Blockchain protocol design as public policy

Most people don't associate career opportunities in tech with a degree in public policy. The blockchain changes this.

The blockchain has, for a long while, valued the engineers and product people who have built it. But as blockchains scale and become more ubiquitous as critical technology, the experience in public policy become more relevant.

How?

Unlike other technology waves, the blockchain introduces economic and social dynamics that borrow from public policy disciplines: economics, sociology, and governance.

The strongest application is economics, specifically the incentive and mechanism designs. On the blockchain, poorly designed incentives that fail to address externalities, bad actors, or changing behavioral dynamics can fail; unlike public policy, which can be changed with a vote or executive order, the blockchain's decentralized and "contract as code" nature makes these changes harder and slower.

Because the incentives often are economic (the tokens have real value, either tradable for real fiat or representative power over resources), the stakes are very real and mistakes can be catastrophic.

On the other hand, there's a purity in running governance, incentives, and overall policy in the blockchain because it's code: removing middle-men and replacing with smart contracts, blockchains remove bureaucracy and counterparty risk. Policies can be coded algorithmically and can be enacted based on provable metrics on-chain.

So what are some examples?

Mechanism designs

For financial products, poorly designed mechanisms regarding how blockchain protocols behave in core ways such as determining interest rates, identifying collateral ratios, and penalizing bad actors through slashing on-chain funds borrow primarily from engineering and economics. But the public policy aspect of thinking through the possibilities of shocks, adverse selection, and decentralization (the blockchain's version of democratic participation) lean on public policy background strong in both quantitive, theoretical and philosophical economics.

Within the protocol design space, especially in finance or protocols with advanced crypoeconomic designs, public policy can help provide the guidance to prevent bad behaviors.

But the inverse is also true: public policy not only can enter the blockchain industry, but they can bring blockchain innovations into existing public policy spheres.

Public policy innovations

Imagine being a policy leader in local transportation.

The blockchain creates a decentralized way to offer ride share that doesn't capture rents for a centralized corporation; instead, it can offer a similar orchestration of riders and drivers within a city while ensuring prices aren't raised asymmetrically to capture profits, but funds the on-going concern on the blockchain and lowering prices in the case of surplus. Or incentivizing youths who graduate from work-force training to become drivers; or integrating with, rather than competing, with existing public transportation.

Many of these tools already exist to operationalize such a project; the advantage of a public policy innovator is that they have visibility and scale to build the critical mass that once relied on venture capital to reach. By using the blockchain, the orchestration and expensive overhead can be reduced and local developers can be incentivized to contribute and extend the service.

Consider local health insurance franchises as alternative to large conglomerates.

City leaders can create local health coverage by partnering with service providers, employers, and individuals to begin to offer insurance that not only streamlines the process, but offers rates based on real insights for more accurate risk assessment while limiting profit taking (which is not possible to do with traditional health insurance providers). Large enough cities or counties can incentivizes employers to offer a blockchain based insurance that has a transparent and auditable premium, fund, and payouts; policy makers can algorithmically design the contracts to calculate risks, payout limits, and premiums that removes profits and incentivizes positive health behaviors (exercise, diet).

Because the service runs on the blockchain, there isn't an opaque profit-seeking operation; instead, the mechanism design needs to algorithmically balance adequate coverage, lower premiums, and provider pricing in a transparent and game-theoretically robust way.

So what are the key ways for a public policy leader to start to look at blockchains to address public policy issues?

Primarily a digital experience
Opportunity to disrupt global rent seekers
Local network effects sustainable
Algorithmically robust public policy

I described two policy areas which are possible and fit this criteria: local transportation and health insurance.

Other possible areas include: economic development through small business lending and workforce training.

What is a viable partnership?

Often the public private partnerships face challenges typical of the principal agent problem: whether a consultant or an investment partner, the incentives often don’t align.

Blockchain public policy can support a blockchain studio providing consulting and development to cover work, and the upside is in the value of tokens issued to align with the success of the project. If the project shows lack of success later, the studio doesn’t gain the upside or can even be slashed.

Because blockchain projects are open sourced, if another government wanted to adopt the same infrastructure, they could without reinventing the wheel; and the initiating government could recoup some of their original costs by taking some of the fees as royalties. Both players win, and a symbiotic relationship amongst governments develops versus the silos when dealing with private centralized corporations.

Unlike traditional public-private partnerships, this aligns real "skin in the game" between the consulting firm, which shares in long-term upside but also shares in the pain from declining usage; the service has transparent treasury -- fees coming into the service, as well as "licensing" fees as adoption grows by other counties or cities.

This is very different from the relationship with traditional software companies such as those that provide local governments with voting software: the upgrade path is cumbersome and antiquated; the relationship is rent-seeking; there are no joint economies of scales the benefit the governments, only the private software vendor.

Final thoughts

There are two paths I summarized: public policy who want to lean further in understanding decentralized technologies and mechanism design (economics and engineering) and add a public-policy "flavor", especially around governance, fees/taxation, and misaligned incentive design; or (the area I believe is truly exciting) to apply blockchains to solve public policy issues.