It’s been almost 15 years since dawn of Bitcoin when the idea digital scarcity became a reality. Programmable trust gave rise to the mantra “code is law.” Although it recognized the infallibility of humanity, it failed to eliminate it. We instead developed a blind spot to the human elements that underlies all transactions, a social “layer zero.”

In his book “Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms” Omid Malekan explains how people have people have economically organized themselves throughout history and how crypto marks a new age in money, markets, and platforms.

As someone who background is in the soft sciences, I was ecstatic and relieved to see a book that covers crypto from a humanities perspective. All too often we get wrapped up in the code and fail to ask the basic questions of “how did we get here” and “what are the ramifications of this technology”. I took it upon myself to read Malekan’s book in order to let his ideas that he has been pondering on for the past decade marinate properly and the result has been one of my favorite interviews to date.

It’s Trust All The Way Down

The overarching theme of Malekan’s book is “trust” and how it has evolved over the ages. To put it simply, humans stand to gain more when they trust one another whether it be another individual or to a society. Yet it at the same time a paradox emerges, the more trust you give to the group the more vulnerable you become to the “free-rider” problem aka being taken advantage of. Free-riders are a natural consequence of systems that have developed trust over time and like rust coating metal, they chip away at the strength of the entire system until it collapses all together.

Money is the lowest common denominator that represents trust in economic form, offering a humanity a way to store their wealth, keep track of balances, and exchange goods and services with each other. It does not matter your race, religion, nor creed. Money transcends the dollar as an immemorial function for a collective social agreement to transact with one another on equal terms.

Money, Money, Money

Throughout the ages, money tool different forms. Initially, money was token-based, gold, silver, copper. Later it became ledger-based, authenticated via intermediaries. The rise of commercial banks that served as the foundation of ledger-based money corresponded with the rise of fiat-money which eventually gave rise to central banks, the arbiter of last resort that commercial banks settle with.

Yet, no matter if a system is token or ledger-based, each one is still susceptible to the free-rider problem. Seigniorage aka the fee the mint takes for creating money is the problem. The larger the cut, the heavier the dilution. For token-based money it comes in the form of dilution of metal coins. In the Roman Empire, silver coins started with 95%, only to be diluted to 5% as society collapsed. For the US dollar, inflation is the problem. It is only because of the dollar’s global reserve status that it is able to take such action with little consequence… for now.

Now decades into the information age, we have finally been able to combine  peer to peer token-based assets with ledger-based money as a blockchain. Bitcoin created a digital system that as Malekan puts it “invites the criminals to become cops” because it is ruled by incentives. And 14 years in, not only do we have “digital gold” but with Ethereum, we have been able to build permissionless markets and platforms. Look no further than the hundreds of millions of dollars transacted on-chain everyday in DeFi that normally would be cloaked in opacity and bureaucratic friction in traditional finance.

Malekan’s Words of Advice

In the interview, Malekan offers advice and warnings to crypto founders. First, he states that projects should be cautious in allocating too large portion of tokens to founders which risks misaligning incentives. When it comes to token distribution, protocols should focus on fostering the widest and fairest distribution possible. This does not mean that founders should not get allocated tokens at all since this would be the pendulum swinging to the other extreme. Rather, there should be a goldilocks zone that rewards successful founders and lifts up the community along with it.

Furthermore, Malekan advises DeFi not to scuff at our TradFi counterparts and the lexicon they have developed over the centuries. He states that if we are to reach the scale that TradFi stands at today, we must develop a level of sophistication that is equal to it. DeFi in its current state can be best conceptualized as computer nerds relearning the laws of finance and economics. Once the financial and economic infrastructure reaches an infallible level of resiliency, only then DeFi will be able to graduate to the next level.

Conclusion

Re-Architecting Trust presents history through the lens of economic transactions and it is often the political that influences the financial. Just because we have code in the mix now does not rid the politics of it all, far from it. We will still see policy debates for protocols and power-struggles within DAOs, the sooner we accept this reality the better. The challenge that faces crypto in the future is two-fold; how do we fight back against the free-rider problem and how can we build more positive flywheels that distributes rewards to those that contribute to its success?

Let’s find out.