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The Network State

The Network State

Eras are defined by their coordination system: monarchs in ancient times, religion in the middle ages, nation states in the renaissance, and corporations in the industrial revolution. Each new era is the result of novel technology that radically enhances human coordination. Written language was necessary for the dissemination of religious texts and a precursor to global institutionalized religion, the printing press enabled Citizens to participate in a democratic model of governance, and venture capital enabled Silicon Valley to out innovate Wall Street.

At the onset of a coordination revolution it's difficult to imagine how much society is about to change — and yet this is precisely what's happening right now due to the rapid maturation of blockchain tech. Whether you are a small team building a dApp, departments coordinating within a multinational corporation, or nation states forming a global alliance — coordination happens at the speed of trust.  The basis of blockchains are that they enable coordination to happen directly between participants, independent of trust. Hence the Bitcoin mantra: 'Don't trust. Verify.' Increasing the speed of trust (or removing it altogether) is a powerful idea. Bitcoin is now the largest monetary network in the world and represents more than ~$1.2 Trillion in total market capitalization. Bitcoin is an early example of the power of 'trustless' coordination at scale, specifically applied to the domain of central bank monetary policy. Bitcoin is an incredible phenomenon, and yet it represents only a single instance of how trustless coordination can be applied to nearly every aspect of our society.

The recent explosion of DeFi, NFTs and DAOs are finer-grained instances of the trustless primitive at work:

  • Money → Tokens create productive potential (money) by more efficiently coordinating the scarce resource of energy (compute).
  • Interest → DeFi creates productive potential (interest) by more efficiently coordinating the scare resource of money.
  • Property → NFTs create productive potential (property) by more efficiently coordinating the scarce resource of capital (human & otherwise).
  • Governance → DAOs create productive potential (innovation) by more efficiently coordinating the scarce resource of shared wealth.

Money, interest, property and governance are necessary components to create and coordinate complex society. When you combine these fundamental concepts with trustless coordination, the promise of a new societal stack begins to emerge —  the 'Network State'.

Novel Characteristics of the Network State

A Network State is in many ways similar to a nation state, with the exception that it exists purely in the virtual domain. The Network State introduces a new set of emergent and dynamic characteristics not previously possible by its predecessors:

  1. Virtual: Reality as we know it is subject to certain impenetrable physical laws. With the rapid development of AR/VR and real-time photorealistic rendering, the 'Metaverse' has moved from the realm from science fiction to inevitability. This new 'substrate for human experience' does not necessarily need the follow the same rules or societal norms as base reality, creating an open canvas for new types of imagination, creativity, and economy.
  2. Zero Marginal Cost: Moving atoms are more expensive than moving bits. Making governance, policy, and monetary changes at fundamental levels of the societal stack is difficult, expensive and risky. Often times it takes decades to see the result of a failed economic policy. In the virtual domain however, governance models, organizational structures, and economic theories can be tested and scaled via continuous iteration using natively digital metrics. In the case of digital property, you can imagine futuristic vehicles, sneakers, and wearable tech that could be simulated and rapidly improved before ever being manufactured IRL. This principle can be applied to almost everything that underpins our society — from governance system to UBI to climate incentives and public goods.
  3. Trustless: There will be centralized Metaverses controlled by corporations (Facebook) and decentralized Metaverses controlled directly by the public through the sovereign ownership of data and identity (Wilder World). The Network State is made possible due to its 'trustless' nature.  Similar to how people 'trust' Bitcoin's trustless model of decentralization, Citizens of Network States will need to trust that critical pieces of infrastructure are truly decentralized and not susceptible to capture — especially the systems of money, interest, property, and governance. Trust in the Network State will cause more Citizens to immigrate to the Network State, thereby radically increasing the network effect and positional advantage of the Network State. Traditional corporations will be challenged to implement these mechanisms due to their fiduciary responsibility to 'maximize shareholder value' above all else; it will be difficult if not impossible for them to do the right thing.

These advantages could enable Network States to radically out compete coordination structures from all prior eras, which results in more civic participation, GDP growth, and collective prosperity.

Minimum Viable Network State

Network States should exist to create prosperity, well-being and safety for their Citizens. There are nine components of the Minimum Viable Network State:

  1. Identity: An NFT that you control represents your sovereign identity.
  2. Citizenship: You become a Citizen of the Network State by holding its native DAO token.
  3. Money: Native currency units in the form of tokens are used to facilitate commerce within the economy of the Network State.
  4. Governance: A programmable DAO makes the majority of decisions on behalf of the Network State. Citizens require three things to participate in the governance process of a Network State: a valid identity, reputation tokens, and native DAO tokens. The collective assets held by the DAO effectively represent the shared wealth of the Network State.
  5. Bonds: Citizens stake their DAO tokens to lend resources to the Network State, which in turn uses the DAO to distribute tokens back to capable Citizens, in order to stimulate economic development and GDP growth. This improves exponentially overtime due to transparent transactions and natively digital metrics.
  6. Banking: Economic transactions happen entirely on chain — between DAOs, Citizens and members of the web3 ecosystem.
  7. Levies: A collective levy is (optionally) set by the DAO for all economic transactions that occur in native tokens. Proceeds are automatically sent to the DAO and can be redistributed by the network according to the rules of the DAO.
  8. Location: A scarce human-readable domain in the form of an NFT is held by the DAO, which represents the location of the network within traversable digital space. Every entity (person, business, token, sub-DAO, location, etc.) within the network is a child of this root domain.
  9. Public Goods: Centers of excellence within the DAO are established to provide certain goods and services to Citizens. For instance, health care, eduction, cyber defense, and digital infrastructure DAOs that are funded and stewarded by the community.

The Power of Incentives

Network States have game theoretic advantages over all prior coordination systems. Social networks grew more rapidly than traditional media companies due to the intrinsic incentive for users to invite friends to the network and produce user-generated content. Doing so not only increased the value of the network for themselves, but to everyone else on the network. Crypto combines this social incentive with a financial incentive — namely the ability to 'make money' as the network grows. In essence: Metcalfe² — a multiplicative network effect that occurs in both the domain of 'information' and 'value'.

As more people become Citizens of the Network State more tokens are utilized, creating upward pressure on the network's native token price. This is the first incentive layer that exist within the fabric of the Network State. The next step is to think of how capital is allocated and wealth is redistributed to Citizens. Traditional nations create government issued treasuries with fixed interest rates to attract investment in exchange for a 'theoretically guaranteed', but very low interest rate. Given that traditional nations are fraught with debt and massive deficits, it's difficult to imagine Citizens ever receiving dividends or excess capital generated due to the efficacy of government. This paves the way to perhaps the most powerful advantage of the Network State: token rewards.

On October 21, 2021 the 30 day trailing average for daily Ethereum fees were $35.24 million USD, which represents an annualized run rate of ~$12.862 billion USD [1]. Since Ethereum's ICO ETH has grown from ~$0.28 to ~$4,000 USD — roughly 14,000x in six and a half years (or ~2,000x per year) [2]. There is no reason to believe that this trend will not continue. The number of crypto currency users reached only 221 million in June of 2021, a fraction of the world's Internet users and global population. Citizens of the Ethereum Network State have done significantly better than those holding fiat currency or government issued treasuries over the same time period. Ethereum has also not kept the rewards for themselves – instead the value of all revenue has been distributed to community participants, further increasing value, trust, and affinity to Ethereum.

Axie Infinity is a more recent example of the coordination power of Network States. Axie is a P2P (Play-to-Earn) game that rewards it's Citizens in its native token for playing Axie Infinity, AXS. Since launch Axie has become one of the fastest growing projects in history, achieving more than $350 million USD in revenue in September 2021. Axie Infinity is currently the number one NFT-based game and one of the most used applications on Ethereum. As of September 6th, 2021 Axie has: ~1.8M AXS holders, ~1.5M DAUs, ~$1B in monthly volume, and ~$120M USD in its DAO treasury [3]. These numbers defy the traditional laws of startup physics and yet illustrate the very real power of Metcalfe².

Nature loves efficacy; capital (human or otherwise) will always move to where it can grow with the least amount of resistance. Similar to Bitcoin's invention of the trustless primitive, Axie represents a new type of economic design that directly rewards Citizens for their participation – it is a prototype of the next-generation coordination system.

The Final Frontier

The final frontier of the Network State will be the Metaverse. Despite the insane growth of blockchain protocols and web3, TCP/IP will be to the blockchain as to what the GUI is to the Metaverse. In other words, 'web3 will be 3D'. Once the technology of VR and crypto are accessible to the masses, participation and value will move upstream (just as it did during the PC revolution). People will cease to know or care exactly what infrastructure they are running under the hood, so long as they can wire in to their virtual home, drive to their virtual job and meet up with their virtual (real) friends inside the Metaverse.

The Metaverse enables us to imagine novel types of industry not possible using the coordination systems of yesterday. Similar to how social media gave rise to the modern influencer or Twitch streamer as a legitimate profession, the Metaverse will create a much larger set of native digital industries that can fund creators anywhere on the planet. Perhaps you are skilled at creating digital animations for 3D avatars or designing virtual foot ware. Or, perhaps you embark on a creative journey to carve out a niche for yourself building advanced hover crafts. Given its scale, accessibility and iterative substrate, there is no reason to believe that the virtual economy will not be many times larger than the real economy.

The potential size and scope of the virtual economy is vast. Energy can move very quickly relative to the physical world. Items do not require harnessing raw materials from the earth, or require to be manufactured and shipped according the laws of conventional physics. Everything can be both created and consumed digitally. The Network States that find a way to efficiently coordinate resources within the virtual economy will likely have a significant advantage over those limited within the physical domain.

The Wilder Nation

Let's dive in to Wilder World and the Wilder Nation – the first Metaverse and Network State being actively built on ZERO.

Today we are announcing Metropolis – the Wilder Nation's native staking system that will begin to deploy many of the ideas outlined herein IRL.

Click here to continue.

From ZERO to INFINITY,

n3o

References

[1] Ethereum fees reported on by coinmetrics.io

[2] Ethereum ICO on Tuesday, July 22 2014

[3] Axie Revenue

[4] The Verge reports on Axie's growth

[*] A special hat tip to Balaji Srinivasan and his musings on the Network State