy and power will be planted and will grow.
When I step back and look at the map, I see only one real contender to the blockchain SOCI (other than its own internal conflicts and stupidity) - the major multi-national corporations. Here I’m definitely not talking about 20th Century titans like big banks or energy companies. Google, Facebook, Apple and the kingdoms arrayed under the names Musk, Bezos and Emperor Xi (aka China) seem like the agents that have the capacity to get inside the blockchain OODA loop for good. Certainly, a Mars-based Musk hivemind linked via neural interface or a Google superintelligent AI has the potential. And China, of course, has already seen this future and is well on the way towards the institution of a “cyber-Mandarinate” that could coordinate its collective intelligence into something plausibly more powerful than the blockchain SOCI.
At this point, however, we are beyond the scope of this essay. Perhaps in five more years I’ll check in and see where things actually ended up. Did the blockchain slam into a wall and fail to evolve past some obstacle? Did it keep up its CAGR and eat TradFi? Did it leapfrog Musk and Bezos into near earth space (or absorb Musk as a major node in the larger SOCI)? These days we have the luxury of knowing that it will only take a handful of years to find out.