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Vellir #9 → Establishing crypto institutions

If blockchains are like nation states, what can the crypto industry learn from international institutions like the UN, IMF and WTO?
Vellir #9 → Establishing crypto institutions
Photo by Davi Mendes / Unsplash

Next week, i’m speaking at the OpenWeb Forum in London about crypto regulation. It’s part of the CogX Festival and runs from 13-15 June. Do register and check it out – there are a host of good speakers and interesting panels.

We wrote in Vellir #7 that blockchains are similar in some ways to nation states. It’s worth repeating an interesting passage from Nick Hotz again here:

Indeed, with a slight squint, the social structures of blockchains also resemble those of nations. When a country first forms, it is a blank canvas with unlimited potential but no real economic value other than “future option value.” But over time, as a society builds roads, schools, and other businesses, a country begins to grow its GDP and tax revenues. The same is true of a blockchain as it moves from early formation and speculative value to a thriving metropolis with apps and transaction revenues. Validating nodes “elect” the government and the rules by which society functions. Miners and stakers serve as the military, providing security to defend the nation from potential attackers. However, with enough of the military defecting, blockchains can suffer brutal civil wars. Chains support diverse economies with goods (NFTs) and services, plus deep decentralized financialization and trade routes (bridges) to connect it all. Much of the activity takes place in the nation’s native token, which is the primary medium of exchange of value. This token is also used to pay gas “taxes” that support public goods that serve everyone who uses the chain. (Nick Hotz, Arca)

In a recent essay with Tina He, co-founder of Station, Packy McCormick used the same analogy but went a little deeper, referencing crypto institutions.

Organizations such as Wildfire DAO are formed to create strategic alliance and collaborations between protocols to “bring together and align community members from all around the ecosystem, forming new squads to handle token design, Governance, and coordination issues transparently and collaboratively.” These organizations are the UN, WTO, IMF of the cryptoverse, protecting the wellbeing of the entire crypto ecosystem by aligning incentives among key players. Membership in one of these organizations symbolizes legitimacy, builds trust, but also comes with a set of constraints and terms imposed by the alliance, and oftentimes by the more powerful players at the table.

This got us thinking. If blockchains are like nation states, what could be learnt from the institutions and practices that have been built to improve relations and support coordination between nation states?

Let’s look at the main international institutions and what their equivalent functions would be in web3.

  • United Nations → aims to prevent war and conflict between nation states. In crypto, a similar organisation might be established for L1 blockchains on a membership basis. This ‘Foundation of Blockchains’ could establish a ‘Crypto Charter’ that aimed to support mutual growth and prosperity, rather than maximalism of one chain ruling all others. Founding members would sign the Charter, and new members would be required to sign to join.
  • International Monetary Fund (IMF) → is a member organisation that helps countries respond to financial crises. Members of a crypto version would pay membership fees to a fund, which would act as a mutual insurance system, should any of the chains get into major financial difficulties - for instance, through major hacks, systemic failures or runs. Members would vote on any new joiners, signalling that they were considered to be credible blockchains (otherwise each chain would not be willing to pool risk or cross-insure in this way). It would also give users confidence about another layer of protection, should anything go wrong. For instance, should a large stablecoin provider look like it was running into difficulty (which isn’t so hard to imagine…!), this ‘Crypto Development Fund’ could spot the signs of trouble and provide a loan to help support the protocol, in return for some firming up of the collateral requirements in future or adoption of best practices.
  • World Bank → provides loans and grants to developing countries. There are already grant programmes for public goods in the crypto space e.g. Gitcoin. Arguably, these new crypto institutions that crowdsource funds and distribute based on a voting mechanism are fairer and more efficient in terms of capital allocation than traditional institutions. However, they lack scale to have a meaningful impact.
  • World Trade Organisation (WTO) → deals with the rules of global trade. Trade in crypto terms is about ensuring that crypto remains an open system (much like the WTO seeks open economies for trade in physical goods), rather than closed (or protectionist for the WTO). The parallel here is really in any future ‘metaverse’, where enabling crypto assets to move freely between chains and digital worlds, and ensure they are interoperable, is a key feature of what Outlier Ventures call the ‘Open Metaverse’. To take the opposite view, a closed metaverse would be one where digital goods and services remain owned by centralised entities within ecosystems, as is the ambition of Meta (or Facebook). An ‘Open Web Organisation’ could be established to set the principles and foundations for an open metaverse.
  • OECD → a rich nation club focussed on policies to support growth and standard setting. The OECD has traditionally focussed on issues like international tax cooperation. Similar standards or best practice could be helpful for web3 protocols – for instance, relating to security practices, audits or token design.
  • World Health Organisation (WHO) → focusses on responses to international public health crises. The crypto parallel might an organisation that tracks the health of crypto ecosystems and users, and coordinates responses across chains. This could be a centre of crypto developer expertise that tracks and responds to hacks or attacks. Members of the ‘Crypto Resilience Organisation’ would pay this group of experts to deliver this public good.
  • G7 and G20 → is a political forum between seven and 20 large economies respectively. There are 193 UN member states so it is logical that a smaller coalition might come together for political dialogue. This may well become necessary if the number of layer 1 blockchains grows to a similar number. For the time being however, a single grouping under a ‘Foundation of Blockchains’ banner seems most likely to be beneficial.
  • NATO → an international military alliance. The direct parallel here would be for a subset of crypto protocols to club together and form an alliance against another powerful protocol/s. We hope that it won’t be needed…

Establishing such institutions would be positive for the sector. This is true not just in terms of the functions that they would provide, but also for the signal that it would send to governments and regulators about the seriousness that the sector takes its responsibilities and future.

However, there would be some tensions in this approach with the current makeup of the web3 ecosystem and the dynamics within it.

  • Centralisation vs decentralisation. Creating such institutions could be seen as centralising decision making on certain issues, pushing against a core component of crypto, which is its decentralised nature. However, it could be argued that existing international institutions are really an early form of decentralised governance: an experiment in bringing together diverse groups of nation states with different views to find consensus. They are therefore an early DAO, without the on chain governance. Crypto institutions could build on this, enabling many more participants, while retaining the benefits that single institutions can bring to global coordination problems.
  • Competition. Some might argue that blockchains are too inherently competitive for shared institutions to be viable. Each work on the basis of inflows of capital and users to grow and accrue value. But this is no different to nation states that also compete for capital and talent. International cooperation has only happened where there are shared challenges and where it is in the interests of every party to do so. The experience that many people have in crypto is one of community and mutual support: the wagmi mantra (we’re all gonna make it) is synonymous with web3. So it does not seem too far a stretch to think this same group could come together and build important institutions and coalitions around shared challenges.
  • Existing institutions. Despite the recent downturn, it is a reasonable prediction that crypto will continue to grow as a share of the global financial system. As it does, the overlaps with existing systems will start to blur. For instance, if the financial system in country X is increasingly built on crypto rails, does the IMF no longer have a role if there was a financial crisis, or would it adapt? Given it dedicated a chapter of its recent Spring Meetings report to DeFi, I suspect the latter. But that doesn’t mean that crypto institutions wouldn’t also have a role, or couldn’t work with existing institutions to shape their responses. If fact, i’d argue they would be actively helpful and welcomed by many people working in them.

There are also potentially interesting opportunities in this approach too. For instance, these new institutions could be based on different forms of membership, participation and governance, with efficient contributions from a global network of participants and governance via a DAO.

Why now?

Institutions often arise after difficult times: the UN and Bretton Woods institutions after WWII or the Financial Conduct Authority in the UK in 2013 in part as a response to the financial crisis. The latest ‘crypto winter’ that many predict we are now entering could be considered a similar moment. It is a time when adoption is growing but not yet mainstream and some projects will start to find it difficult to survive as the tide of capital pulls out, in line with a broader market slump.

But beyond this, as crypto becomes mainstream, regulation is coming. A united industry that has thought deeply about coordination and scaling issues, and has developed sophisticated institutions that can engage with existing structures will be invaluable. Institutions could support growth, innovation and help to bring crypto mainstream in a way that retains the benefits of the technology while mitigating against the risks.

Teething pains are inevitable; institutions can help ease the transition.

Where to start?

There are numerous versions or variations of the institutions we’ve floated in this article. And like for nation states, these institutions grow and evolve over time as they respond to their environments. The UN was once the bedrock of international activity, and while it is arguably not much more than a talking shop now, few would argue that it has not added a great deal to global cooperation, particularly in the post war period. Similarly, the Bretton Woods Institutions (the IMF and World Bank) were setup to rebuild the post-war economy, but have since morphed into a financial crisis bailout fund and development agency.

The same is likely to be true for any such crypto institutions. The important thing is to start with what is needed now. The four most compelling ideas in this article as we see it are as follows.

A. The Crypto Charter → as the foundation of future cooperation. The UN Charter has 29 Chapters and 111 articles. A Crypto Charter could start with its purpose, principles and membership.

  • Purpose: to promote growth and innovation in web3; to maintain a supportive and reinforcing ecosystem between and within blockchains; to retain the benefits of an open web; to harmonise activities within the crypto space where it is mutually beneficial to its members; and to facilitate a sensible and beneficial co-existence and interaction with nation states.
  • Principles: equality between members; cooperation between members; and mutual support.

B. The Crypto Development Fund (CDF) → to monitor ecosystem level risk and provide a mutual insurance mechanism for major L1 blockchains.

C. The Open Web Organisation (OWO) → a body dedicated to establishing the protocols and principles behind an open web.

D. The Crypto Resilience Organisation (CRO) → an organisation designed to provide technical expertise and guard against external attack.

What next?

We have taken only a superficial view of these issues and the institutions that could be created to support the development of the web3 world. Far deeper thinking will be required.

But we think that they could provide the bedrock of the next stage of crypto’s life. As entrepreneurs build the next wave of web3 infrastructure and applications, the industry should also build the institutions to support them.

The leaders (defined or nominated) of the main L1 protocols and exchanges by market cap should come together in 2022 for a private ‘League of Crypto’ genesis discussion. Project Vellir would be happy to facilitate this discussion.

Let history be a lesson. Crypto should develop its Bretton Woods institutions before it needs them.

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