Blockchains aren’t just tech, they’re new economic systems

Forget for a moment about the value of the cryptocurrencies that you may or may not own. Instead of thinking of blockchains as investment bets or just cool technology, think of them as entirely new, and previously impossible, economic systems. Because that’s what they are.

Just like any economy, a blockchain requires that its designers define monetary policy* (inflation), fiscal policy (block size), taxation (fees), voting (governance/upgrades), and provide for the common defense (securing the network). Yet, unlike traditional economies, they offer the possibility of greater freedom and transparency because they avoid the problems of centralization and concentration of power.

That’s the good news. The bad news is that these new economies comes with extremely high risk.

One of the risks, ironically, is also one of the technology’s greatest strengths. As Elad Verbin points out in his post on Behavioral Crypto-Economics, “Blockchain systems are, by design, difficult to change once deployed.”

Mark Zuckerberg’s hallmark mantra “move fast and break things” does not apply here. If blockchain developers don’t start from an extremely well thought out design, they may very likely have doomed their project. Repairs and improvements to these systems are famously difficult. Protocols with billion-dollar valuations could disappear overnight. Things can get very acrimonious. Want evidence? See the Bitcoin block size debate.

As if designing a system without flaws weren’t enough pressure, blockchain creators face another big risk when developing these new economies: accurately predicting people’s behavior.

It is one thing to lay down the rules for an economy and encode them in software (i.e. “code is law”). But those rules are based on predictions of how people will behave in the economy — the value they will place on a currency or the level of incentive that will drive them to participate in the ecosystem, for example. And those predictions are notoriously hard to get right.

Just look at some of the decisions each of us make on a daily basis. We may vote for policies that go against our own economic interests. We make food selections that are at odds with our physical health. There’s no clear, codeable logic in much of our behavior.

In fact, an entire field of people study this very phenomenon, including Nobel laureates Daniel Kahneman and Amos Twersky as well as University of Chicago professor and former Clinton advisor Cass Sunstein (author of Nudge). It was Sunstein who discovered that changing the default setting from “opt-in” to “opt-out” on things such as organ donation on a driver’s license and 401k contributions at work could dramatically improve uptake.

Of course, once Sunstein discovered this, he only had to share the findings with a few, key central authorities who were able to institute the decision across the entire network. They did not need to poll every citizen in a state to get approval to change the Driver’s License registration process. The “fork” of the protocol, in this case, was relatively painless.

Blockchain system designers face greater challenges than Sunstein in implementing changes.