Patri Friedman

For the past 20 years I’ve been working to enable start-up societies: permanent autonomous zones on land or at sea intended to accelerate economic development and to serve as laboratories for voluntary political experiments.
For just as long (in fact since I first read&nbsp;The Sovereign Individual), I’ve been interested in the potential of digital cash, which is finally arriving in the form of bitcoin and the emerging cryptocurrency industry.
Start-up societies and cryptocurrencies have many parallels. Both grew from individualist movements seeking ways to take their philosophy from online message boards to the real world. Both seek to decentralise power in order to disrupt traditional institutions seen as having been captured by selfish elites. And both are critically dependent on ‘governance’ — the technology of designing and enforcing rules for collective decision-making.
Because of these parallels, people are often curious about how the two movements relate. Will seasteads — as manmade permanent dwellings at sea are known — use cryptocurrencies? Will blockchain projects such as Bitnation replace the nation state? In a world of competing virtual economic systems, do we even need to reform government in real life? (Answers: maybe, not soon and absolutely.)
There’s an old saying that we overestimate what we can accomplish in a week, but underestimate what we can accomplish in a decade. Similarly, I think people greatly overestimate the immediate impact of blockchain on startup countries, while underestimating the degree to which the fates of start-up countries and blockchain are ultimately intertwined.
In the near term, I don’t believe that blockchain will somehow enable start-up societies. The reason is simple: the hard thing about starting a new country is not the payment system. That’s why we live in a world with 1,000 cryptocurrencies but no sovereign micro-nations.
I’m also sceptical of the crypto-anarchy theory that rapidly evolving online institutions will somehow remove the need for improving offline ones. Physical space underpins virtual space, and most human activity still happens in physical space. Moreover, no matter how transcendently effulgent your networked life is, it can be ended by a single bullet. So the performance of your friendly neighbourhood nation state, with its monopoly on physical violence, still matters in the digital age.
That said, it’s hard to imagine that a successful blockchain industry will not eventually produce profound political change. First and most obvious would be the potential for private currencies to directly reduce nation-state revenue (and thus power). As Vijay Boyapati writes in&nbsp;The Bullish Case for Bitcoin:
‘A global, non-inflationary, reserve currency will force nation states to alter their primary funding mechanism from inflation to direct taxation, which is far less politically palatable. States will shrink in size commensurate to the political pain of transitioning to taxation as their exclusive means of funding.’
Blockchain also threatens something as existentially important to nations as money: their legitimacy. The democratic republic model used by most western nations is claimed not merely to be practical and functional, but also to be maximally moral, as if no other form of social organisation could possibly be as ethical as ‘one person, one vote, once every few years’. Most strangely, this 18th-century governing technology is also put forward as the final, ultimate mechanism for organising human affairs. Winston Churchill described democracy as ‘the worst form of government except for all those other forms that have been tried’, and Francis Fukuyama famously said he believed liberal democracy might emerge ‘as the final form of human government’.
Both claims are fragile because they can be disproved by counter-example, which is exactly what cryptocurrency governance experiments are in the process of doing. For example, one proposed revision of the democratic republic is to a ‘delegative’ democracy, a system whereby a voter can choose different representatives for different issues, and change them at any time, not merely within the minuscule boundaries of an election period.
As with any mechanism for collective decision-making, this proposal has its critics, but before the advent of blockchain it could only be evaluated abstractly (a ‘professors having pints in pubs’ sort of discussion). Now, because cutting-edge governance is so critical to crypto network success, these ideas have been implemented as governance methodologies for cryptocurrencies such as Tezos and EOS.
As billions of dollars pour into coding competing governance technologies, it seems likely (perhaps inevitable) that some will succeed. Those that do will have proved that they are able to coordinate millions of stakeholders to manage an economy worth billions. It would be difficult then to describe these methods as untested.
At the same time as the legitimacy of today’s governing methods begins to be questioned, the crypto-literate population is growing. This includes both early investors (who have already collectively amassed a hundred billion pounds of profit) and later adopters now increasingly familiar with a new way of doing things.
Early adopters naturally associate their wealth and success with the disruption of fiat currency. They believe — from experience, not just theory — that private, decentralised solutions can replace ancient public institutions, and that profit comes from cutting out complacent gatekeepers. The gap between the evolution of governance online (measured in years) and offline (measured in centuries) is already large. As Venkatesh Rao writes: ‘Offline we’re still in the fall of Rome. Online we’re already into Italian city states.’ Should crypto prove itself in practice, and there is still a giant question mark, the expectations and resources of its adherents would eventually make the gap untenable.
At some point, the start-up society pitch becomes as simple as: ‘Imagine having the innovation and flexibility of blockchain governance, but for the real, offline world.’
Superior governance tends to attract both citizens and capital, as the British Empire in the 1800s and the United States in the 1900s both demonstrated. As we continue to experiment with governance methodologies and technologies in the virtual world, we should be optimistic that the highest forms of governance have not already been discovered, rather that improvements upon them can become a continual process.
At the very least, we should accept that governance is a technology, crypto is profitably disrupting it and the resulting innovations are unlikely to stay caged in the virtual world.