I. Crypto’s Biggest Problem

“Reputations will be of central importance, far more important in dealings than even the credit ratings of today.” - Timothy May, The Crypto Anarchist Manifesto, 1992

The Crypto Anarchist Manifesto, written over 30 years ago, was our original North Star for cryptocurrencies and blockchain technology. Timothy May and the original Cypherpunks in the early ‘90s laid out the foundation for Bitcoin, smart contracts, DeFi and NFTs.

That foundation was always rooted in unlocking functionality- a peer-to-peer cash system that was decentralized and anonymous. The speculative upside in the value of that asset was considered an inherent side-effect, and to many early cypherpunks, a “necessary evil.”

Many of us today revel in this speculative upside; there has been significantly more financial opportunity in cryptocurrencies than in most speculative marketplaces over the past two decades. That opportunity also breeds greed and fraud, which has grown exponentially in the last few years. From the original days of Bitconnect & Thodex, to the ICO-mania of Pincoin and iFan, to the more recent days of SquidDAO, AnubisDAO and countless NFT “soft-rugs,” fraud is now ingrained in the culture of crypto.

In fact, TRM estimates that over $9.04 billion was stolen globally in crypto fraud schemes in 2022, a notable increase in volume from 2016.

And thus, the sentiment around cryptocurrencies is typically quite negative: 75% of US investors say they do not believe that the current ways of investing or trading crypto are safe or reliable.

Since crypto was built on the foundation of pseudonymity, and with the recent surge in financial greed, it’s become more obvious than ever that we’ve still missed on May’s original manifesto: Reputation is an unsolved problem.

Today it’s even easier than ever to grift, rug-pull, exit scam, shill, front-run or insider trade than 15 years ago. The financial incentives of being someone with no reputation significantly outweigh having any reputation. Together those two realities bring us to where we are today: significant, widespread fraud.

As a recap:

• The space has swung from function (cryptocurrencies) to greed (financial gain.)

• Public consensus agrees crypto is not safe.

• The ease of fraud has become exponentially easier and more lucrative recently.

• Reputation in the space is still not valuable.

So we ask:

• How can we possibly gain true mass adoption of crypto against the current paradigm?

II. History

In the 1600’s, Thomas Hobbes rooted his social contract theory in the idea that man was eternally self-interested.. naturally cruel and fueled by greed. He believed that the rules and standards that society abides by (eg. “a social contract”) would never be in the interest of others. Man was evil and brutish to Hobbes, and would only protect his own natural rights. Sound familiar?

Hobbes concluded that the correct form of government was an absolute monarchy- a single person to look after everyone. Government was needed to protect man himself. That style of governance is society mostly played out across the globe for the majority of ancient history.

John Locke later challenged this Hobbe’s beliefs, stating that man was inherently moral, reasonable and good. Locke believed that humans cared about progressing as society as opposed to just their individualistic needs- and thus would self-govern through accountability for one another. Locke suggested that how society governs was dictated by a want to benefit the general public, not a need.

Hobbes: Self Interest & greed → Need centralization & authorityLocke: Selflessness and collectiveness → Self governance through social contracts

Crypto started in the early days of Cypherpunk-ism with a Lockean approach to social contract theory. A new avenue for currency, a new function for modern society that did not operate on the premise of a single centralized “monarch.”

However in the last few years, we’ve shifted away from that, going back to our brutish Hobbesian views of self-interest and greed where financial incentives align mostly with self-interest. We’re back in the Wild West, where it’s more lucrative to rob trains and pillage towns than it is being an upstanding citizen.

We believe that we must significantly progress as a crypto society to reach global crypto adoption. We simply cannot do that with the current Hobbesian state of nature that acts in self-interest above all. We need accountability, trust, reputation, credibility, morals... it’s important that we rewire our ethos back to our roots.

III. Solution

The role of reputations--common in business and interpersonal dealings--is generally ignored in the academic crypto community, who end up tearing their hair out over extremely complicated protocols that attempt to avoid issues of reputation and economic incentives. - Timothy May, 1993

It’s now 2024, and we’re still stepping over the reputation problem. Why? It’s an incredibly difficult problem to solve in an objective or calculated manner.

In modern society outside of crypto, we’ve progressed to a point where credibility, reputation and networks are valuable. They’re how you get a job, how you choose a doctor, how you get matched with an Uber driver or how you choose to buy a product on Amazon. Some of these are objective (your 4.9 star rating on Uber) and others are subjective (how applicable is your experience for this job?)

We still haven’t found a good way to implement these measures into the fabric of how crypto operates today.

Except, maybe it has been right under our nose this whole time…

More recently in crypto history, many chains have started to adopt Proof of Stake, which rewards consensus through validation. Given a set of rules, validators ensure the chain follows a set of commands:

• Validators confirm consensus in accordance to those commands? They’re rewarded with tokens.

• Validators confirm actions that are errant to those commands? They get slashed; they’re punished for negative behavior and they lose tokens.

• Validation through staking introduces security of the network through token price, making it expensive to attack the network and break consensus.

Over time, those validators have built up their own reputations based on objective measurements like uptime, rewards and amount of slashings.

By bringing each of these mechanisms of Proof of Stake together, we believe it may help us solve our reputation and credibility problem, too.

People acting as social validators.

As a thought exercise, consider if we replace “validators” with “people:”

• Staking in people can help show who can be trusted. Those people can now help define consensus around social transactions.

• Slashing people can help reprimand bad actors who step out of line social consensus.

• Rewarding people for work done in providing that social consensus.

By introducing financial upside and downside into reputation, just as Ethereum validators do today, we can:

• Protect reputation through financial security (ie. it is sufficiently expensive to fake reputation and credibility)

• Make reputation itself be inherently valuable (ie. reputation and credibility are instrumented, measurable and can be appropriately rewarded)

• More easily observe societal interactions (ie. who is connected to whom, when and under what circumstances)

And with each of those, we can start to shift financial incentives from grift & anonymity to credibility & reputation.

IV. Thesis

The Ethos thesis is that by adapting Proof of Stake to use people instead of validators and apply that to social interactions instead of transactions, we can create “Proof of Credibility” which can enable a more trusted, transparent and safe place for peer-to-peer interactions onchain.

Ethos Labs is taking the first stab at this by building the Ethos Network.

Please consider subscribing to this mirror.xyz blog and following us on Twitter