Decentralization

Technology's Impact on Organizational and Societal Structure

Craig Calcaterra, Wulf Kaal

• Publisher: De Gruyter
• Year: 2021
• eBook ISBN: 9783110674033
• Edition: 1
• Topic: Business
• Subtopic: Business Development
• Index: Business

Entrepreneurs as well as seasoned business leaders are struggling to innovate and stay ahead of change in the age of decentralization. What separates the companies that get disrupted from the ones that thrive when faced with decentralization? What tactics can be deployed to decentralize large monolithic organizations? Drawing on their experience as researchers and tech entrepreneurs, Professors Calcaterra and Kaal show how to

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• Learn to embrace the change that comes with decentralization

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• Evolve technology, communication, and culture as the business encounters decentralization

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• Use best practices to maintain profitability in the emerging environments of decentralization across industries

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• Combine responsibility with velocity to leverage the advantages of decentralization for the common good

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The book examines the core infrastructure elements that are needed before the first genuinely decentralized transaction can happen including a legal environment, underwriting, a truly decentralized blockchain that can overcome the blockchain trilemma (decentralization, scaling, security), and efficient governance of blockchains. Decentralization is essential reading for businesses seeking to win in an increasingly decentralized world where adaptation speed is the competitive advantage that matters most.

Chapter 1 Historical Sketches of Centralization Versus Decentralization

Each advance in information technology has led to an improvement in humanity’s ability to organize.

It is easy to observe the effect of these advances when power is centralized: you follow the choices of the central leader. Most recorded history is about centralized hierarchies. The “Great Man” version of historiography records the history of the decisions of kings and queens. It’s a popular perspective for historians, because it is easier than explaining how the more important story is the litany of changes in “little people’s lives.” The psychological state of Henry VIII is endlessly debated, even though changes in barrel makers’ techniques and their trade organization better explain why we live the way we do today. The individual is easier to recognize and relate to than abstract decentralized trends that often are unnoticed even to the people living through them.

Advances in organization mean we can cooperate more efficiently in our use of energy, making us more materially wealthy. The progress of information technology coincides with the progress of human power over their environment. The more efficient our system of communication, the larger the group that can be organized, the more powerful and efficient the group.

Groups cooperate most efficiently when there are clear rules for cooperation. Hierarchies are the most efficient pattern for creating a control structure in a group. They are used in large and small scales from an army to an emergency phone tree in an elementary school. They form naturally when power structures emerge as people differentiate themselves into more and less powerful members of a group. If competition exists, for instance, then people come to be arranged in a hierarchy. If the competition continues long enough, if there is enough organizing energy, the natural end result is a complete tree structure.¹

As a hierarchy organically arranges itself, redistributing power and wealth via competition, an exponential pattern of power centralization emerges. This is referred to as the Matthew principle, where “the rich get richer and the poor get poorer.”² Essentially, someone who is more powerful is better able to secure more of any power available. They’re more aware of whatever power is available, they have better connections and resources for accumulating power, and they’re better practiced at acquiring it. As the hierarchy becomes more entrenched, this exponentially distributed power structure crushes those at the bottom, leaving minimal power and wealth for the vast majority of people. The discontent of the majority is the first destabilizing force of a centralized organization.

At the same time the very success of the hierarchy may lead its power relations to become more rigid. This rigidity can become brittle when power relations become entrenched with secular laws. Under a codified system of logic-based rules, the letter of the law tends to override the spirit of the law. Rigid hierarchies are unstable and inevitably fall, eroded from internal corruption or novel external challenges that the hierarchy is not flexible enough to adapt to. These are the second and third factors that explain why centralized organizations are unstable. Rigid competitive hierarchies with secular laws face internal corruption as members’ optimal strategy is to push the rules to the limit. From the outside, any change in the problems the group faces can find the hierarchy unready to face the new challenge.

This explains the sequence of revolutions throughout history. Both the extreme power inequality and the rigidity of centralized hierarchies historically have inevitably led to collapse. Rigidly centralized organizations are seen as unstable on a historical scale, compared with decentralized organizations.

Ancient Egypt and Imperial China were relatively stable for millennia despite strong political hierarchies. What distinguished these civilizations from the many others that rose and fell around them? Their stability was due to protocol decentralization.

Humanity’s ability to organize in more sophisticated networks has advanced alongside improvements in information technology. Information technology progressed from the beginnings of symbolic language (ideas and beliefs, mysticism, ideas about ideas) and proto-writing (probably before homo sapiens evolved), then written symbols (Sumeria & Egypt, ca. 5,000 years ago), then mass printing (especially in China, which used stone rubbings in 200 bc and relatively durable clay moveable type in 1100 ad; later in Germany with the improved metal moveable type in 1440 by the goldsmith Gutenberg). The introduction of electronic information technology with the telegraph brought humanity to the contemporary era, with global light-speed information communication (Europe, America, and Asia were connected before 1870).

In broad terms, information technology is broken into three components: information storage, information processing, and information transmission. Memory, computation, and communication. These three components are not clearly separated. For example, how you store information in memory determines how efficiently and effectively you can process and transmit information. Your means of processing determines how and what you store in memory. How information is stored determines how it can be transmitted and shared. How you store and share information determines how it can be filtered and processed.

Developments in information technology accompanied the rise and eventual downfall of empires. In Imperial China the fantastic success of the hierarchy in fostering economic cooperation gradually made its bureaucracy more rigid. China invented the printing press and used it to centralize power – politically with uniform edicts and economically with the first printed money. Eventually, the hierarchy couldn’t respond to internal corruption and external threats such as Mongolian, Manchurian, and Western imperial invaders.

Europe started its own printing presses a few centuries later. Instead of using the press to centralize power like the Chinese Empire did, Europe’s use of the printing press greatly decentralized knowledge. The resulting cultural transformation led to the collapse of the centralized powers. The highly hierarchical Catholic Church lost its hegemony in Europe in the face of the Protestant Reformation, which may be attributed to the dissemination of bibles to the public. Eventually the entire European aristocracy collapsed and was replaced by greater power decentralization with democracy. But the decentralized organization of scientists, which has thrived since the advent of the printing press, has been remarkably stable, unified by an adherence to the value of objectively verifiable truth.

In this chapter we explore these ideas starting with early hominids through Imperial China and the American Revolution. The primary goal is to witness the central-decentral dichotomy in its evolutionary context to understand more fully their effects on organizations. We will witness the stabilizing effect of decentralization in context and the greater temporary effectiveness of centralization. The “unstoppable power of decentralization” is threatened by unregulated competition for profits, but can be maintained in the most extreme circumstances by a secure and meaningful reputational system. Analyzing modern Western democracies, the largest DAOs ever assembled, shows networks of members with diverse values can be united with protocol centralization, and its destabilizing effect can be ameliorated by power-decentralization through dynamic design of governance. In the long run, organizations are held together by their transcendental values.

A secondary goal of the chapter is to combat our historical myopia. There is a natural inclination to accept the fallacy of uniformitarianism, the idea that the institutions and cultures we have today are natural and have always been this way, and will always be this way. History teaches us how dynamic societies have always been. Revolutions demark the regular switch between the forces of centralization and decentralization in power, different legal protocols, and different ideals. This dynamic perspective helps us better understand what freedom and power we have to reorganize our social networks.

From Hominids to Imperial China

Prehistory of Information Technology

Centralization and decentralization are two qualities of power. A simplified, cartoon model of centralized power would be a static org chart at a corporation. This hierarchical pyramid structure leads to fewer and fewer leaders at each level with an ultimate leader at the top (see Figure 1.1).

Figure 1.1: Corporate org chart illustrates centralized hierarchy.

Such powerful centralization was not universal throughout history. Anthropological theories argue the origin of kingship, but the very tentative consensus from the archaeological record indicates the type of absolute rulers attended by a bureaucracy enforcing their rule did not exist much before 5,000 years ago. The Tomb U-j at Abydos about 3320 bc identifies the first ruler of Dynasty 0 as (possibly) the pharaoh Menes who unified Upper and Lower Egypt. There were certainly smaller kingdoms before that, but we have no earlier evidence of large bureaucracies. Before Menes, local leaders exerted more or less power over tribes since before the existence of homo sapiens. Pack hierarchies are evident in many species of social animal.

Before large scale kingship, the decentralized collection of warlords exercised far less centralized power, and humanity’s relatively weaker ability to organize meant we controlled measurably less energy.³ Technological evolution in symbolic language, and later, writing, were crucial ingredients necessary for the development of the strong centralization that attends kingship. The theory of behavioral modernity posits the idea that homo sapiens made advances in information technology on the mental level with improved language 500,000 years ago, leading to sophisticated human organization around 50,000 years ago.⁴ The theory claims abstract language led to improved abstract thinking, planning depth, and symbolic behavior such as art. With these new information technology tools (transmission, storage, and processing of information), people were capable of more complex cooperation, leading to more sophisticated societies, which eventually led to the first political hierarchies.

These early societies that emerged 50,000 years ago are what we would crudely refer to as cavemen. They are distinguished from earlier groups of hominids since they left a record of organized coordination that is maintained continuously throughout generations. These cavemen invented tally sticks and cave paintings. Besides words and ideas themselves, these tools are the most primitive information storage technology known. The Lebombo bone, dated to 40,000 bc, is the first known example of a tally stick. Tally sticks were used even into the 20th century in illiterate communities in Europe and Asia, to record economic transactions and ownership using notches on a piece of wood. The Chauvet cave holds the earliest picture drawings that have been found, dated to 30,000 bc. They record information on local animals and the earliest known religious objects.

Particularly important is the symbolic thought necessary for abstracting the notions of gods and sacrifice and worship that would lead to the centralization of thought and coordination of action necessary to unify large populations beyond local kinship groups. Such universal spiritual beliefs give people the harmony required to create institutional order and eventually practical secular laws.

In fact, sacralized law has been shown to generate more stable and successful institutions than secular beliefs. Sosis explains “religious communes are more likely than secular communes to survive at every stage of their life course.”⁵ One mechanism proposed to explain the discrepancy is costly-signaling theory. The idea is that sacrificing to a religion signals commitment to the group, which solves the free-rider problem. This falls under the field of evolutionary psychology of religion, which is obviously quite contentious. There is a more basic mechanism that explains the success of spiritual values for unifying groups.

From an abstract perspective, transcendental values are more stable unifiers than formal secular rules. The Folk Theories of Game Theory (see Chapter 4) illustrate the obvious point that it is not possible to construct a perfect secular constitution, that is, a complete set of static rules that will account for all positive and negative behaviors to permanently govern a group profitably. The Folk theories demonstrate that however the rules are written, strategies exist that follow the rules yet profit the individual at the expense of the group. (See, e.g., the Nobles vs. Peasants game in Chapter 4.) When a law is written down rigorously, specifying precisely what is acceptable and not acceptable, people are obligated by competition to find the most efficient behavior possible within those rules. Such behavior is often located right on the boundary of what is permissible. This erodes stability as excessive effort is then required on policing the laws. On the other hand, a transcendental value by definition is not rigorously formalizable. When people organize around an eternally unobtainable ideal without clear boundaries, they are less likely to probe the boundaries of what is acceptable.

A more traditional spiritual tradition explains a very simple and practical method for uniting disparate members in a large stable community. An ascetic Orthodox monastery on Mount Athos in Greece has a continuous tradition from at least 800 ad. How have they managed to unite devotees from different cultures? They’ve maintained an open policy for new members (any Orthodox male is accepted regardless of national origin) yet they have survived for 1,200 years during numerous wars and changes in government. This cenobitic (communal but hierarchical) monastic order’s solution is to pray together, work together, and eat together.⁶

We will borrow this strategy as a plan for harmonizing decentralized autonomous organizations (DAOs) using blockchain and other P2P internet technology in Chapter 4. An ideal DAO has an open membership policy for any anonymous person from any culture on the planet. How can they maintain harmony? They must share a transcendental value, work toward a common purpose (even if it’s simply profit), and share fairly in the spoils of the work.

Protocol Centralization in the Law

The earliest historical evidence of law is found in Egypt. Their system was closer to our sense of holding to the spirit of the law instead of the letter of the law. The remarkable stability of Egyptian society, for more than 3,000 years, testifies to how successful prioritizing transcendental values can be, compared with a system based merely on formal rules.

The Ancient Egyptians had a strong sense of nationalism, believing that Egyptians were the best people because they had the best model of behavior deriving from the best possible spiritual ideals. (This is naturally mirrored in nearly every national identity; the Chinese and Romans are two other exemplars of such attitudes, arguably because they have had the most successful empires.) The Ancient Egyptian term Maat encompasses this collection of ideals, meaning roughly truth, balance, order, harmony, law, morality, and justice. Maat is also the goddess who upholds and polices society according to these ideals. She also regulates the stars, the seasons, and even the other gods.

Though Ancient Egypt was politically centralized in the sense that the pharaoh was the supreme hierarch, it was protocol decentralized in the sense that people were not held to explicit formal rules and a legal constitution. The application of the law was vague and applied by autonomous priest-judges who were bound by their creative interpretation of Maat, instead of precedent and formal rules. Though the Egyptians had developed writing on papyrus by 2600 bc, and therefore had the technology to implement formal permanent rules, they avoided this type of protocol centralization and enjoyed the longest period of stability of any empire in history.

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Table of contents

• Title Page
• Copyright
• Contents
• Acknowledgments
• Chapter 1 Historical Sketches of Centralization Versus Decentralization
• Chapter 2 Contemporary Decentralization
• Chapter 3 Future Decentralization
• Chapter 4 Technical Perspective
• Chapter 5 Eight Institutions
• Chapter 6 Reputation
• Chapter 7 Governance
• Chapter 8 Finance
• Chapter 9 Historiography
• Chapter 10 Transcendental Unifying Values
• Conclusion
• Index