© SFMade

Architect Joni Baboci tells about Governing Futures

January 14 2022

Resistance to change is a feature of bureaucracies. The circular economy aims to revolutionize the way the economy works, and therefore it is expected that institutions are not ready, willing or able to engage with radical change. It is therefore paramount to reimagine shared institutions that could govern the future of finance and redesign the incentives that preserve the status quo.

In terms of individual incentives modern life has become a constant sacrifice of privacy and individuality for convenience. Social media, streaming platforms, communication apps, fast-food chains, or the mobile device companies are only some of the industries that have commodified time. Balaji Srinivasan recently referred to how the traditional media mantra “if it bleeds, it leads” has shifted in new media to “if it enrages, it engages.” Unfortunately climate, circularity and sustainability have also fallen prey to enragement for engagement. The discussion has slipped from technical to ideological. The depth of argument in the public discourse is critically shallow.

© McKinsey & Company

In governance terms decentralization has been the keyword for a while. A network of distributed but well-networked horizontal teams iterating through an agile framework has been favored to strictly top-down hierarchical organizations. In a recent report McKinsey & Company describe four features of team networks that can help large organizations stay nimble:

– Launch teams fast and build as you go;

– Get out of the way but stay connected;

– Champion radical transparency and authenticity;

– Turbocharge self-organization.

This model does not simply generate buy-in or active participation. It changes the structure and incentives of organizations. It looks more similar to the German stakeholder corporate-organization model than the more popular and typically known Anglo-Saxon shareholder model. This long-term model of corporation governance means that an organization is not managed only in the short-term interest of its shareholder. It is rather a constant negotiation between the needs of its internal stakeholders (employees, managers, owners) and the larger, often more generic needs of external stakeholders (suppliers, society, government, creditors, customers).

An interesting case study in governing small-scale manufacturing is SF Made in San Francisco. It provides an interesting model in how a small-scale circular-economy focused group of manufacturers could start an integrated community through common governance. SF Made is a guild-like member-based community formed by the collaboration and participation of all of its members, local manufacturers. It is a nonprofit that provides much needed organization and coordination to artisans and makers with a particular interest in advanced manufacturing. Interestingly SF Made defines advanced manufacturing as: “not a new sector of industry but rather a set of digital tools and conceptual frameworks that can be woven into any manufacturing process.” From this mindset, advanced manufacturing, 3d printing and other maker processes are interpreted as a conceptual framework, rather than a well-defined set of technologies. I think similarly the circular-economy should be thought of as a strategic framework around which manufacturing technologies that still haven’t joined the mainstream can slowly coalesce into the status quo. In terms of urban manufacturing, SFMade provides another interesting example in how to kickstart an integrated, co-located, localist maker community. Through its different partnerships, SFMade was able to amend zoning codes and construct a new building which hosts most of the participating businesses. What is termed “inclusionary zoning” is one of the first examples of allowing light-industrial use to be mixed with other, more typical urban land uses. Referring back to the triple helix model in the previous essay, the SFMade ecosystem was further extended with Lime Lab, a manufacturing academy combining a prototyping studio with an education center supplying skilled workers to the future of manufacturing. This diversity in urban use can provide a fantastic framework on the physical future of our economy. It is a strategy that benefits manufacturers as well as residents. While previously industrial areas were highly polluting and therefore located far away from residential centers, advanced manufacturing produces almost no pollutants - and with strong recycling mechanisms in place - could easily be co-located with residential or commercial land use in future cities.

© Wikipedia

Distributed Governance

TikTok, Clubhouse and the changing use-pattern of Twitter illustrate a technological future where the border between consumers and creators is blurred further than ever before. Podcasting is great, but the success of clubhouse demonstrates that people don’t want to be “just” listeners. Blogging allowed individuals to publish their thoughts to the world, but now substack allows them to own a piece of their audience’s inbox. Instagram enabled and popularized photo-sharing, however - in contrast to instagram - the five most popular creators on tik-tok are social media personalities whose names you will most probably not know if above a certain (very young) age.

Transposing this way of thinking to democracy and governance exhibits how the future of elections and decision making will be less about multi-year representation and more about active individual participation or temporary short-term delegation. This means that one could either research an issue and involve himself directly in its decision making, or decide to delegate her voting stake to an expert of the domain on which a decision needs to be taken. If the city needs to decide on the morphology of a new art gallery a cultural operator might be better placed to make that decision, while if the decision concerns matters of infrastructure, an engineer might be the best person to delegate your voting stake to. This could happen ephemerally and temporarily for every single decision, or one could delegate entire domains to excellent individuals. The results and outcomes of decisions can be consulted to see how specific individuals perform in such a system. Merging the potential of future technology with the cause-based sensible engagement of citizens can produce a new way of governing - a modern, remote-first Agora.

 

The most important innovation of the last decade is blockchain technology. Cryptography has enabled private communication for decades, but an anonymous individual or team working under the alias of Satoshi Nakamoto introduced the first practical application of an anonymous but trusted distributed ledger to the world in 2009: bitcoin. The past twelve years have seen a gradual boom and bust cycle of innovation in cryptospace: beyond financial speculation however, there are a number of relevant uses of blockchain tech that could revolutionize the way we govern communities, organizations, cities, governments and potentially, the economy of the future.

A distributed ledger is a trustless, permissionless distributed database+computer that allows individuals to transact, collaborate or govern through a common infrastructure owned primarily by its users. 

 

Distributed means that the system doesn’t have a single point of failure. Furthermore it’s success is directly related to its users. The more people use the system, the more resilient it becomes.

The Ledger is a complete list of all transactions from all individual addresses from the beginning of the specific blockchain’s history to the present. The ledger is immutable, it cannot be changed unless more than 50% of it’s distributed owners agree.

Trustless means that the ledger is governed by code. As long as the open sourced code is audited and time-tested there is no need to trust a third party. Code is more trustworthy than people. 

Permissionless means the blockchain is public, any individual can participate in it anonymously and no individual or group of individuals can prohibit the system use by a third party.

 

This is not the place to unpack how this works technically, but suffice to say that individuals could organize in setting up governance platforms that are fully horizontal and provably secure from malicious intervention by third parties. The platform itself would be distributed and owned by the community. The history of decisions, policies, votes, and results would be embedded on-chain forever and could be consulted by all citizens without fear of manipulation. People could trust that it would be reasonably impossible to “hack” elections without needing to trust a third party.

 

This form of government could be recursive not just in scale but also in typology. One could imagine different community governments governing different aspects of the everyday. The way local government, NGOs, unions and businesses work could be revolutionized. An individual could belong to hundreds of community organizations that could interlock, connect and be dependent on one-another without the fuss and bureaucracy of the current system. Different policies could be implemented differently and at different scales increasing individual autonomy while at the same time improving community and collaboration. This brings all sorts of different options to mind. Interactive blueprints could automatically change by responding to neighboring developments by restricting the possible options available to a specific plot. Rules could be implemented where the decision of one organization impacts the range of options of another.

Distributed Autonomous Organization are at their core, complex blockchain contracts. Smart contracts are not really that smart; they’re more akin to programmed executors of whatever programmers intended them to do. A smart contract can independently and autonomously store rules on the blockchain. They can connect through application interfaces termed oracles to “sense” the environment, and ultimately execute transactions - acting akin to self-reliant escrows. Smart contracts are able to store, verify and self-execute rules agreed upon by parties independently and without outside interference. It is therefore foreseeable that the right incentives could be provided automatically and with minimal overhead. It is interesting how these features look suspiciously similar to McKinsey’s approach to team-building and organization previously described in this essay.

 

One of the first implementations of DAOs is happening in the banking and finance sector. Decentralized Finance might be a precursor to a decentralized economy:

Murphy, Hannah. “'DeFi' Movement Promises High Interest but High Risk.” Financial Times, 30 Dec. 2019,

"Decentralized Finance (commonly referred to as DeFI) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum. DeFI platforms allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interests in savings-like accounts."

The process that is dramatically changing banking through decentralized finance could soon become the modus operandi of most tech-based businesses which currently make up an important part of our economy. It is foreseeable that after having consumed the most profitable and speculative space of the world economy, decentralization will start challenging tech-enabled enterprises with a first easy step being what is colloquially known as the sharing economy. Ride sharing, short-term rentals and other matching services could easily be coordinated through smart contracts rather than tech-middlemen. This would instantly remove overhead costs and corporate driven profit and would drastically lower prices. At the same time it would allow platforms to be governed democratically by its users and service-providers rather than shareholders looking for short-term profits.

Application to the Circular Economy

Tracking and sensing has become a new normal, even beyond megacorp big data aggregation. We track the number of steps we take, our resting heart rate, the amount of calories we ingest, the number of minutes we spend staring at screens, the number of likes our social media posts earn, and pretty much everything that is reducible to numbers. We attempt to make our individual life more legible, hoping to understand ourselves better and improve our daily routines. 

 

The next step to tracking and personal data collection might be some sort of on-chain proof of social belonging - a digital moral compass. A platform where you prove how you live by your values. Sustainability? With live-tracking you could soon prove to others (and to yourself) how sustainable your lifestyle is: whether you truly live by the values you preach, whether you actually walk the walk.  

 

This could bring a sea change in how things are manufactured. In Skin in the Game, Nassim Taleb explores the power of small but intransigent minorities in bringing about change. The idea describes how almost no one is actively against a sustainable product. If you could offer it to society at the same cost and without sacrificing convenience, a sustainable product would be virtually identical to an unsustainable one (something alternatively termed hedonistic sustainability in the first essay.) Intransigent minorities on the other hand proactively fight against an unsustainable product. Therefore despite being small in number, as long as the potential change does not have a negative impact in the day to day of the majority, intransigent minorities can have a strong impact in manufacturing. Taleb uses the example of kosher drinks in the United States:

Taleb, Nassim N. Skin in the Game: Hidden Asymmetries in Daily Life. London: Allen Lane, 2018

"A strange idea hit me. The kosher population represents less than three tenths of a percent of the residents of the United States. Yet, it appears that almost all drinks are kosher. Why? Simply because going full kosher allows the producers, grocers, and restaurants to not have to distinguish between kosher and nonkosher for liquids, with special markers, separate aisles, separate inventories, different stocking sub-facilities. And the simple rule that changes the total is as follows: A kosher (or halal) eater will never eat nonkosher (or nonhalal) food, but a nonkosher eater isn’t banned from eating kosher. Or, rephrased in another domain: A disabled person will not use the regular bathroom, but a nondisabled person will use the bathroom for disabled people. Someone with a peanut allergy will not eat products that touch peanuts, but a person without such an allergy can eat items with peanut traces in them. Which explains why it is so hard to find peanuts on U.S. airplanes and why schools are often peanut-free."

Now imagine a small community that is able to track how it recycles its outputs. Imagine it being governed horizontally through a Decentralized Autonomous Organization. Imagine it records inputs and outputs on-chain, providing a trustless platform which can further connect with the centralized manufacturing sector by being transparent, public and accessible to all. Furthermore, imagine NFT badges of circular honor: immutable badges that prove your dedication, engagement and active participation in creating a sustainable future and a circular economy. Just as people fight for superficial likes they could be provided with a platform that makes them fight for recognition - that acknowledges their discipline and dedication towards a sustainable future.

 

A crucial element in the future horizontal governing structures that might enable the economy of the future is managing responsibility and shared ownership. The most interesting thing that is already evident in the most popular DAOs is a total transparency in records, bookkeeping, arguments and decision making. Today corporations only expose whatever they explicitly need to expose and it is not unheard of for entities to commission distorted research that might favor specific business outcomes. A commonly managed organization on the other hand operates in a state of total transparency. Every account, every transaction, every commission and every decision is recorded for posterity on the blockchain. The system - by design - makes it impossible to hide anything from the public at large. 

 

Progressive Decentralization

 

Distributed governance will not happen immediately. It will probably follow a process of first consolidating small wins, and later slowly decentralizing governance to users and circular economy adopters. Progressive decentralization is more apt as a process that slowly decentralizes initially hierarchical organizations and then opens up to a process of slow but consistent and steady adoption. 

 

As most forms of successful innovation, adoption will start slowly, and then all of a sudden. One can imagine a future in which special economic zones based on sustainability and zero carbon manufacturing could incentivize businesses to slowly transform their practices. In a decentralized near-future it is not inconceivable for these zones to transform into charter cities. A charter city is the ultimate form of urban devolution: a local government system where everything that can be devolved from higher, more abstract forms of government, is devolved to the local level. The financial independence that has seen SEZs thrive all around the world might soon be extended to other domains. Soon charter cities could draft their own fiscal legislation, their own economic development policies - they could co-exist as highly independent islands in the traditional nation-state government.

Similar attempts have happened before - albeit in different forms. Netflix recently released a fantastic independent movie. (As a short juxtaposed addendum Netflix is an interesting instance that globally centralized an already super centralized industry: it not only finances movies all over the world but also provides a platform for their international dissemination.) A cool Italian movie which often might have never made it beyond national borders, is suddenly all the rage in our super-connected world. Rose Island tells the true story of the rise and fall of an informal, independent micronation outside of Italy's territorial waters; one of numerous independent micronations that sprung out in the 60s. Considering that 50% of the planet's surface is mare liberum - international waters that do not belong to any State's jurisdiction - it is interesting how we do not see even more examples of independent sea steading. A handful of attempts seem to be pioneering the way to water based city-states; which never fail to remind of a prescient movie that dealt with sustainability and a circular economy more than twenty five years ago: Waterworld.

 

These novel forms of organization might also take the shape of self-sustaining carbon-neutral circular independent entities. One could foresee an international network of closed-loop urban projects which could easily connect and form an alternative urban reality - similar to virtual gated communities. These new cities - while fully integrated with one another - might rarely interact with the outside world. Alternatively their interaction with the outside world might be strictly on a zero-carbon basis. That would mean that any goods or services brought from outside the network - imports as we colloquially know them - have to be carbon-settled. All embedded energy stemming from the production or transportation of goods could be automatically tracked on an energy blockchain.

 

The state of Wyoming recently passed legislation which establishes a process for incorporating Decentralized Autonomous Organizations. This is one of the first examples of cracks in the invisible barrier between digital and physical assets. This is fairly significant as it gives individuals and their block-chain based organizations access to a legal environment in which they can begin operating. This change also creates an opening for DAOs to begin exercising rights in the physical world. This might be only the first step in future sea changes in urban ownership, planning and management.

Credits

This research is made possible by the generous contribution of our Partner ENI.

Bibliography
Alexander, Andrea, et al. “To Weather a Crisis, Build a Network of Teams.” McKinsey & Company, McKinsey & Company, 22 July 2020, www.mckinsey.com/business-functions/organization/our-insights/to-weather-a-crisis-build-a-network-of-teams.

Sofis, K. Making it local: Urban Manufacturing in San Francisco and Beyond. London, 2019

City of San Francisco, Make to manufacture - advanced manufacturing playbook. The San Francisco Mayor’s Office of Civic Innovation, San Francisco Office of Economic and Workforce Development and SF Made. 2016., p.3

Murphy, Hannah. “'DeFi' Movement Promises High Interest but High Risk.” Financial Times, 30 Dec. 2019, www.ft.com/content/16db565a-25a1-11ea-9305-4234e74b0ef3.

Taleb, Nassim N. Skin in the Game: Hidden Asymmetries in Daily Life. London: Allen Lane, 2018., Location 1225-1240

Jesse Walden, Progressive Decentralization: A Playbook For Building Crypto Applications, https://a16z.com/2020/01/09/progressive-decentralization-crypto-product-management/

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