by Anton Galenovich
The more taboos there are in the empire
The poorer the people;
The more sharpened tools the people have
The more benighted the state;
The more skills the people have
The further novelties multiply;
The better known the laws and edicts
The more thieves and robbers there are (Daodejing II. 57)
The primary axiom for trustless peer-to-peer systems, i.e. “Trust no one”, should not be interpreted solely as “one must trust no one” paranoia but rather as “one may trust no one”. A person is entitled to the choice of trusted parties. It might be wise to believe and trust everyone and everything but just until there is something they want from you or you have something they want. Which is exactly the case with trading. As the Russian hyperbolic folklore saying goes “No lies no sales”. The trick is to make lies subtle and ethical. Even if it is not always the case, one is in his right to seek “trustless” solutions. And such solutions are almost there including the one for the issue we are exploring — the issue of collateral damage of economic activities.
To take a widespread example of compensation of environmental damage (carbon footprint) of air travel, one must trust the airline, the ICAO, the green NGO that advertised specific offsetting scheme, the project developer and financial organization that developed and financed mitigation project, the auditor that verified the outcomes, the program (the standard) that accredited the auditor and certified the results and issued offset credits, the registry, the OTC broker or the exchange, — to trust all of these institutions and pay their expenses, aka institutional costs. Things do not get better with substitution of voluntary offsetting by tax. It’s the institutions that extort the money that change.
Those institutions whether they are governmental or non-governmental form the establishment, which is a corporation, a firm that has been reducing transaction costs at least until there appeared a more efficient way to avoid these costs on a p2p decentralized basis.
Those might be the reasons at least to try to provide an alternative way to address the issue — the p2p decentralized way of doing things.
Sometimes if not often people tend to analyze decentralized p2p technologies from the point of view of them being better or worse than the existing ones to trade one for the other or not. And often this is not the case for such comparative analysis, not an applicable approach as decentralized p2p technologies provide features non-existent with the current models at all. Such features as anonymity or pseudonymity combined with transparency, elimination of middlemen combined with elimination of the need or even possibility to trust the opponent. These virtues in many cases and by many are considered as flaws and often and for many, especially for the establishment, are useless and even harmful. Economic activities, trading of values, should they be bilateral, multilateral or unilateral, are reasonable and purposeful, they are based on certain set of reasons and purposes, but they often are not rational or “calculated”. Many findings in the field of economics such as Prospect theory etc. prove to the irrational nature of economic decisions and actions. The social, behavioral, emotional motives matter more than cold-blooded calculation. Overweighting low probabilities for winning, risk aversion for probabilities of losing, the value of collectibles or unique items that no one else has, the value of the bargaining process per se as a “bazaar” sort of interaction, almost instinctive social need to trust, need for middlemen, for social appreciation, the value of social attitude (admiration, appreciation or jealousy and envy) toward the deal one enters, — those “distorting” factors are numerous and almost unavoidable. And they make the field for traditional economic models, trading models self-sustained and aversion for decentralized p2p “trustless” models almost reflexive.
Furthermore, there is a price one must pay for the new features of the new mechanism, including such as direct and secure p2p interaction. However, this price is a much cheaper alternative to the institutional costs mentioned above.
Still, once the trading, exchange of values are means not ends, and the goal is to achieve a more favorable state for the subject, for all the counteragents, decentralized trustless p2p model is indispensable.
To apply Peer-to-peer transaction-based model in a consistent and somewhat comprehensive way we must move to the fundamental level, i.e. the level of a transaction. As we’ve tried to describe earlier, subjective perceptions, cognitive metaphor of juxtapositioned values are immanent basis for economic choice, economic activity, for trading values, for a transaction per se. The parties first must make sure that the values they want exist at the disposal of their counterparty, and that they cannot be double spent. They also must be sure that they comprehend not only the value but also the liabilities they acquire. Once a person buys a car, he takes over numerous liabilities and risks, for instance of harming other people, and buys insurance to address some of those risks.
Most of the things and values traded in contemporary world are not ‘real’. They are representations of ownership, of property stored in ledgers, registries, depositories, or of services, skills, expertise verified by a certain track-record, which basically is also a registry. And these representations are getting more and more digitalized. Even an individual as an owner or bearer of values is more and more digitalized. His identity properties including biological properties like fingerprints, social, professional properties, economic and financial properties, geographic locations are stored in a digital form in all sorts of more or less accessible digital registries. Still it does not solve all the problems with the identity.
But for the purposes of trading we do not need the counterparty identity, we need verification of the value we want. Furthermore, if not otherwise required the identity of the counterparty may be anonymous, while the deal should still be enforceable.
Verification of value, which actually in most cases is not a physical object, or service, or hours of work but a subjective cognitive metaphor of the relatively more favorable state we want to achieve as a result of acquiring of the value, is not easy. Disagreements arising from the differences in perceived values in the transaction happen all the time irrespective of prolonged efforts to refine standard contracts. Many of these disagreements take roots in the false understanding of the object of the deal perceived as something material. There are many examples when this is exactly the case. When you fill your tank with gas you get a material energy carrier and once it’s quantified in quality and quantity by trusted hardware you get exactly what you want — exact amount of specific fuel to be combusted in the engine of your car to provide you with a mileage and co-benefits. In most other cases people do not actually buy oil, or gold, or hours of an expert or a lawyer, they buy perceived rights subject to perceived liabilities enforced by particular institutions or bid that the figures related to those commodities go up or down at the exchange. Those values are not worth anything if and when the institutions fail.
There is only one generic way to define the perceived values, cognitive metaphors juxtapositioned in the transaction, and the way is a semantic one. The sematic context and the definitions of the exchanged values of the counterparties should exactly coincide. The semantic context is a market as an institution. The description is a definition or specification of the value traded.
The sematic context of the origination of the value should be the same with the context they are traded in. The point, where the goods and services enter or are admitted to the market, is a critical point of potential falsifications. So many institutions are busy certifying that the goods and the titles are original, safe, and overall eligible. If the value takes root in the same decentralized p2p space and, even better, cannot appear in different space before it is eliminated in the initial one, the issue of verification and avoidance of double-spending can be resolved. For instance, applying it to the issue of collateral damage of economic activities would mean that the provenance of mitigation instruments and of the quantified negative impact is the very same decentralized p2p space it is consequentially offered for sale or offsetting.
Once the parties differences in understanding the values they trade are minimum thanks to identic context of origination and definitions, they might be sure that they bargain over the things they want.
Transition to decentralized p2p models is already technically possible but so many institutions would lose their functions and piece in the pie that the establishment would do its best to subvert or at least to slow the process down to impose quasi p2p solutions subtly and “ethically” selling them as new technology.
Subjective means that comparing the values one sells with the perceived value he gets is a unilateral process. Anyone or anything can be the counter-agent, including a vending machine or a trader.
When it comes to proof of existence and origin, to bargaining, modern IT and communication technologies, public and programmable blockchain technology in particular, are close to achieving the goals of making institutional costs negligible and broadcasting price information to the peers instantly. In a very close future, trading bots, neuronets, AI shall learn to deal with bargaining more efficiently than human beings. However, they’d have to comprehend subjective values of their “hosts” and a “win-win” strategy to make the seller and the buyer acquire more subjective value than the value traded.
To sum it up the space fabric for the transactions and their negative impact mitigation is there to stay and may be it would make sense to start with large volumes of transactions related to natural resources commodities though the wormhole to the new universe might look scary and dangerous.
P.S. There are adjustments to make to the transaction-based model:
- The efficiency of the 3rd party decentralized p2p fund would substantially increase if contributions are leveraged by matching;
- Introduction of the two-step bargaining for the seller and the buyer would efficiently reduce free-riders’ opportunities. The first step to negotiate the factor, by which the negative impact should be compensated, the second to negotiate allocation of liability between the seller and the buyer
- Solution to ‘train-hotel’ problem should be added to provide for linkage of the primary deal with damages offsetting deal, for instance, of purchase of electricity or other carbon intensive commodities with the deal on carbon footprint offsetting.