In a nutshell, the rise of human civilization has been a big coordination game. Over only a few thousand years, we’ve scaled our species from tribes of a handful of people to nations of over a billion. On net, over countless instances and iterations, humans have found more utility in deciding to coordinate with each other rather than defecting and doing their own thing.
Coordination isn’t just an altruistic practice, either. In fact, it’s necessarily selfish: we coordinate with each other because we have a personal vested interest in doing so. We practice a division of labor because we all save on our bottom line. We form companies because building under one roof is more efficient and we can all make more in the process. Voluntary, self-interested coordination is the basis for the advancement of our civilization and underpins the free market economy. Unsurprisingly, we’ve evolved to lean into it— as David Hoffman puts it, “We don’t group into tribes because we enjoy socializing, we enjoy socializing because grouping in tribes makes survival easier.”
Public Goods and the Tragedy of the Commons
Things start to get blurry when public goods are involved. By definition, they are non-excludable and non-rivalrous, meaning they’re impossible to exclude individuals from using and can be used by anyone without worry of obstructing someone else’s access to them. Our parks, roads, and public broadcasting systems are all examples of things that fit this bill. While they represent a massive benefit to society, public goods are also examples of things that no one individual has vested interest in maintaining, presenting an interesting problem. If this is ringing a bell for you, it’s more commonly known as the tragedy of the commons.
To enforce the upkeep of public goods, government steps in and pays people to take care of them. Be it park rangers, construction workers, or broadband providers, government subsidizes public goods because they’d fall apart otherwise. Even if society benefits from it, you don’t get paid for picking up trash off the street. The argument for government intervention is based on the idea that the free market can’t provide public goods or handle externalities. Soon, that might be changing.
Welfare economics breaks down government provision of public goods around two main ideas, known as the fundamental theorems of welfare economics. The first states that markets are efficient. As it would happen, they aren’t, and humans are not rational actors in practice. Many investors have beaten market averages handily over the course of many decades. The second states that whenever markets stop being efficient, governments should intervene to restore efficiency to the system. What fails to be considered is that centralized governance is just as opaque and fallible. Donovan Choy puts it well:
“Here’s a twist: Government interventions aren’t as costless as economists imagine [them] to be. In theory, incorruptible, selfless public servants with no knowledge problems are carefully modulating the economy in the name of the public interest. In practice, charismatic buffoons get elected into office by the unwashed masses, face perverse incentives, and are subject to regulatory capture.
It turns out that the costs of democracy may be so costly that imperfect markets are sometimes preferable.”
Of course there are exceptions, most notably online. Some of the greatest pieces of public infrastructure were built without any kind of outside incentive by small groups of incredibly passionate people. Tim Berners-Lee is credited with inventing HTTP, which underpins much of the modern day internet, without any real financial incentive in play. The vast majority of Wikipedia is similarly maintained by a small group of people, including Steven Pruitt, who has made over 3 million edits to the internet’s default knowledge base. For reference, his contributions represent additions to one third of all English language articles on the site. For this, he was named one of the 25 most influential people on the internet by TIME, despite the fact that he’s never been directly paid for his work. Things like DNS and OpenSSL are other examples of critical infrastructure that’s been built and maintained purely voluntarily, with no financial incentives in play.
I spoke with Nadia Eghbal about this maintenance problem a few months back:
“…We know who’s supposed to be funding physical infrastructure, but in the digital realm with open-source projects, these developers can be coming from lots of different countries. There's no legal entity associated with the project. It's just this concept that exists in the digital realm.
And so from that sense, there is no central funder. There is no fallback support… it just falls on people to maintain it if they want to maintain it and to self-organize and figure out how to do it.”
In this, there’s an incredible opportunity to be considered. If we built the foundational infrastructure of the modern day internet without any financial incentives, imagine what we could do with them.
Blockchains offer a novel solution to this problem because they enable mass coordination in a way that markets haven’t been able to. Allowing for ownership over a network or protocol might just present a third option beyond the inefficiencies of government and the marketplace. If you owned part of the street, you’d have a vested interest in picking up the trash.
Proof of Physical Work
The gravity of the unlock at play here is best visualized in its physical applications. As it turns out, digital coordination can unlock a lot of innovation in the real world by bridging the two via hardware. Tushar Jain coined the term proof of physical work to help illustrate this:
“…Protocols that fit this thesis incentivize people to do verifiable work that builds real-world infrastructure... Given society’s collective experience with centralized capital formation over hundreds of years, the natural inclination is to think about solving this class of problem in a centralized fashion, in which a single company decides who, when, where, and how people are compensated. We contend that this model is obsolete in the internet era.
Put simply, if you help build public goods like Berners-Lee, Pruitt, and so many others, then you should be able to participate in the economic upside associated with its development.
In practice, this new paradigm of distributed infrastructure usually looks like people deploying or activating hardware to take part in a larger network, earning in a native token for their work. Projects leveraging this are creating networks in 4 key categories: wireless networks, mobility, environmental, and compute. The element of decentralization they leverage allows these networks to do two important things:
Scale quickly: By giving network participants ownership over what they’re building, they’re very quick to scale. Rewarding early adopters with network equity in greater magnitudes solves a cold start problem nascent startups are plagued by.
Exhibit neutrality: Sufficient decentralization means means network stakeholders can be confident that the rules of the game can’t and won’t be changed. While companies can change policies on a whim, protocols’ rules are written in code.
We can divide these decentralized infrastructure networks into two categories: location-specific and location agnostic. Location-specific networks rely on the location of infrastructure to provide some kind of coverage. Good examples of this are spacially-reliant goods like wireless networks and maps. Location-agnostic networks, on the other hand, don’t depend on the physical location of their nodes. Things like distributed storage protocols would fall into this category.
Helium is probably the ultimate case study of this thesis in action. In short, it’s a location-specific crypto protocol that incentivizes individuals to install wireless hotspots. By doing this, they mine Helium’s native token, HNT, rewarding them for providing wireless coverage and validating hotspots. At first glance, Helium might conjure up images of nerds and ham radio. Shockingly, it’s giving telecom a run for its money, and it’s only been in business for 3 years.
Launched in August 2019, the Helium network is now closing in on 1 million hotspots, already surpassing the 400,000 cell towers of the entire US telecom industry. Although the hotspots themselves aren’t as powerful as their corporate counterparts— Helium uses Long Range Wide Area Network (LoRaWAN) coverage— they still reach 200 times further than WiFi, and don’t have to compete with cell towers because at scale there’s so many more of them. Now, they’re moving into 5G cellular networks.
The real beauty in decentralized infrastructure networks like this is non-speculative demand for what’s being built out. A network like Helium can serve real businesses and consumers from the start, giving it immediate tangible value that’s become rare in a space so ripe with speculation.
Another advantage these networks provide are the massive reductions in costs they create. A telecom provider, for instance, would need to map out a region, buy a plot of land, assemble and activate a cellular tower, jumping through regulatory hurdles each step of the way. In a model like Helium’s, labor costs go to zero, land costs go to zero, backhaul costs go to zero, and there’s far fewer regulatory issues to contend with.
For the people building decentralized infrastructure, there’s an economic flywheel that drives them forward. Supply-side participants are incentivized with a native token reward, which scales the network, attracting developers and end-users in the process. More end users means more revenue for supply-side participants, creating a feedback loop that often grows the network exponentially.
Ultimately, this model makes sense for anything that needs to happen in a physically distributed manner. Besides collective ownership, there are two main advantages that decentralized infrastructure networks provide:
Freshness: The data or service being provided over a network is constantly up-to-date. This can be an inherent component of the service, as in a wireless network, or a core feature, as in a real-time map.
Redundancy: The decentralized nature of these kinds of networks allows for varying degrees of redundancy. This means typically overlooked areas of coverage or groups of people are served, often without relying on a single node for service.
From logistics to electrical grids, we’ll find more and more use-cases that fit this model. As time carries on, what we know as the internet might come to encompass much more than just what’s digital.
On Retrofitting
For this internet of infrastructure to be fully realized, we need to get these systems into the hands of more than just nerds and enthusiasts. With the assumption that individuals won’t be able to scale the network globally on their own, participation starts looking a lot like franchising. Companies are being built for the sole purpose of acquiring land and deploying hotspots, for instance. Hexagon Wireless is a great example of this in action.
A common critique of proof of physical work and decentralized infrastructure networks is their reliance on individuals to own and operate hardware. There are two main points of consideration here. The first is that nearly all of these projects are incentivized to operate with totally open-source hardware. Giving any hardware manufacturers the blueprints to build compliant hardware drops manufacturing costs, drives prices down, and ultimately gets the necessary device for network participation into the hands of more people.
The second big idea here is that we might already have the hardware we need. When innovation takes place at a software level, retrofitting legacy hardware for compliance in a network is simply the smarter option. If we built a new computer for every piece of software we wrote, we’d be in a very different place as a species. The same principles can be applied here.
What’s at Stake
As is the case with any nascent technology on its way to wider adoption, there are inherent risks to contend with along the way. For an internet of infrastructure, this might be bigger than just light legislative pushback. Salvador Gala puts it well:
“Twenty-five percent of the entire telecom industry globally is government-owned, and the other 75% is extremely heavily regulated… After money printing, it’s the number one thing that governments care about maintaining sovereignty over.”
Government’s insistence on maintaining leverage over pubic infrastructure comes down to power. As it turns out, strict regulation or outright ownership of critical industries like telecom are a good method of exerting control over citizens, with shutdowns becoming more common in non-democracies as freedom of information presents an increasingly existential risk to sovereignty. To assume that user-owned networks will go unchecked is, in all likelihood, short-sighted.
That being said, humanity has found itself at an interesting point in time. The way in which we interface with the world around us is going to increasingly take place in a digital format, but the ownership of that format has yet to be determined. Assuming this broad trend of digitalization in our social and work lives continues, we can’t risk it being mediated by a centralized entity.
Thanks for reading,
Alex
Sources:
Crypto can fix public goods by Donovan Choy
Crypto-economic protocols that incentivize people to build real-world infrastructure - Hivemapper Network
Helium: The Network of Networks by Mario Gabriele
Incentivizing The Creation of Public Goods Together - Helium
On Coordination vs. Defection by David Hoffman
Proof of Physical Work - Permissionless 2022
Proof of Physical Work by Tushar Jain
Token Incentivized Physical Infrastructure Networks by Mike Zajko
Using Crypto to Build Real-World Infrastructure By Sami Kassab