Embracing Plutocracy 🤑
Three Things #159: March 2, 2025
In a previous life, I worked for six years in traditional finance. It was good training and I learned a lot, but over time I felt more and more that my work wasn’t aligned with my values. I was more interested in helping everyday people build wealth than I was in helping institutions and the already wealthy. I was attracted to the blockchain and cryptocurrency space because of the possibilities it offered for democratization. This includes democratized access to financial tools and services. It also involves the creation of more participatory networks and systems in general that everyday people—not only wealthy, well-connected, privileged insiders—could access on the same terms as everyone else.
I fought long and hard for that vision for many years. I worked hard to design and build systems that are as inclusive and participatory as possible. One important aspect of that, for me, has been pushing back against plutocracy. In my opinion, plutocracy—rule by the wealthy—is the default state of human affairs. It clearly works, and it’s efficient, which is why every company on earth is a plutocracy. But it’s an old system, and we have novel, powerful tools and technologies at our disposal. Surely we can do better, I thought. Surely there are fairer, more democratic, more open and participatory systems.
This is one reason I pushed back hard against on-chain governance systems in the early years, because basically all of them were designed as plutocracies. It’s one of the main reasons I’ve always disliked proof of stake. It was a big part of my motivation for working on Spacemesh for nearly six years.
And yet I’ve recently joined the NEAR Foundation to work on building an on-chain governance system for a proof of stake protocol. I need to explain why, and why I’ve changed my mind about these things. This is something I wasn’t able to speak to when I wrote about my motivation for my recent transition.
Thing #1: United States 🏛️
One place where plutocracy is ascendant is in government in general, and the United States government in particular. All elections are plutocratic: those who are wealthy and well-connected can affect public opinion and can sway the vote at least somewhat through things like advertising and other forms of campaign spending. But this most recent election was one for the history books. Around $16B was spent on the election, and the super PACs played a significant role. It was an election where the billionaires, including Trump supporters like Elon Musk and Vivek Ramaswamy, really took the day.
Things also seem more plutocratic than before in the sense that, according to some friends who are insiders, everything and everyone these days is on sale. While I haven’t seen any hard evidence, it’s supposedly possible to pay for political appointments. It’s supposedly possible to purchase a presidential pardon. A friend who grew up in the Soviet Union and now lives in the United States told me candidly that the USA today reminds him of the Soviet Union of his childhood, where everything and everyone had a pricetag and everything was on sale. He said he thought he had escaped that by coming here, and that he finds the thought depressing.
While I generally support most of Trump’s policies, hearing these stories makes me really sad. In the same way that, to me, blockchain and cryptocurrency represent a better possible future, thanks to a powerful, novel set of tools and technologies, the United States stands for, or at least used to stand for, the same thing. At the time of its founding, the US Constitution and the democratic system with balance of powers was truly enlightened and truly groundbreaking. It’s remarkable that it’s stood the test of time since then, something that was far from given when it was conceived and founded. Grift, corruption, and underhandedness are how politics was always conducted, and how it’s still conducted in most places. We can and should stand for something better.
At the same time, however, I sort of feel like it can’t be avoided. As I wrote last week, our government has grown too large, too unaccountable, and too corrupt by some accounts to be reformed gradually, from the inside. The only person, or group of people, capable of the task are demolitionists like Trump & Co. who are going to take sledgehammers to the facade of power and make deep structural changes that are sorely needed. As I wrote last week, that simply cannot be done without breaking some eggs. And it seems that an unavoidable byproduct or side effect of that structural change is some degree of grift and corruption. I’m just not sure that you can have one without the other.
With respect to modern politics, I would not by any means say that I’m embracing plutocracy, but rather that I’m grudgingly willing to tolerate it for some period of time as an expedient measure towards other critical changes for the better. It should be possible to have big change without corruption, and with stronger, better leaders, we’ll eventually get there.
Thing #2: Consensus 🤝
In the beginning there was Bitcoin, and Bitcoin was proof of work. Ethereum started this way too, but transitioned a few years ago to proof of stake. Since then, basically every protocol on earth (other than Bitcoin) has embraced proof of stake. Where proof of work is permissionless and meritocratic—anyone, anywhere, at any time can bring miners online to compete and earn coins—proof of stake is nepotistic and isn’t permissionless. You need someone to sell you coins in order to start mining, and quite a lot of coins if you want to mine at scale. The vast majority of those coins tend to be sold to insiders early on, and a tiny, invisible cabal of miners can effectively capture the network if they control more than half of the stake.
I pushed back on Ethereum’s transition to proof of stake on these grounds, and it was one of the reasons I left Ethereum in 2019. I still think that proof of stake is deeply flawed in some fundamental ways. I spent nearly six years building an alternative called proof of spacetime at Spacemesh, which was a “best of both worlds” approach that had the best properties of both proof of work (permissionless) and proof of stake (environmentally friendly).
It’s good that we built and tested proof of spacetime at scale. It’s good that alternatives exist. But the reality today, six years later, is that basically everyone is still using proof of stake. The biggest flaw of proof of spacetime, and one reason it hasn’t been more widely adopted, is that it’s extremely complicated. It’s difficult to explain, difficult to reason about, and difficult to implement. That makes running the software complicated, much more than for proof of work or proof of stake. There are a lot of parameters to fine tune, and miners have to experiment and constantly tweak parameters and settings. There’s also the downside of having to make all of your miners replot all of their storage when you upgrade the protocol.
Despite my objections, I understand why proof of stake has won. First of all, it’s cheap. Protocols that use proof of stake can pay less for security than those that use proof of work, since mining (running a validator) is much cheaper and easier than running a proof of work miner. Secondly, it’s simple. Once we understood basics like slashing (in order to avoid the nothing-at-stake problem), economic security, and delegation, proof of stake became pretty easy to implement, and most protocols do more or less the same thing. There are now many battle-tested, off-the-shelf designs and implementations to rely on. Proof of stake also has some nice properties in case the protocol gets attacked.
So proof of work isn’t ideal because it’s so energy intensive and expensive, and proof of stake isn’t ideal for the reasons explained above. Proof of spacetime is overly complex and is still immature. What other alternatives exist?
Sadly, there aren’t any. There are vanishingly few practical alternatives to proof of work and proof of stake, even after all these years. There are obscure alternatives like proof of burn and variations on proof of stake like proof of liquidity. There’s also several protocols that are building a form of “proof of humanity” that might make sense for some applications, but that wouldn’t work for miners of a layer one blockchain.
Proof of spacetime was designed to be this alternative. It’s supposed to be democratized and fair to the little guy. The vision for proof of spacetime was to pick a scarce, valuable, but nevertheless widely endowed resource that miners would commit to the protocol. Not everyone has access to a Bitcoin mining ASIC, and not everyone has access to 32 ETH to run an Ethereum validator, but basically everyone has access to some free hard drive space.
That fairness proved almost impossible to maintain in practice due to economies of scale. No matter how much you try to democratize access to mining, no matter how easy you try to make it for the little guy, large players—whales, professional mining operations, those with access to cheap hardware, etc.—are always going to have a huge advantage. Even if rewards are precisely linear in the amount of space you commit to the protocol, even if smaller miners are able to earn rewards without joining pools, there are still plenty of incentives to join pools, which end up dominating the protocol and working against the goal of decentralization. And the protocol simply cannot scale to millions of tiny home miners.
Proof of stake, especially the dPoS variant, by contrast, explicitly leans into these economies of scale. A small number of validators, on the order of tens or hundreds, receive the lion’s share of the stake (from those small home miners) and do the lion’s share of the work securing and operating the network. In practice, this is how the real economy works. We don’t all bake our own bread or build our own automobiles. We allow scale economies to do their thing, and we allow companies to specialize. Democratizing access to mining sounds nice in theory, but it doesn’t work so well in practice, no better than expecting everyone to bake their own bread and build their own cars. It’s no longer clear to me that the blockchain economy should be different from the real economy in this respect: there’s nothing inherently wrong with specialization.
As much as it pains me to admit, proof of stake is an economically rational way to run a blockchain. It doesn’t mean that there won’t be plenty of other opportunities up and down the stack, especially at the application layer, to create economic opportunity and value for everyday participants. That’s where my focus is today.
Thing #3: Governance 🗳️
Which brings us to the last and maybe most important arena where plutocracy has a role to play, and the thing I’m currently focused on: governance.
Consensus and governance actually have a lot in common, more than most realize. They both involve making decisions, coming to shared agreement, and allocating scarce resources. The best version of each requires that the participants have skin in the game. As such, there are many ways in which consensus research and design can inform governance design.
For instance: both are vulnerable to sybil attack. In consensus, if you try to implement a one-person-one-vote, democratic system, it simply won’t scale. It might work with a few known actors who have their reputation on the line, or where there’s legal recourse if things go wrong. This is known as proof of authority. But if you open the floodgates to hundreds of participants, or thousands, or even more, there’s simply no way to prevent sybil attacks or to hold so many participants accountable. The same thing is true of governance. This is why it’s so important that all participants—in consensus and in governance—have skin in the game, such as in proof of authority (i.e., personal reputation), proof of stake, or the vote escrow governance model. This ensures there’s a way to reward good actors and punish bad actors.
I believe that, as flawed as it is, democracy is the best tool we have for real-world, jurisdiction-based governance. Naively, it’s tempting to think that we should do the same thing on chain. I used to think so. Indeed, some protocols have gone as far as to set up multicameral on chain governance systems with systems of checks and balances, emulating “real world” governance systems.
But these “real world” systems tend to break down when we attempt to implement them in code, for several reasons. For one thing, it’s simply too hard to build trust virtually. We’re good at trusting the people we see every day face to face, but no system currently exists to build that trust online. For another, there’s no good way to bootstrap identity and ensure that people are who they say they are online. You can have participants in governance who are pseudonymous, but they simply don’t have the same skin in the game as known, identified actors who have their reputation at stake, because a pseudonymous actor can always burn their identity and create a new one (this is why I’m inherently distrustful of pseudonymous actors). You can do things like KYC, checking government-issued IDs, etc., but this is highly centralized, fragile, and relies on existing, off-chain governance systems, so it’s not self-hosting or sovereign. And it violates the privacy of participants.
But the biggest reason I’m deeply skeptical of on-chain democracy is the fact that blockchains account for assets, not people. There is simply no reliable, decentralized, fair way of determining that a particular account or wallet address belongs to a unique human actor. There are many attempts to do this, including World ID, and I think they’ll work to some extent, but as I wrote before I don’t think there is or will ever be a truly robust, scalable, decentralized system that works.
Which, unfortunately, brings us back again to the lowest common denominator: assets, a.k.a. wealth. It’s trivially easy to build a governance system that works a bit like proof of stake. Those who want to participate can stake, or “escrow,” their assets into a special program which in turn grants them some degree of authority or participation rights in governance. Typically, those participants who remain active, who submit and review proposals, who vote on them and share their rationale for voting, etc., receive some degree of reward or compensation, as do those who delegate their voting authority to those participants (again, in a manner very similar to dPoS). Furthermore, the locking or escrow mechanism aligns incentives: there’s an opportunity cost associated with locking one’s assets, and the lock mechanism ensures that participants can’t “vote and run” and will instead themselves be affected by the governance process, via exposure to the token.
The counterargument is that this is basically plutocracy with extra steps. Those who have the greatest wealth and power always have the greatest influence over governance. Token-weighted voting systems simply codify this in a more explicit, visible fashion. I don’t think they’re good, or bad, they just are a practical reality. They’re a recognition of the way the world really works. They’re the practical, rather than idealistic, straightforward way of doing on-chain governance, which is why basically everybody does them.
Perhaps someday will eventually come up with something practical that’s better, fairer, and more democratic, but with every passing year I think that’s less likely. We want to do the most sensible thing for NEAR governance, and the token-based House of Stake system that we’ve designed and are in the process of implementing is that thing, at least for now.