Twelve Principles for the Blockchain Economy

From the Network Economy to the Blockchain Economy*

Some 20 years ago, Kevin Kelly wrote an influential article in Wired magazine that you may have read.

The article was titled New Rules for the New Economy, and was later also published as a book. In it, Kelly made the case for describing the modern, information-based economy as a fundamental reconfiguration for the role of information. He keenly felt that the correct picture of the information economy was better encapsulated by networks, and he proposed calling the modern economy the Network Economy.

Kelly proposed 12 laws for the Network Economy in his article — principles that described some fundamental characteristics that inhere to an economy where value emerges from patterns in the communication of information across shifting networks comprising a cast of agents.

With the benefit of the intervening 20 years, two observations are worth considering. First, Kelly’s principles remain largely relevant today, which stands as testament to his ability to capture some interesting fundamental transformations that were incipient in economies by the late 1990s.

Second, a similar consideration is now owed the transformations that are being engendered by blockchains. Blockchains, of course, live on networks, and so can well be seen as a mere product of an evolved Network Economy However, this undersells the transformative effect of blockchains.

In other words, it makes patent sense now to consider the Blockchain Economy as an evolution of the Network Economy that is significant enough to be fundamentally transformative.

Different Paths to Innovation

That this contrast between a Network Economy and a Blockchain Economy cannot be dismissed as merelyy ersatz is evident even from the essential tenets that, for Kelly, set the Network Economy apart from traditional economic structures.

In a Network Economy, for example, Kelly observed that wealth is achieved not by optimization, but is accrued directly from innovation. This is to be expected if network structures represent existing value from extant information, and reconfigured network structures represent ‘new value’, as information is amplified and augmented.

It is worth noting that, in a Network Economy, the process of network dynamism stands as a strong proxy for innovation. Connectedness, in a sense, is crucial to innovation, but even more impactful is the ability to keep networks ‘nimble’, or, in other words, rapidly reconfigurable. If this signals a willingness to abandon familiar network structures in the grand pursuit of novel innovations, then this is, indeed, exactly what Kelly wished to convey.

The edifying difference in a Blockchain Economy is that the pursuit of innovation has been brought back to the domain of optimization, and this gives the Blockchain Economy the distinct appearance of being closer in approach to a traditional economy. However, the nature of this optimization, as it is facilitated in a Blockchain Economy, is characteristically different.

To understand this point, it is worth steering the discussion off the main road for a space to consider the process of innovation.

It has been argued that innovation can be achieved, either by a combinatorial approach to ideas or by adopting a more sequential one. Research in psychology on the topic of creativity has long identified this difference. More generally known is that creativity is seen as being associated with ‘divergent thinking’, a cognitive process that emphasizes an esemplastic and fluid mental ability. Naturally, this lends itself directly to combinatorial approaches. However, psychologists have also identified sequential and incremental creative processes. The propulsion model for creativity is one such example, but there are also others.

This distinction is rather relevant to our discussion here.

A combinatorial approach, as the descriptor suggests, is assisted dramatically by network structures that possess both these features of connectedness and reconfigurability. The Network Economy, then, is especially amenable to a combinatorial model for innovation. However, once networks have permeated much of the economy, reconfigurability ceases to provide a cheap shot in the arm.

In other words, very highly connected networks dull the innovation surplus that nimbleness can yield.

A sequential approach to innovation, however, is fundamentally different, through its emphasis on directed optimization rather than ‘random’ reconfiguration. The objective with sequential innovation is to associate ideas incrementally and cumulatively, and increasing complexity is then almost definitionally unavoidable; by contrast, the objective with combinatorial innovation is reconfiguring ideas, and complexity can increase, remain constant or, as is often the case, even reduce.

A Blockchain Economy is built on the powerful capacity to synthesize both these modes of innovation, sequential and combinatorial innovation. First, the blockchain technology is more than trivially based on the premise of sequentially associating blocks of transactions; such sequences may have nothing whatever to do with an innovation potential, after all. The point is that the blockchain creates an organically preferred infrastructure for sequential, state-dependent innovations. Yet, it also retains the ability to include combinatorial approaches; naturally, it does this with ease for processes involving other blockchains, but, by separating aspects of innovations that aren’t served well by being on blockchains, it increases the quality of information and signals across the entire economy.

Economics created the traditional dichotomy of the market and the firm; they stood as the two fundamental alternatives for the organization of economic activity. The Network Economy provides the infrastructure to link across these forms in ways that had previously been thought infeasible. However, once the initial low-hanging fruit of reduced transaction costs is plucked, this essential dichotomy remains intact.

Here, again, the Blockchain Economy is inescapably different. It has introduced a third alternative to the mix — an alternative that I have previously called the cryptographic stigmergy. Stigmergy refers to the process whereby a set of individuals are enabled to interact via identifiable changes in their environment. There has never been proposed an environment for such a form of coordination to occur before the advent of blockchains that did not rely either on the invisible hand of firms or the guiding (and, more usually, grasping) hands of planning.

Revisiting the Twelve Principles

In what follows, let us restate our understanding of Kelly’s 12 Laws for the Network Economy; by undertaking this exercise, we can reflect on whether they remain relevant to the Blockchain Economy, and how they are impacted by its processes.

The Law of Connection or Dumb Power. The law of connection pertains to what we would recognize now as the IoT. It suggests that the value of connectivity is substantially enhanced as the size of a network burgeons on account of vast quantities of dumb nodes joining in.

Arguably, this law is even better suited to the Blockchain Economy than it ever would have been in a Network Economy. Kelly seems to have recognized this when he observes that “…the surest way to advance massive connectionism is to exploit decentralized forces…”. Dumb nodes on a network remain dumb unless they can be gainfully employed to providing usable information that aids economic activity. Through its decentralized premise, the blockchain creates smart power through a stigmergic organization of dumb power.

The Law of Plentitude. The idea behind this law for the Network Economy is essentially that of network economies. As the size of network increases arithmetically, the value that the network represents to it members grows exponentially.

In a Blockchain Economy, value is not derived solely from plentitude in the way Kelly described it — essentially, as network economies — but, rather, from ‘trust economies’, or, if you prefer, a form of networked social capital. The average costs of transactions are lowered from an increasing stock of trust.

The Law of Exponential Value. This law is essentially a restatement of the previous one in the case of a Network Economy. When network economies apply in a market, exponential value inevitably follows.

The reason the law deserves separate consideration here is that the source of exponential value for a Blockchain Economy rests in a combination of network economies and trust economies. Network economies say nothing directly about the costs of transactions, but trust economies do indeed have a direct relationship to it. The ability to trust network participants equally, regardless of the size of the network, assists stigmergic organization of economic activity over and above what a network can manage of itself.

The Law of Tipping Points. Drawing its inspiration from epidemiology, with this law Kelly observed that the tipping point for the adoption of an innovation is lowered in a Network Economy by dint of its higher connectedness, when contrasted with a traditional economy. Following from this, he made the observation that, in a Network Economy, the significance of an idea precedes its momentum.

For the Blockchain Economy this does not appear to be a relevant characteristic, even when it is true. Blockchains are most effective when they have apposite use cases. Finding these requires experimentation; when a blockchain application yields only weak incentives for stigmergic organization of economic activity, there is no reason to suspect that it would lower the tipping point for the adoption of an idea.

The Law of Increasing Returns. There is a subtle point that Kelly made with this law, one that is easy to dismiss as yet another restatement of the obvious fact that the Network Economy benefits from network economies! However, the law pertains to the nuanced idea that a growing network can begin to represent significantly large value, of itself, to such an extent that it supersedes the value of a firm. Essentially, the collaborative potential that large networks represent serves to dull the relevance of firms, even when it does not entirely invalidate their need.

This, then, is a law that remains as keenly relevant for a Blockchain Economy as well. The increasing returns of a network economy represents a rent that is captured most effectively by firms, but increasingly also by collaborative ventures. This explains the burst of collaborative activity, beyond the boundaries of a firm, that the Network Economy has motivated, such as innovation commons. By enabling stigmergic organization, we should expect the Blockchain Economy to set fundamental transformations in motion that allow this rent to be captured by individuals more directly; this burst of participation will naturally look chaotic in the beginning, but can only serve to increases the health of markets, as well as a host of other social and political outcomes.

The Law of Inverse Pricing. Kelly observes that, in a Network Economy, where Moore’s Law and Gilder’s Law work in synchrony, computing power and communication bandwidth increase in such a manner that transactions costs collapse drastically. The result of this is that, all else equal, a good or service of a given level of quality declines in price. The idea at the crux of this law is that competition in a Network Economy is over quality, or, stated differently, competition intensifies in disruptive innovation.

It is arguable to what degree this law bears out for the Network Economy in its current instantiation, some 20 years after Kelly made his bold prediction. While instances of its veracity abound in technology, more generally Kelly may have been proposing a limit-argument, since modern digital economies still face a range of frictions that prevent any uniform decay in transactions costs. However, the applicability of this law to the Blockchain Economy is one of both the intensive and the extensive margin.

On the extensive margin, blockchains enable broad inclusiveness, thereby extending the benefits of a Network Economy. This will be far more transformative for some peoples of the world than others; the dismantling of the barriers to networks is a fundamental promise of the Blockchain Economy. On the intensive margin, blockchains will permit individuals to select consumption based on innovations they desire, rather than be guided by aggregate markets. The cryptographic stigmergy will, therefore, not reduce transactions costs to the same degree across all consumers; it may well increase it for some. However, it will enable choices that will permit them to optimize on quality, and, therefore, on the quality of life, to a far greater extent than the Network Economy.

The Law of Generosity. While the terminology might be different, the essential idea with this law is that a Network Economy incentivizes the development of platforms for the delivery of services. Such platforms select on and cultivate networks, and, as such, their value is in being able to demarcate a community of consumers, and ‘generously’ provide them with access to the platform for free. Goods and services provided atop such platforms are, of course, costly.

In a Blockchain Economy, the impact of this law is made yet more luculent. Platforms are synthetic attempts at stigmergic coordination. The bold prediction here is that blockchains will, therefore, make such top-down attempts at directing market participation less relevant.

The Law of Allegiance. Either Kelly was extraordinarily prescient or he had extraordinarily good luck in stumbling upon this observation. The law simply suggests that the Network Economy makes all other descriptors less relevant than the one that identifies one user of a network with another. The only allegiance that holds value is to the network, and, consequently, the Network Economy works on the principle of developing and safeguarding standards that protect the network.

In a Blockchain Economy, by contrast, the only law of allegiance that matters is that which is reified within the consensus protocol of the blockchain. If the only allegiance that mattered in a Network Economy was not to organizations, but to the networks, in the Blockchain Economy, by contrast, the only allegiance that matters is to oneself; decentralized access to networks will permit us the realization the only meaningful ‘allegiance’.

The Law of Devolution. This is an interesting law, with imagery drawn from adaptation in biology. The point of the law is to suggest that, in a dynamic and turbulent network environment, firms may often find themselves in the situation where innovation requires backtracking markedly from a seemingly advantageous status quo — devolving, in a manner of speaking — in order to access opportunities that new ideas and unfamiliar technologies might generate.

This law seems to be less applicable to the context of a Blockchain Economy than it is in the Network Economy. The approach to innovation that a blockchain instantiates, as we have discussed above, makes it less chaotic for new technologies to be developed before the status quo is abandoned. Yet, a comprehensive economic transformation enabled by the Blockchain Economy, on the whole, will be built on large-scale experimentation, and the process will most certainly not always be linear.

The Law of Displacement. This law declares that ‘the net wins’. It arises from the simple fact that networks attract economic activity on account of their ability to cater to larger markets at lower costs than can traditional industrial economies. The Network Economy, therefore, forces weightless technology and network logic on to traditional markets, displacing mechanical, costlier and weightier antecedents.

In a similar contest between transactions on the blockchain and off it, both residing on networks, ‘the blockchain wins’. More seriously, though, the point is essentially that the Blockchain Economy enhances the logic of this arc with the benefit of trust economies that serve to organize synergies across the Network Economy.

The Law of Churn. The Network Economy creates shorter-duration innovation cycles that are more turbulent than they tended to be in the traditional economy.

In the Blockchain Economy, this ‘churn’ remains valid for the class of innovations that can be seen as combinatorial, but for applications of the blockchain in sequential innovations, churn is reduced; innovation cycles would be longer than they are in the Network Economy, and less turbulent to boot.

The Law of Inefficiencies. The purpose of networks is not solely to connect across all that can be connected, animate and inanimate, merely to seek higher productivities. The grander ambition is that of discovering new opportunities that can serve to change the way things progress, rather than solely to do things that are done marginally better.

It is pleasant to be able to end this article with a law that applies — in broad intention — equally to the Network Economy and the Blockchain Economy.

It is perhaps a disservice to think of the Network Economy solely within the delimited purlieus of economies. Networks have had, repeatedly since Kelly’s article, transformational effects on society and politics as well. Blockchains will make these effects seem tame in comparison. Blockchain Economies will assist the cryptographic stigmergy in exposing and remedying inefficiencies that have been taken in economies, societies and polities as necessary evils. That, at any rate, is the future that the Blockchain Economy promises.

• I thank jason.potts for his feedback on this article.

More where this came from

This story is published in Noteworthy, where thousands come every day to learn about the people & ideas shaping the products we love.

Follow our publication to see more stories featured by the Journal team.