The Punchshake Economy

I've been reading James Gleick's book on Time Travel, and he makes the interesting point that even though it is a completely familiar concept to us, there's actually no record of anyone ever thinking of it before H. G. Wells wrote the Time Machine in 1895. Shortly after, Einstein developed his theory of relativity which brought the notion into the realm of useful speculation and (in at least the very limited form of time dilation) into reality. People had considered somewhat related ideas like falling asleep and waking up years later (Rip Van Winkle, 1819), but nobody had considered the precise idea of traveling in time. But in 1895 that thought was finally ready to be thunk. It remained impossible, but it became conceivable. Today of course, we are able to work out entire imaginary book-keeping schemes involving parallel universes and grandfather paradoxes. Children learn the basics of fictional time-travel calculus before they're 10.

Smart contracts are kinda like that. Though there are ideas that come close, the precise form we are talking about these days is actually fairly new, and relies on a technological capability nearly as magical as time-travel:  the ability to eliminate trusted third parties... up to a point. The result is what I call a punchshake economy: one where the basic transactional act is like a combination of a hitting a punch-clock and a handshake, but without there being a specific third party institutional context like a factory with a big boss.

Punchclock+handshake+2 private keys=punchshake

1/ In Harry Potter and the Half-Blood Prince (book, 2005, movie 2009) Severus Snape makes an unbreakable vow to Narcissa Malfoy, with the spell cast by Belliatrix Lestrange.

2/  This was likely one of the first fictional depictions of a smart contract without a trusted third party involved (correct me if I'm wrong and you know of an older depiction)

3/ LeStrange cast the spell, and so served as a programmer of sorts, but the spell was not a unique power of hers, and her role was not to underwrite trust or bear witness.

4/ In fact, the spell was available to any trained wizard to use. The older Weasley twins trying to get Ron Weasley to make an unbreakable vow when they were kids.

5/ The unbreakable vow is self-enforcing, relying on the laws on magic, not a particular witch or wizard's trustworthiness, escrow, or enforcement services.

6/ There are irreversible magical curses and boons in older fantasy literature, but things vaguely like smart contracts with no trusted third parties are recent.

7/ The Monkey's Paw (1905) is almost a smart contract artifact. I'd be interested if you can think of older constructs that have some of the features of trustless transactions.

8/ Curiously, Nick Szabo wrote the classic Trusted Third Parties are Security Holes in 2001, only a few years before the Half-Blood Prince. Clearly an idea that was in the air.

9/ A smart contract is a combination of a handshake and a punchclock: a punchshake machine. Changes take a quick handshake-like action and are recorded in auditable form.

10/ The blockchain economy is going to be a punchshake economy just as the industrial economy was a punchclock one. Instead of factories, we'll have fat protocols.

11/ The industrial economy was based on two ways of measuring and rewarding work: the clock and the commission.

12/ Labor movement victories like the 5-day week, limited hours, and overtime are all ideas that relied on measuring time more precisely in auditable ways.

13/ In pre-industrial economies, clocks were rare (the village clock tower was a central time bank) and work was measured by the day. Measuring hours was a major leap.

14/ Where time spent doing work (or being available to do work) is a reasonable measure of effort, clocks support a good commitment protocol.

15/ Ubiquitous clocks allow buyers and sellers of labor to agree that a certain amount of money will change hands for a certain number of hours clocked.

16/ Wristwatches allow workers to "audit" factory clocks and punchclocks, and ensure employers aren't cheating them of wages by manipulating clocks.

17/ Where time is not a good measure of effort, or too easy to game, but output can be measured, you can switch to piece-work or commission-based structures.

18/ Sales jobs have sales quotas. Production jobs have output quotas. If you can measure the output, and it correlates to effort, you can measure and reward work.

19/ Knowledge work though, falls through the cracks. It is hard to measure knowledge work through either time instruments or output instruments.

20/ A joke about car repair illustrates the problem. Guy takes his car in for a weird noise. Mechanic takes a quick look, tightens one screw, and noise stops. Bill: $50.

21/ "You just tightened one screw!" says the irate customer. Mechanic replies, "Cost of tightening screw, 50 cents.  Knowing which screw to tighten, $49.50."

22/ The joke illustrates both the positive and negative aspects of knowledge work, and why neither market nor organizational technologies from the industrial age quite work.

23/ Negative aspect: there's a principal-agent problem. You have no way of knowing if $49.50 is a fair price or an outrageous distortion of a theoretical market price.

24/ There are 1000s of such fine-grained details in knowledge work that markets cannot price. There isn't enough legibility and liquidity around "screw tightening" microtasks.

25/ How would you even price-shop? Would you loosen the screw and take it around to a bunch of other mechanics? Would the first mechanic agree to have his claim tested that way?

26/ Positive aspect: knowledge is leverage. An honest but ignorant mechanic might spend hours, at $50/hour, getting nowhere. Results, not time, are the better measure.

27/ Measuring "output" is equally hard. Too much of knowledge work is illegible intermediate products and services, with "output" valuation events being rare.

28/ In piece-work, the unit of work is small, individually capable of being valued. In piecework shirt-making, every shirt is effectively a nano-scale IPO.

29/ In knowledge work, the chain of value addition between valuation events can be very long. Research lab work can take decades to get to any sort of market liquidity event.

30/ So it is hard to value or compensate it during rare payoff events, even within a single organization, let alone things like basic research --> commercialization flows.

31/ Real-life example. Once as a postdoc I needed a way to figure out if 2 polygons were touching, overlapping or disjoint. I came up with a bad way requiring a lot of ugly code.

32/ I described the problem to a smarter friend and he pointed out a way to use linear programming to solve the problem much more elegantly in just a few lines.

33/ Both of us were being funded by government grants in a research university. The consulting transaction worth maybe $50 was "covered" in the slop between our paychecks.

34/ In industrial work it is inefficient to even attempt to value such things. So we aggregate them by type in "organizations" (like universities) where things sort of balance out.

35/ We vaguely assume that free, unmetered exchange of ideas/work in organizations like tax-funded universities eventually pays for itself in economic growth decades later.

36/ This is a dangerous assumption. When it works, great. When it doesn't, it creates entire sectors of bullshit work and vast inefficiencies in invisible markets.

37/ Financialization of work -- measuring it in ways that can be real-time valued using markets -- sounds awful and dystopian, but is a check-and-balance on bullshit.

38/ But how do you capture such knowledge economy watercooler transactions? Count lines of code? Create super-detailed meta-work processes to track it all?

39/ Should universities create such things as "5 minute watercooler consult support request token?" It sounds like an awful idea and instinctively bad. But is it?

40/ Historically, watercoolers have catalyzed handshake economies: people build up trusted networks of people with complementary skills and trade favors around them.

41/ The only contract is a handshake: the assumption that over time we'll all do our sincere best to return favors and, as friends, not screw each other over intentionally.

42/ Handshake economies though, don't scale, and are hard to seed. It takes about a decade in a career to build up a useful favor-trading network of trusted friends.

43/ We instinctively suspect that an idea like "watercooler consult token" would in practice be Kafkaesque bureaucratic authoritarian high-modernism.

43/ But mechanisms like reddit karma, frequent flyer accounting schemes, and looser constructs like "likes" and "faves," suggest an alternative realization.

44/ They suggest that you can measure and quantize favor economies without "legibilizing" them in ways that make their functioning bureaucratic and authoritarian.

45/  Pre-blockchain credit/karma economies like on Hacker News, Stack Oveflow, Reddit, and Quora managed to model "favor balances" in knowledge economies at a toy level.

46/ But these mechanisms hit complexity and value ceilings. We only put in low-value downtime labor that we are willing to give away for goodwill chump-change.

47/ Clay Shirky's notion of cognitive surplus has so far been mostly cognitive exhaust: the lower-value "waste" brain time that we'd otherwise be spending on TV.

48/ At their best, Wikipedia, Stack Overflow or Quora are 10x higher quality than equivalent "paid" information. Cognitive exhaust is real value, but not yet serious surplus.

49/ There are limits. You have to rely on a confluence of factors: your need being somebody else's status-seeking passion, and timing (coincidence of wants) working out.

50/ When you need more serious levels of effort and commitment, and include time deadlines and specifics of instances of problems, cognitive exhaust isn't enough.

51/ Even the most brilliant answer to a general math question is no use when what you want is a piece of code that implements that answer for a specific data set by next week.

52/ There are two limiting factors here. The first is transaction costs of contracting. You can't be writing bespoke contracts for all these fluid, non-standardized value exchanges.

53/ Neither can you be entering into heavy-duty, overarching employment-style contracts, with enough slack to cover indefinite streams of illegible value exchange.

54/ The second limit is more significant: the need for a trusted third party. When value and complexities are significant, and two-way trust isn't strong enough, you need a third party.

55/ You may trust the admins on Reddit to maintain decent accounting schemes for low-value status points earned from cognitive exhaust, but not for real focused effort.

56/ On the other hand, the handshake economy doesn't scale even if there is high two-way trust all around because non-rigorous estimates of value can drift and cause conflict.

57/ If you have a lunch buddy and take turns paying for lunch, it's easy to keep track and ensure lunches owed never exceeds say 1-2 sandwiches, but that's the complexity limit.

58/ "Hard" currencies solve the problem by allowing periodic settling of accounts. So the unsettled part of the handshake economy is never allowed to go grow too big to fail.

59/ Hard currencies are to generic value accounting as village clocks are to time accounting, and historically actually evolved with time-keeping technology.

60/ To scale industrial work beyond village-sized economies took the proliferation of wristwatches, smaller mechanical clocks and punchclocks.

61/ To meet the needs of large-scale businesses like railroads, which spanned many local village-clock times, time zones had to be invented.

62/ Thousands of uncoordinated local-dictator "village clock" times were replaced by centrally coordinated time-zones, but audited by individually owned watches/clocks.

63/ This was centralization of time-coordination, but decentralization of time-keeping. The idea that people can actually agree/disagree on what time it is requires watches.

64/ Central time-coordination (first railroads, then governments) has to agree with local and individual time-keeping. This is such a familiar fish-in-water idea we forget it.

65/ One example of how this works is railroad delays. Whether it's a dictatorship or democracy, people can tell if trains are running on time or late down to the minute.

66/ Time manipulation became prohibitively expensive with wristwatches. To cheat factory workers or train riders, you'd have to tamper with far too many clocks.

67/ Distributed time-keeping was in fact the first, narrow kind of smart contract. You could eliminate trusted third parties to the extent their only role was to audit time.

68/ In fact, arguably, traditional fiat currencies such as the dollar became viable precisely because distributed time-keeping allowed them to be used as "time protocol tokens."

69/ Wristwatches were the first blockchain. Fiat currencies were the first tokens, accessing the first fat protocol: based on "mining" human labor in factories rather than gold.

70/ Sure you still have to trust watchmakers, but they are like programmers. They are not party to every time-based contract, and don't supply underwriting, escrow or witness services.

71/ If you agree to pay a babysitter $15/hr, you can "confirm" start/end times with any random stranger, and it doesn't have to be the same stranger at start/end.

72/ To time-cheat a babysitter, you'd have to create a really expensive conspiracy with your neighbors (like 51% attacks on blockchains). There are no time-judges to bribe.

73/ It's still not completely trustless. You need a pool of random strangers all wearing reasonably accurate watches, and the ability to find one anytime.

74/ It's harder to collude with the pool of local watch-owners than to bribe individual judges, but not as hard as hacking a sunrise/sunset in pre-industrial day laboring.

75/ Now how do you do this with other elements of contracts besides time? Enter punchshakes. Protocols for agreeing on anything, anywhere, not just time in factories.

76/ The phrase "code is law" doesn't quite capture it. Mere coded contracts have been around forever.

77/ Long before we were mindlessly clicking 10-page EULAs for "free" web services, we were mindlessly signing paper contracts that ran on human-bureaucracy computers.

78/ Contracts have always had code-like qualities. Lawyers are programmers of computers embodied by the judiciary, running "rule of law" operating systems.

79/ Law has always been code-like, and code has always been law-like. And both have always relied on centralized "village clock" kinds of third-party trust.

80/ Ordinary code does not actually tackle third-party trust issues. You buy a computer, you rent code from Apple or Microsoft, and and hope hackers don't interfere.

81/ Ordinary law also does not actually tackle third-party trust issues. Rule-of-law depends on institutionally certified human third parties playing roles like judge or referee.

82/ In traditional law and traditional code, third parties are trusted not because they are saints but because we structure incentives to make them disinterested and impersonal.

83/ Low-paid judges can be bought in big cases. Sports referees can be bribed by bookies if gambling is big. Certificate-issuing authorities can be corrupted/hacked.

84/ In the time example, if the village clock is the only clock, the rich factory owner could bribe the clock-tower attendant to mess with it.

85/ Code-is-law philosophy is actually code-is-law-without-fixed-judges. There are still "lawyers" who program smart contracts, but you can eliminate judges in some cases.

86/ More precisely, you can replace judge-like roles with a mix of things verified by mathematics, and functions supplied by randomly sampled members of a "crowd"

87/ Just as random strangers with watches can audit time for 2 parties, random nodes in a blockchain can monitor changes to smart contracts, and verify digital signatures.

88/ In traditional contracts, witnesses can sign contracts without understanding them. But specific witnesses may still be required later to confirm that the signature is theirs.

89/ That idea generalized is the ability of anybody to confirm anybody's digital signatures. Add automated execution of contract terms, and you've eliminated a LOT.

90/ About the only roles left for trusted third parties in a smart contract is interpreting and arbitrating terms and changes that are not automatically executed by machines.

91/ This development is comparable to the proliferation of wristwatches allowing anybody to audit time claims and detect manipulation of village/factory clocks.

92/ Steve Jobs once called the personal computer a "bicycle for the brain." Blockchains can be understood as networks of "wristwatch courthouses without judges"

93/ This has its own problems of course, smart contracts can have bugs and exploitable holes, just like the law, and we've already seen interesting exploits.

94/ And just like the law, as particular smart contracts age (forming a sort of body of case law), they will have bugs squeezed out and become more reliable.

95/ The difference is, you don't need an assumed institutional context to use the system, let alone one monopolized by powerful political entities with guns or bribe-able judges.

96/ The best part? As the store of available, tested, smart contracts grows, it will become easier and easier to modify robust existing contracts for your own needs.

97/ For more structured classes of uses, rather than writing or copying individual smart contracts you will be able to simply use negotiation and contracting protocols.

98/ What are being called protocol economies powered by "tokens" can be thought of as a way to put a lot of the logic required for a smart contracting domain in the background.

99/ All the variable elements in a particular context can then be reduced to the simplest possible kind of punchshake machine: a token.

100/ So yes, a "watercooler token" for getting expert math advice from a colleague is a realistic idea. You just have to replace the entire research university with a protocol, nbd,

NERD BONUS: Here's an in-the-wild twitter tweetstorm I did a month ago on the history of how ethernet evolved as a "double-spending" type protocol from older token-based bus/ring networks and how they weirdly relate to blockchains/protocol economies.

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