Ponzi Schemes

Let’s be honest, the two options of ponzinomics and grindhell make short-term, zero-sum sense from a supplier’s point of view, but they’re provably terrible for a longterm ecosystem. Likewise, longterm economies that can be treated as a game are also capable of being unraveled by those mechanics. Here’s the thing. There’s a lot of hard work in “Main Street” economics, and there’s a lot of diligence and competition in computer science. Somewhere along the way of modernization, we created such complexity in both fields that no one could fully comprehend the breadth of either. Unfortunately, in many of these fields, a common bluff formed: if the underlying product could be formalized or capitalized, there would be some leverage in the confidence of the end consumer.

Let’s not forget, information networks and their applications are incredibly complex. And the same confidence game can be summoned where there is arbitrage between the end user of the World Wide Web, and the website they visit. The weakest link of any web application are the humans that operate it. When the stakes are databases chock full of all the things that make us unique, the badges and certificates that we bring to institutions, to facilitate every aspect of our lives we can’t afford to lose, there’s a high societal cost.

When complex apparatuses like Wall Street or cryptoeconomics get mentioned, we tend to gravitate to words like “Ponzi scheme” or “scam”, and it’s at least the partial truth. Where there are poorly lit frontiers of the Internet, like the warez, torrents, and darknets, we find phrases like “the Wild West”, and the truth is, we’re accepting the risk that those phrases partially reflect some reality. Unfortunately, a lot of these conversations lead to the slinging of logical fallacies, and we also tend to end them prematurely, without offering every potential perspective the opportunity to analyze every potential discrepancy.

Back to the main point, we don’t fully comprehend how to redesign the productive value without some arbitrage of asymmetric investment of preexisting capital, and the always-present arbitrage of the last buyer’s confidence. However, we do know that where the attention of the public focuses, there is some residual productive value. There’s a knife’s edge, where a competitive ecosystem produces innovation and dissolves previously certain moats. There’s also people that lose money, their time, or their sanity, or a combination of these.

So are there sustainable gamified systems, and if so, what are the current attempts to reach this stage?

Reflection

I drafted the content above much earlier because it was useful to draw a picture. On this day (Nov 8 ‘22), I think about the same ideas, but it’s in the context of the FTX black swan. The points remain the same: there is some game here, and it can be implemented as sustainable, but due to complacency, it isn’t completed. Not only that, this complacency is weaved through many media formats, and as I walk away from a livestream where multiple infamous figures discuss their ethical boundaries, I feel that the damage and contagion is much more impactful than the enjoyment of the underlying confidence game.

On the flip side, it’s more important than ever to take inventory of the capital that remains. That includes our ability to perceive economic opportunity and the architecture that is closest to that. In sane times, this capital should be risk-friendly and not a public burden by necessity. In sane times, we might fail in public because the intangible inspiration is more valuable than our personal loss. Fortune favors the bold, as they say. It coincidentally doesn’t hurt the prepared. To be bold and prepared, we need to define the circumstances and the system within.

What is gaming? It’s first and foremost a recreational format, secondarily, it is also an activity that can be looped for a greater share of daily time. Gaming is not limited to a stereotypical interface, although many readers are picturing a glowing computer and joysticks at the moment. The only parameters that gaming requires is an interface that induces a change in serotonin & dopamine. Many of us feel a vibration and open up social media as a Pavlovian response. That is modern gaming, and the high score is more ingrained in your eagerness to play (gamers like to “level up” because a numerical high score simply doesn’t cut it).

What is banking? It’s first and foremost a financial institution, secondarily, it is an undersigner of universal consumption. One of the things to keep track of is that most human actors seek sustenance and pleasure, and avoid input of labor. Banking is just an easy box to build for humans to consume what they choose, conversely it is less easy to build a box for superhuman producers to choose how they are consumed. What do I mean by superhuman? A farmer or hunter can acquire enough of a thing to barter with it on their own, but in modern society, even a simple victualer may need assistance in consuming many things to sell one item of food. These situations can become more dynamic because there is a financial interface that all involved parties can depend upon, and it is not another human. The more complex a commercial operation becomes, the less it can remain optimal with human discretion. In other words, in order to maximize your happiness as an upstanding member of an industrious society, you want to be within the most calculating apparatus that does not marginally increase the resources it takes to run itself.

This is the crossroads of confidence games. On one hand, there are market participants that want to maximize their happiness, but they do not want to calculate the total resources that get consumed. On the other hand, the apparatus needs to control as many resources as possible while minimizing the human discretion (i.e. the “credible” oversight that succinctly broadcasts a calculation) . In a human-only system, this typically becomes a bureaucracy, a stack of compartmentalized echelons that are each responsible for an intermediate input & output; a buffer of decisions that involve as many producers and consumers as possible. In a ponzi scheme, it should be noted that something is normally exchanged in the background, typically this means a legitimate bank with legitimate money. The ponzi can be overseen by a single person, but it takes echelons of “investors” to pay in, get paid out by further echelons, and become “promoters” to keep the game going. It also takes, besides a bank’s money, the legitimacy of a forum to promote that ponzi scheme. The more broad and legitimate the platform, the more damage the ponzi scheme can inflict, and it takes more collective human effort to reveal the damage.

It’s easy to call something a ponzi scheme. It’s easy to create zero-sum gain in a confidence game. This architecture goes all the way back down to the gritty reality, us figuring out how to exchange resources for enjoyment. Unfortunately, our best options are confidence games to some degree, but we are free to make them less fallible. If scalable economy revolves around our financial resources and our appetite for enjoyable consumption, the most likely outcome is a technological pyramid that acts as a Skinner box for all participants. In VC-talk, there’s AI and there’s crypto.

What do I mean by AI? Firstly, let’s appreciate that our food supply has been industrialized through analog devices like the tractor, but will continue to be upscaled through robotics. In this context, AI will be generalized as computer vision, decision-making, and optimization. These all abstract away the accountability of the components to not only the end consumer, but also the farmer that owns them. Logistics notwithstanding, the “bank” of agricultural output can be less fallible at a greater scale with decreasing human intervention. When applied to other essentials like potable water, housing development, and other forms of infrastructure maintenance, modern society is confident that it can sustainably grow further with an underlying economy of self-organized atoms. We don’t exactly know how this confidence can be capitalized in the present except through funding startups that focus on AI & robotics.

What do I mean by crypto? Crypto is simply ascertaining facts without depending on a fallible third party. What we have now is not anywhere close to being a universal “bank” of infallible truths that can abstract away the flow of resources for an end consumer, but we do know that this frontier is remarkably ripe for implementations. So far, cryptoeconomics is at the point where we can issue flavors of self-governance, financial instruments, and digital consumption. It’s much more of a Skinner box for spending money to be confidently speculative than it is for spending time and effort, confidently, to achieve an enjoyable life of consumption. One of the very unexplored areas is universally accounting for time and effort to distribute resources. This includes the ability of any given project with an attached financial instrument to cultivate attention of producers and consumers so that the instrument can better reflect a greater ability to be “the bank”.

Let me stop there and state the two confidence games, or ponzi schemes, in both fields. In AI, the product is typically a model, and while many believe ML models depend on their scale, or parameter count, it is actually the quality of the training dataset that is consumed for that model that determines its value. So, a common ponzi scheme in AI is farming cheap training datasets. One can produce a language transformer by algorithmically sweeping the Internet for content without paying the upstream price for licensure, privacy, or domain-specific expertise. A subscriber can (over)pay for an application that runs the model, and not only is that money not flowing completely upstream, but the subscriber is providing valuable, undercompensated feedback for that model to be iterated.

In crypto, there’s the public instrument offering. This instrument is typically an abstraction of capital gain with an underpaid social cost. Considering the latest black swan development of FTX, on top of everything else that’s happened in 2022, the public is putting valuable capital into blackbox machines that sell perpetual motion with an unknown expiration date. It should be clear that many tokens are distributed as ponzi schemes, first with a small cartel of promoters that depend on being compensated disproportionately by later buyers. In other cases, the ponzi scheme is simply time arbitrage, where early public buyers of a token are confident that their adoption is more premature than riskier speculation in the future. There’s also the typical seller in question, whether they’re a quantitative engineer, financial manager, or a visual artist, using a percentage of the speculative volume to speculate by proxy, the capital gains either coming from depositor fees, royalties, or the sale of an early allocation at the more liquid point to speculators.

Sustainable Boxes

There are some clear parameters for efficiently boxing up an ecosystem to serve an end consumer’s enjoyability:

• Inputs are fully accountable. This means that the regulating element of the ecosystem needs to spend less of its own resources to achieve a growing volume of public oversight. This also means a stochastic pushback for risk-taking, like defending against extreme volatility as an exploit of public funds, and the prevention of private actors colluding for the short-term gain of a socializable black swan.

• Actors are proportionately recognized without disenfranchisement. This means sacrificing as small a portion of an airdrop to sybil attackers without fully disenfranchising non-KYCd actors. This also means directing public attention to public forums, not farming social capital via private invite or directing public user namespace to be used for advertisement in exchange for private capital gains.

• Outputs are permissionless. One of the clear failings of traditional institutions is red tape, plain and simple. The ability to ship a product should depend on easy-to-enforce criteria. If we have increasing technological means to recognize a good or service is “up to code” without human discretion, consequently it should be easier to ship and consume.

• The interface optimizes the flow of user serotonin and dopamine to reinforce productive gains in UX. An addicting game that resolves into monotonous grindhell is a net loss of resources, plain and simple. A social game that promotes the few content creators from the many audience members is just an echo chamber. If the goal is to “gamify productivity”, the productive user can’t be capitalized as a single product; the user needs to be transformed continuously through different niches to maximize their potential. Unfortunately, the interface has to trade between generalization and specialization at that point.

• The spectrum of those that produce accountability and those that consume abstraction needs to be provably nondisruptive. We need these ecosystems to be “fun”, but not for the price of complacency, technical debt, or anticompetitive pressure. There needs to be as much innovation as possible, and still remain falsifiable by an honest minority.

For an easy example, take web3 social. The interface is a mobile app, and it’s publicly accessible via a one-time verification process. At this point, there’s several forms of user capital: only they can alter their profile, they can post append-only content, and they can curate a publicly readable social graph. Dopamine comes in through notifications, users experience serotonin in posting and sharing. The key improvement in UX is that the content is publicly composable, meaning that a user typically has the ability to transport themselves into a new production environment on demand. Input is accountable by the sortition of that input being more accountable. Anyone can read/write anything to the underlying social network, but the common interfaces transparently curate content for consumption feeds. This curation is the much-needed double benefit; it protects vulnerable audiences from toxic content, but it doesn’t outcast honest-but-critical perspectives from proper provenance.

The game is to post content for social capital. However, the interface should eventually change the game to benefit diversification; it’s easier for an influencer to cultivate more social capital from the derivative content of an original creator. Ideally, we want audience members to engage in constructive interpretation of original content, and we want influencers to marginally earn social capital by influencing other creators to critically create more and relatively earn more. We want users who produce less content than they consume to “level up” as secondary or tertiary content creators, but not optimize for recursive “reaction stream” content creation.

Another example of a sustainable game/bank is a multiplayer engine that can immediately evaluate the value of a new user being onboarded. The stochastic pushback is determining what actions the user has to perform to reach a minimum viable incentive (and what that amount actually is) without it becoming a DDoS in aggregate. The UX should be reproduceable, but the goal in most games is producing aesthetics; in other words, you want a committed game user to be a tester, and consequently, a modder, so they can curate their own aesthetics for newer users to experience further novelty. It’s like a ponzi scheme for fulfillment, the cost needs to be limited to spent time and effort, but a) there’s a cap on spending time and effort on one thing to feel fulfilled, and b) the output continuously grows itself for anyone to choose how it’s most efficiently consumed.

Economic Clarity

Our goals should be ambitious. We are a diverse crowd of builders, creators, thinkers, and artists, but all of us need to consume things. We are fallible individuals that become complacent, and there’s a lot of systems that we indulge in that fail spectacularly. Crypto, or web3, or blockchains are all words that reflect a desire to change our individual circumstances in aggregate. I’m sure there are many cynical operators that believe the only way to survive or succeed is to outcompete the public. I would say that there is no example of survival or success that remains in the collective human consciousness except the instances that bring groundbreaking benefit to the public. The honest conclusion to take from the FTX debacle is that these bubblesof attention and financial gain in 2021 are popping. Given time, they’re going to be forgettable stains like the failures of 2017 and before.

I think there are common platforms that we all desire and we all want to build on. I think all of us want some recreational pursuit and we all want the best “bang for the buck” for what we invest our lives into. Now is as good a time as any to reflect on what is so wrong with our financial circumstances that we think of them as a predicament, and what is so wrong with our recreational pursuits that they’re boring and addicting.

Right now it’s buidling season, and there’s quite a bit in public about verifiable credentials in many forms, and quite a bit about proof of concept gaming (OPcraft comes to mind)

The other angle is gritty cottage economics. Our financial ecosystem is obviously dependent on electricity costs for computation, just like many web3 & AI apps depend on the roundabout cost of maintaining datacenters. Our financial ecosystem revolves around consumer demand for basic necessities like food, housing, transportation, clothing, medical care and internet access. Recently there was speculative fever around the most efficient way to deliver groceries and fresh food to residential addresses. At some point web3 or AI will procure a common, neutral infrastructure for the delivery of basic necessities. The question remains how web3/AI procures a stack for producers of those necessities, and how that can be accomplished without fiat on/off ramps and traditional red tape/backchanneling. Once established, it can be gamified and capitalized, then further scaled.

There’s an abundance of ways to improve our daily lives, and we have our work cut out for us, but we do not need to play with matches and gasoline to get to a brighter future.