The Burkean Evolution Of Blockchains
Thomas Paine and Edmund Burke were both sympathetic to the ideals driving the American Revolution, but they split over the French Revolution a decade later. Paine, to a rough approximation, believed the existing institutions in France should be torn down and the new ones built from scratch. Burke believed that the best way to achieve essentially the same objectives was to keep the parts of the existing institutions that work, and augment or modify them. In the case of the French Revolution, this meant the strengthening of constitutional components of the French government. Burke’s view was that institutions had evolved for a reason, and it would be imprudent to discard the lessons learned during their development.
Blockchain technology will be integrated with aspects of our existing institutions that work well, the way Burke envisioned political institutions should evolve. This is particularly true for financial applications, that run on existing internet infrastructure, and where widespread access is regulated. The continued integration of blockchain technologies and existing institutions is probably also advantageous, because it avoids having to repeat certain mistakes.
Although the analogy with the French Revolution is not perfect, embellishing key aspects gets at an important insight: in complex systems, it is often better for innovations to be integrated with the parts of the existing infrastructure that work well, rather than to also serve as the basis for replacing said ancillary infrastructure. It is a sign of success when a new technology becomes integrated with deeper institutions in society. To continue to make use of this comparison, I will refer to incremental revolutions dynamics – where technology and institutions evolve through a process of integration and assimilation – as Burkean.
Signs of Integration
The fact is the existing financial, academic and government institutions are entrenched in the processes for the development and dissemination of new technologies. There are many examples. NASA is one of SpaceX’s largest clients. The technology for Google’s search engine, PageRank (based on a Markov decomposition) was developed by Brin, Paige and others while at Stanford. Research done at Bell Labs, operated by AT&T for much of its modern history, gave rise to inventions like the transistor and the first solar cell.
This entrenchment also holds for blockchain technology. Jump Trading developed Wormhole to facilitate the growth of applications on Solana. Traditional finance companies like Citadel, Schwab and JPMorgan Chase have setup designated crypto teams. Avalanche came about as the result of work done at Cornell by Emin Gun Sirer and some of his grad students. The technological revolutions that come out of these collaborations tend not to undermine the institutions that created them – they are Burkean.
Most integration is happening mid-stack, which is a light-weight and malleable software layer. Web3 – another name for the ecosystem of blockchain applications, networks and corresponding workflows – runs on existing communications infrastructure to provide access to network activities like creating blocks, voting and running transactions. The development stacks for web3 are already deeply integrated with web2 stacks at this layer.
Web3 developers need more than expertise in Solidity to compete: they need expertise in Javascript, Typescript, and often frameworks like React and languages like Python and Go. It makes more and more sense for development teams to have both web3 and web2 engineers, and more and more hybrid applications are being built – Vitalik Buterin predicted a burst of hybrid applications in 2023. The cumulative impact of these shared tools and shared infrastructure is that innovations in web3 are transmitted with the help of the parts of web2 that work well.
The Scope of the Revolution
The distinction between Burke and Paine is a matter of degree: it’s about how to calibrate the scope of a revolution. In the Burkean picture, technology is still a revolutionary force, and it results in the disbanding of arcane technologies – it’s just that the revolution happens through a process of integration and assimilation of new workflows. In the case of web3, technological innovations can be widely adopted, quickly. Because the mid-stack infrastructure is not overly sticky, new applications and software can be made available at relatively high frequency and relatively low cost.
In practice the scope of the revolution – the extent to which existing institutions are displaced – will vary for structural reasons. One of the main bottlenecks for web3 financial technologies in financially developed economies is regulation, which is an evolving challenge but will improve in the coming years along key dimensions like clarity, specificity and predictability. There will always be some tension between regulators and innovators because of a timing mismatch. But this means the existing institutions play a relatively strong role in moderating the scope of the revolution.
A slightly different picture emerges for national economies with less developed financial systems. In these cases, the overhead for building web3 infrastructure is so low that the path of least resistance is to skip the establishment of traditional financial institutions and adopt web3 infrastructure directly. For example, Block recently announced it is building on the Lightning Network (a scaling solution for Bitcoin) which will allow its merchant customers in parts of Africa to accept and manage payments without a bank. The impetus for the African startup Lazerpay was to let users send USDT across borders within Africa, avoiding onboarding with local banks and the costly process of converting currencies.
So, in the case of emerging economies, the existing institutions will play a relatively weak role in shaping the scope of the revolution. It is likely these economies’ financial systems will grow quickly as a result of blockchain infrastructure. But, their local governments will establish regulators in response, and companies will continue to form around the ventures driving blockchain applications. These institutions – regulators, venture, etc – will ultimately be integrated in terms of shaping innovation, development and maintenance of the web3 infrastructure. Although the initial scope of the revolution will be broader, we will see the same process of Burkean integration play out.
In economies with advanced financial systems, a natural or man-made disaster could lead to commodity shortages, leading to fiscal insolvency because of loss of tax revenue, and finally hyperinflation from the combination of supply contractions and money printing to pay government debt. In this case, permissionless, trustless, self-custodied ways of storing and transferring value are important as a type of insurance against the collapse of our political and market institutions. The supporting infrastructure will then play an outsized role in terms of institutional prominence. But my point is: in lieu of such a collapse, the technological integrations will continue to be incremental.
Tearing Down Institutions is Costly
I don’t have to take a stand on whether the incremental revolution approach is better to be able to say it is more likely. But I will also say: tearing down institutions can be costly. Ultimately, the French Revolution played out, Paine was imprisoned, and after the so-called Reign of Terror under the Jacobins, Napoleon took power and waged ten years of war in Europe. In the end, Napoleon’s government was overthrown and France returned to a monarchy – but with modernized constitutional provisions – a result that could have been obtained years earlier and at much lower cost if Burke’s advice was heeded.
We have several recent anecdotes to help illustrate these costs. Sam Bankman-Fried setup FTX outside the scope of the existing regulatory institutions, making it much easier for him to operate without the checks and balances arising through a board of directors and compliance and risk management teams, which are requirements in advanced economy jurisdictions. Lending platforms such as Voyager Digital and Celsius operated essentially as banks but operated outside the scope of the banking institutions, and repeated the mistakes of unregulated banks in the early twentieth century.
Recently, Vitalik Buterin correctly noted in a tweet that FDIC insurance sets the precedent for reimbursing smaller wallets for reimbursements from scams or attacks – the FDIC was established as a response to bank-runs during the Great Depression. Another great illustration is the evolution of DAOs, which in many cases have relearned the costs of direct democracy, despite the known lessons from history reflected in representative democracies, republics and corporations.
These anecdotes corroborate the principle that Gary Gorton, an economist at Yale, once told a group of PhD students I was with: “you cannot study economic institutions without studying history.” The existing institutions have a story to tell, because they arose as a reaction to specific behavior. They are far from perfect. I will say more in a future post about the perverse incentives at some major regulatory bodies. But the institutions represent lessons learned.
I will end with a normative prescription: advocates of web3 should avoid the mistake of trying to redesign everything from scratch, and instead, think of the things that can’t be done without web3 or that can be done for an obviously better reason on web3 that people want to use. This will make the innovation more targeted and fruitful, and will avoid having to relearn known lessons. If the incremental revolution is done right, over time we won’t keep old things that don’t work, and the institutional balance can skew as far towards blockchains as the technology can deliver.