Great minds don’t think alike – and all decentralized systems are not alike either.

How do you identify risks and opportunity zones in Decentralized Systems?

“Given a random piece of tech, the first question is not how does it work, but what does it do. The difference is subtle.” Spockmay 

Zeitgeist: Decentralize everything!!!

But wait, how will decentralizing everything change the world? (Assuming it is possible.)

What are the risks and opportunities of decentralized systems?

“Code does not care about humans or the planet – humans do.”    – Douglas Rushkoff

When we create exponential technologies, they are intentionally designed to scale impact using network effects.

As demonstrated in recorded history of humanity, unexpected systemic outcomes from successful, rapidly scaling technologies impact not only societies, but entire value systems, socio, economic, environmental and political systems – reshaping the world in ways we could not have imagined.

Decentralization is becoming a mainstream discussion as a way to increase systems resilience. For example, decentralizing critical infrastructure that provide electricity, in response to environmental challenges, such as the forest fires in California.

When creation of novel new technologies are based on “decentralize everything”, it is helpful to create a common understanding of

  • what decentralization is,
  • why it is a zeitgeist in this moment (the hope),
  • a simple framework for experts and non-experts in decentralization to explore risks and opportunity zones in decentralized systems (and its myriad of interpretations and permutations).

What is a decentralized system?

“A decentralized system is a subset of a distributed system.

 

The primary difference is how/where the “decision” is made and how the information is shared throughout the control nodes in the system.

 

Decentralized means there is no single point where the decision is made. Every node makes a decision for it’s own behaviour and the resulting system behaviour is the aggregate response.”

Think of groups of humans for this:

  • We all make decisions (constrained to be sure) but our decisions influence the decisions of all around us until we get “large” system level behaviour (e g capitalism)
  • A key characteristic is that typically no single node will have complete system information. For example, in a company it is impossible for the executive team – all who represent their own value creation streams – to  have complete system information (because of the nature of human interactions).

Distributed means that the processing is shared across multiple nodes, but the decisions may still be centralized and use complete systems knowledge.”

 

Swarming algorithms are typically decentralized to increase the robustness of the system; but even some of them have a “leader” that all others must follow.

 

Some control algorithms I’ve seen for multiple quad-copter control are purely distributed in that a central over-seer gives optimization problems to each copter to solve then return the the solution. The over-seer will then issue commands based on the aggregate result.

 

Here is a philosophical question: if the over-seer is “voted” into office by the nodes, is it decentralized or centralized? I’d have to say decentralized, but it is arguable.”

 

Spockmay on Reddit (experienced engineer in aero and space, specializing in control systems)

How does decentralization disrupt current business models?

In “The Starfish and The Spider: The Unstoppable Power of Leaderless Organizations, Ori Brafman and Rod A. Beckstrom describes the ten rules of a decentralized organization, which highlights the potential for innovation and new value creation. For example:

“Diseconomics of scale: Small size combined with a large network of users give decentralized companies both flexibility and power.

 

Network effect: The overall value of the network increases with the addition of each new member.

 

The power of Chaos: Decentralized systems are wonderful incubators for creative, destructive, innovative, or crazy ideas.

 

Knowledge at the Edge: The best knowledge is often at the fringes of the organization.

 

Everyone wants to Contribute: Not only do people bring knowledge, but in decentralized organizations they have a fundamental desire to share and to contribute.

 

Catalysts Rule: Unlike traditional ways of organizing where one leader is in charge, in decentralized organizations catalysts inspire people to action.

 

The Values Are the Organization: To change a decentralized organization, you have to alter the ideology of its members.”

What are some of the downsides of decentralization?

Free riders on trust:  

One of the inherent problems within a decentralized market is the emergence of free riders on trust.

“The free rider problem is the burden on a shared resource that is created by its use or overuse by people who aren’t paying their fair share for it or aren’t paying anything at all.” Investopedia

Lack of governance

The word governance has its root in the Latin verb “Goubernare” which derives from the Greek “Kybernan”, meaning “to lead, to steer, to be the head of, to set rules, to be in charge of the power”.

“Governance is related to vision, decision-making processes, power dynamics and accountability practices. The ultimate goal of governance is to effectively fulfill an organization’s goals in a way consistent with the organization’s purpose.” (Co-operative Governance: Fit to Build Resilience in the Face of Complexity by Sonja Novkovic and Karen Miner)

Participants with extreme views on decentralization argue against any forms of governance, accountability, cooperation and guidelines on ethics.

Slow user adoption:

Decentralization users are often a small, niche market opportunity. User adoption roadblocks include the need to understand the new dynamics of decentralized market places and the underlying technologies.  Users who live in countries with democratically elected governments prefer participating in stable, predictable networks and markets that comply to regulations and standards, while offering some levels of consumer protection and remedy for loss. When decentralized systems cross the borders of different countries, regulatory diversity and complexity slows down adoption.

Ideology driven:

The ideology of a decentralized system might be attractive to only a few users. Some ideologies might enable lawless behaviour, harm to people or the environment. Since changing the values of a decentralized system is very difficult, such patterns of behaviours make those decentralized system unsustainable in the long term.

Consensus and decision making takes a long time:

“Everybody has to decide everything (cannot delegate), coming to decisions takes a lot of time and energy (which could have been used to grow the network), people who are the do-ers eventually burn out continuously asking for permission and operational tasks are held up. Some people can have a disproportionately strong/weak voice. Those who repeat themselves often and loudly, win. A few people do most of the work/low accountability/low support.” Sociocracy in communities

What alternatives are available?

Evaluating different types of decentralized systems

To understand the aggregate behaviour of a decentralized system it is helpful to have a simple matrix framework to create “helicopter” view lenses to predict patterns of behaviour in its ecosystem.

An important question to ask is “Where does value come from”? (Mariana Mazzucato)

1. Is this decentralized system designed based on extractive or regenerative enterprise principles?

Extractive Decentralized System

“The extractive economy asks” How much can we get from this landscape/ecosystem? Or what can we take from these people or this place to make a financial capital profit?”

Extraction is the removal of capital from a system in a way that diminishes its overall health, function and resilience. A nearly ubiquitous example of the current extractive economy is the mining of soils known as agriculture. Millions of tons of soil are inexorably lost every year through tillage, biology-destroying chemical fertilizers, and the resulting rapid erosion. Dr David Pemental of Cornell University estimates that some farms lose more than 250 tons of soil per acre per year, destroying their ability to produce food: “As a result of erosion over the past 40 years, 30 percent of the world’s arable land has become unproductive.” Ethan Roland and Gregory Landua in their book:  Regenerative Enterprise: Optimizing for Multi-Capital Abundance

In the extractive economy, for example, a financial derivatives market is building a virtual economy that does not necessarily invest back into growing the real economy, such as small business, for example,  bakeries, grocery stores, local farms or manufacturers. It therefore extracts financial value from an ecosystem, but does not have as its value creation goal to replenish and build resilience and resources for future financial wellbeing for the real economy on the ground.

To be able to continue to grow, it will therefore need to look for new alternative opportunities, as the real economy systems becomes depleted, similar to soil, ultimately requiring more and more effort to be productive while requiring increasing investment and exploration effort searching for “new, healthy soil” or new financial ecosystems.

Eventually the decentralized financial ecosystem faces rapid collapse, potentially resulting in the loss of the entire decentralized financial system at the heart of the change.

Regenerative Decentralized System

“Within the framework of Regenerative Enterprise, the questions become: “What are we cultivating in our interaction with this landscape? How can our connection with the system we are harvesting from grow the integrity, resilience and long-term viability of these people and this place?”

 

A regenerative enterprise does not harvest the root of the tree of production, only its fruit. They gather the unique, surplus place-based goods and services that are emergent properties of healthy eco-cultural systems, while simultaneously nurturing the system’s ability to thrive. The regenerative enterprise helps to grow the roots deeper and wider, healing the damage that has been done and eventually creating the possibilities of new and larger fruits.”

 

“A regenerative enterprise can certainly obtain financial capital profit in the process of regenerating local ecosystems, but the majority of capital flowing through the enterprise will be transformed or invested into long-term, living, social and cultural resilience.”  Ethan Roland and Gregory Landua in their book:  Regenerative Enterprise: Optimizing for Multi-Capital Abundance

In regenerative economies systems design principles aim at regenerating multiple capital assets including social capital, cultural capital, living systems capital, experiential capital, etc. In context of farming, the soil is not only restored, but the entire ecosystem including animal and human wellbeing even in the supply chain, is not only restored but more resilient to future changes.

For an example in the financial world, values-based banks aim at cultivating financial wellbeing in their local ecosystems, while they work together as the Global Alliance for Banking on Values, to achieve a common mission, which is offering localized expert financial services that regenerate the local economy and ecosystems. These banks invest in the cultivating of not just financial capital, but also cultural, social, living systems.

An influential member, VanCity is based here in Vancouver, Canada.

Does this Decentralized System apply the play rules of the Monopoly Game or Prosperity Game?

“Play is older than culture, for culture, however inadequately defined, always presupposes human society, and animals have not waited for man to teach them their playing.” J. Huizinga in his book: Homo Ludens: A Study of the Play-Element in Culture

Culture arises first as a playculture, it is often helpful to look at origins of games, to gain more insights about future trends in a decentralized financial eco system.

“The Landlord’s Game (Prosperity Game) is a board game patented in 1904 by Elizabeth Magie. It was designed to educate users on the economic principles of Georgism, a system proposed by Henry George. The game included two sets of rules – and players could therefore play two different games, depending on which set of rules they wanted to follow. The games’ rules allowed players to switch the game even during play.

In one rule set, ruthless monopolists attempted to crush one another. In another set of rules, building property benefited everyone on the board.” Episode 189: The Landlord’s Game on 99% Invisible.

“A win in the Prosperity Game was when the player having the lowest monetary amount has doubled her original stake.” (Wikipedia, May 2017)

In the popular Monopoly Game (the Fast-Dealing Property Trading Game) created by Charles Todd in 1931, the goal of the game is to drive all players into bankruptcy, leaving one monopolist in control of the economy. He purchased the rights to the Landlord’s Game, and stopped selling the Prosperity Game while only selling the Monopoly Board Game.

How is value is created in different decentralized opportunity zones?

In scenario planning methods, one technique for creating different scenarios for the future, is to combine two different frameworks into a grid. In this instance, we combined economic models and play culture to form our scenario matrix.

Each of the four areas can be developed into a scenario and stories, which would potentially result in different social, economic, environmental and political outcomes.

To test assumptions and improve robustness of these stories about the uncertain future, it is good practice to test them by gathering data and running simulations based, for example, using dynamic systems thinking.

The purpose of creating four different “imaginary” worlds, is to be able to pick up signals when it emerges, and as part of a larger learning organization, make adjustments to respond more successfully to future risks and opportunities.

Below is a simplified Digital Futures opportunities framework for potential predictive behaviour and outcomes in decentralized financial systems, creating four different opportunity zones for possible outcomes.

 

Using the matrix to identify potential risks and opportunities

Some questions you can ask about each of the four decentralized systems in the matrix:

What are the characteristics of competition in this world?

For example, in a decentralized financial world the accelerated pace in an extraction economy and monopoly game rules will require you to expect more and more black swans (unexpected events) and be able to shape shift quickly to respond. It also becomes possible that financial ecosystems become depleted and collapse.

What is the impact on human wellbeing in this world?

For example, will accelerating the pace of extraction in the prosperity game address generating financial wellbeing for participants while not accounting for the cost of the health of the ecosystems in which it operate? How will this play out in the social, political, economic and environmental systems in which it resides?

Does this decentralized system improve and build social trust?

For example, in a decentralized financial system build on regenerative economy principles playing the monopoly game, might continue to erode social trust to benefit a few monopolists who drive the direction of the future economy.

What is the ideology, values and potential human behaviours in this world?

For example, a system build using regenerative economy principles, based on the prosperity game, will set up seed behavior that generates whole systems health, including reputational capital, living systems regeneration, governance based on life’s principles and good citizenship.

(Book extract from forthcoming Digital Futures Leadership Philosophy series and book.)