Nakamoto Village and the Social Fabric of Machines

A fanciful then philosophical discussion of blockchain technology with implications for the machine-to-machine economy

Nakamoto Village

Across the ocean of impossible depths and beyond the beach of fractal sands lies the imaginary town of Nakamoto Village. Like most towns, the denizens of Nakamoto Village have a system of accounting for the goods and services they produce and consume. Most towns throughout history have used metal or paper currencies to keep track of such things, with more modern cities using electronic ledgers stored in bank databases. However, Nakamoto Village uses a completely different technique for tracking the transfer and storage of value. Where we use forms of money, Nakamoto villagers use something called a distributed ledger.

When two people in the village wish to exchange value, say Alice wants to buy something from Bob, every member of the village stops what they are doing, takes out a special piece of parchment, and pays attention to them. Alice announces to the entire village that she wishes to send Bob 5 units of value. Every person in the village checks their parchment, which is a ledger storing the units of value that everyone in the village has. They all look up Alice, and if she has 5 or more units they make a record of the transaction for historical purposes, subtract 5 units from Alice’s balance, and increase Bob’s balance by 5 units. They then confirm with fellow townsfolk to ensure they all recorded the same transaction. If Alice doesn’t have enough units for the payment she wishes to make, then the townsfolk deny the transaction and Bob holds onto his goods.

There are no physical coins or paper currencies in Nakamoto Village. This means there is no cost to producing the medium that carries value, it is pure information. There is no mining precious metals or stones, no printing paper with designs that have to be constantly updated to keep ahead of counterfeiters, and no need to trust banking families or companies to keep track of balances and act in good faith.

Cerro Rico

In 1545 as the Spanish were tromping through South America, they stumbled upon a mountain they would call ‘Cerro Rico’ or ‘Rich Mountain’. The mines in this mountain would supply Spain with massive amounts of silver. The increase of silver in Spain mixed with the Chinese appetite for silver led to greater trade between Europe and China. The Spanish crown thought the discovery of silver would make Spain wealthy. Instead, the influx of silver ended up causing massive inflation and contributed to the decline of the Spanish Empire. The flow of silver into China also had negative consequences and contributed to the collapse of the Ming Dynasty.

When using a natural commodity like gold or silver there is always a possibility that someone could discover a large amount of it, making themselves rich while making everyone else poorer by diluting their stake. The Nakamoto Village system of accounting is safe from accidental inflation through natural discovery and it is also safe from a central authority devaluing the currency by printing too much. Hyperinflation due to an overprinting of a currency has happened many times in history and has been a part of the economic collapse of various nations.

Eve in Disguise

It is also impossible in Nakamoto Village for anyone to forge money or spend someone else’s units of value. If someone tries to claim more units than they have, the townsfolk simply check each of their ledgers to know their true balance. If someone tries to spend someone else’s units, in effect pretending to be them, the townsfolk can simply ignore it because they all know each other and can see the person isn’t who they are claiming to be.

The Nakamoto Village system keeps track of everyone’s wealth while being tamper resistant, forgery proof, inflation resistant, and not controlled by any individual or organization. If you move the time consuming task of observing and recording transactions onto computers while using cryptography to verify identities and keep people from moving coins they don’t own, you have the basic foundation for a blockchain.

A blockchain is a shared, distributed ledger that uses cryptography and software code to allow a diverse group of entities to keep track of value and asset transfers without needing to trust each other.

The Collective Consciousness of Machines

“But he hasn’t got anything on,” a little child said.
“Did you ever hear such innocent prattle?” said its father. And one person whispered to another what the child had said, “He hasn’t anything on. A child says he hasn’t anything on.”
“But he hasn’t got anything on!” the whole town cried out at last.

-Hans Christian Andersen, The Emperor’s New Clothes

When dealing with the logic of knowledge and belief, philosophers sometimes refer to two concepts known as mutual knowledge and common knowledge. When everyone knows something, it is mutual knowledge. When everyone knows something, and everyone knows that everyone knows that thing, and everyone knows that everyone knows that everyone knows… and so on, that is common knowledge. In The Emperor’s New Clothes, when the emperor was parading naked in front of the town, the fact that he was naked was mutual knowledge. That mutual knowledge became common knowledge when a child yelled out, “But he hasn’t got anything on!” and the entire town shouted out in agreement.

The difference between mutual and common knowledge is why free speech is so important for keeping tyranny at bay. Without free speech there can be mutual knowledge that a dictator is dangerous, but if no one can be sure others believe the same they can’t safely voice their concerns or stir up a revolution. Free speech allows subversive mutual knowledge to safely become revolutionary common knowledge.

Common knowledge is not just about revolutions. In order for a society to share beliefs, ideas, and morals, people need to be aware that others share their thoughts. A collective consciousness requires some common knowledge. From Christmas and Santa Claus to democracy, property rights, money, and freedom, common knowledge is part of how culture emerges.

On the Internet, data stored on one computer can end up passing through thousands of other computers in seconds. This has helped democratize knowledge for us humans, but it has kept machines as passive processing and storage devices. Machines may “know” the data they contain and may even come to “know” the data other machines have, but they can’t ever know that other machines know something. Computers have been stuck with mutual knowledge, until now. Blockchains are how machines achieve common knowledge. Blockchains are how machines can have culture.

Towards a Machine-to-Machine Economy

The town of Nakamoto Village used their system to record the transfer of money, but they could have just as easily kept track of the transfer of any asset including land, stock, bonds, cars, houses, and so on. For purely informational assets such as money, stocks, and bonds, a transfer on the villagers’ ledgers is the transfer of the asset itself. For physical assets such as land, houses, and cars, the transfer is merely a change of the record keeping function that represents ownership. Today these kinds of ownership records are normally kept in buildings or databases by government offices or corporate entities which are expensive to maintain and query, and are also subject to mistakes, data loss, and corruption.

Bitcoin was the first blockchain. Like the system used in our imaginary town, it was created to move digital money around without a central controlling party. Some have extended the Bitcoin blockchain to store and transfer other digital assets, although these usually require computation outside of the blockchain and so don’t work for giving machines common knowledge. Machines sharing knowledge about financial transactions is great, but any economy or society needs a whole lot more than just common knowledge of monetary balances in accounts to exist, let alone thrive.

In the 18th century BCE, the Babylonian king Hammurabi had the laws of his land engraved into a giant stone stele and erected in a public place where all could see. This enabled the laws to become common knowledge (at least for those few who were literate). For commerce to grow and society to function there needs to be rules and ways of disincentivizing cheating so that people can assume a certain amount of trust. Think how difficult it would be to drive to your job if you couldn’t trust that everyone else would drive on the correct side of the road and stop at red lights. Imagine how impossible it would be to build a company if you had to assume any contract you entered into would be broken.

Sometimes rules can be made such that market forces can replace punishment for incentivizing honest behaviors and creating trust. Reputation and rating systems used within online markets such as Amazon and Ebay have allowed us to trust complete strangers in parts of the world where our country’s laws have no jurisdiction. Cheaters are found by people taking risks and purchasing from new vendors, and then sharing the outcome of the exchanges with everyone else. These are the kinds of systems we’ll need in a blockchain for a machine-to-machine (M2M) economy to flourish.

IBM has argued that the current Internet of Things (IoT) isn’t working and needs a reboot with blockchains playing an integral part. While some have envisioned Bitcoin becoming a part of the M2M economy, it should be clear by now that you can’t build an economy on payments alone. If a machine buys weather data from another machine it has no way of knowing if the data is accurate. Machines will need rating and reputation systems and those systems will have to be a part of their common knowledge. The machine culture will need to be a deep and fully featured culture, not just one of payments.

Ethereum is a next generation blockchain that is capable of driving the M2M economy. Ethereum can move around currency and assets like Bitcoin, but it also has what are called smart contracts built in. Just like the money on blockchains are digital forms of physical cash, smart contracts are digital forms of the laws and contracts in our human world. Smart contracts can be used to create the rich historical rating and reputation systems needed to incentivize a functional M2M economy. With smart contracts, payments could even be tied up and made conditional on future events. A cleverly written contract could mean that a dishonest machine wouldn’t end up profiting at all, even before other machines knew it was cheating. Payments could be tied up and made conditional on future reputation. This could let market forces work even better for machines than they do for us.

What will the common knowledge of machines lead to? What will a fully featured machine culture and a true M2M economy mean for our future? The challenge to find the right set of rules for the M2M economy is not easy and will probably take a long time to solve, but when it happens we can expect to see the world change before our eyes.


References and further reading

Wikipedia – Cerro Rico
Wikipedia – Potosí
Wikipedia – Economic History of Spain
Weatherford, Jack – The History of Money
Ferguson, Niall – The Ascent of Money: A Financial History of the World
Wikipedia – Decline and fall of the Ming Dynasty
Wikipedia – Hyperinflation
Wikipedia – Collective Consciousness
Wikipedia – The Emperor’s New Clothes
Wikipedia – Modal Logic
Wikipedia – Mutual Knowledge
Wikipedia – Common Knowledge
Wikipedia – Culture
Wikipedia – Bitcoin
Wikipedia – Code of Hammurabi
Device democracy – Saving the future of the Internet of Things (IBM)
Ethereum Project

“Nakamoto Village” and “Eve in Disguise” artwork by Madelyn Havelka
Cerro Rico picture from Wikipedia.org