The Breakdown - A Primer on Balaji’s “Network State”

Episode Date: July 18, 2022

This episode is sponsored by Nexo.io, Chainalysis, FTX US and Ava Labs.   On this week’s Long Reads Sunday, NLW reads the “essay” version of Balaji Srinivasan’s new book “The Network State”    - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Ava Labs releases Core, the free, non-custodial browser extension, built for the power of Avalanche. Core is an all-in-one operating system bringing together Avalanche apps, Subnets, bridges and NFTs in one seamless, high-performance experience. Eager to start using Web3 dapps to their fullest potential? Download today at core.app! - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: Andriy Onufriyenko /Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDes. What's going on, guys? It is Sunday, July 17th, and that means it's time for Long Reads Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you If you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX.

And finally, this week I have loved having Aval Labs as a sponsor. Did you know you can bridge Bitcoin natively across the Avalanche bridge and take advantage of the thriving defy ecosystem on Avalanche? This is just one of the innovative features of CORE, the new non-custodial browser, extension and wallet developed by Avalabs. Core is engineered for Avalanche users to have the most secure and seamless Web3 experience. Easily swap assets, display your NFTs in style, and store your assets in a ledger-enabled wallet. Plus, you can put real dollars in your Core wallet in just a few clicks.

Go to core.app to access the full power of Web3 on Avalanche, and thanks again to those guys for sponsoring the show this week. Now, today we are doing an LRS that I am extremely excited for. Balaji Shrenavasan is one of the most interesting thinkers in the crypto space, or really just the internet world writ large. He has been on the show, of course, and it was one of my favorite, wide-ranging, big think-type episodes that we've ever had. Now, Balaji has been a little quiet for a while, and what he's been working on is a new book project called The Network State. He has made the entire book available to read online at the NetworkState.com. Of course, you can buy it

on Amazon for easy consumption on your Kindle or download a PDF as well, but the way that he's set it up on the website is really cool. In particular, he has a quick start section, which sums up the book in one sentence, one image, one thousand words, and one essay. Today I'm going to read the one essay summary, but I'm also going to read the one sentence summary as a way to kick us off. He writes, in one informal sentence, a network state is a highly aligned online community with a capacity for collective action that crowd funds territory around the world and eventually gains diplomatic recognition from pre-existing states. When we think of a nation state, he writes, we immediately think of the lands, but when we think of a network state, we should instantly

think of the minds. That is, if the nation-state system starts with the map of the globe and assigns each patch of land to a single state, the network state system starts with the seven-plus billion humans of the world and attracts each mine to one or more networks. Here's a more complex definition that extends that concept and preemptively covers many edge cases. A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population,

income and real estate footprint to attain a measure of diplomatic recognition. He saw, sums up this one sentence section, okay, that's a mouthful. It's lengthy because there are many internet phenomenon that share some, but not all of the properties of a network state. For example, neither Bitcoin nor Facebook nor a Dow is a network state, because each lacks certain qualities like diplomatic recognition, which are core to anything we think of as the next version of the nation state. So that, I imagine, is enough to get you excited, so let's read the network state in one essay. A proposition is not a nation, though it can become one. Here we describe a peaceful, reproducible process for turning an online community premised on a proposition

into a physical state with a virtual capital, a network state, the sequel to the nation state. We want to be able to peacefully start a new state for the same reason we want a bare plot of earth, a blank sheet of paper, an empty text buffer, a fresh startup, or a clean slate, because we want to build something new without historical constraint. The financial demand for a clean slate is clear. People buy millions of acres of vacant land and incorporate hundreds of thousands of new companies each year, spending billions just to get that fresh start. And now that it's possible to start not just new companies, but new communities and even new currencies, we see people flocking to

create those as well. The societal value of a clean slate is also clear. In the technology sector alone, the ability to form new companies has created trillions of dollars in wealth over the past few decades. Indeed, if we imagine a world where you couldn't just obtain a blank sheet of paper but had to erase an older one, where you couldn't just acquire bare land but had to knock down a standing building, where you couldn't just create a new company but had to reform an existing firm, we imagine endless conflict over scarce resources. Perhaps we don't have to think too hard to imagine this world. It resembles our own. In the distant past, people could only write on clay tablets. In the recent past, they were executed for contemplating entrepreneurship, and in the immediate

present they are arguing over replacing an ancient gas station. In these times and places, making a fresh start has been technologically infeasible, politically impossible, or judicially punishable. And that's where we are today with countries, cities, nations, governments, institutions, and much of the physical world. Because the brand new is unthinkable, we fight over the old. But perhaps we can change that. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto,

you need a trusted partner by your side. NXO is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about NXO's reliable business model and start your crypto journey at nexo.io. That's N-EX-X-O.I-O. Eager to make more informed decisions around crypto, chainalysis is here to help. Chainalysis demystifies cryptocurrency. by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets.

For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets. with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S.

FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show. How to Start a New Country. There are at least six ways to start a new country. Three are conventional and three are unconventional. We will introduce them only to deprioritize them all in favor of a seventh. The most conventional way to start a new country involves winning sufficient power in an election

to either, A, rewrite the laws of an existing state, or B, carve out a new one from scratch with the recognition of the international community. This is the most widely discussed path and by far the most crowded, perhaps too crowded. Number two, revolution. The second obvious way is a political revolution. We don't advise attempting this, particularly momentous elections are sometimes referred to as revolutions, though a revolution frequently involves bloodshed. Revolutions are infrequent, but everyone knows that they mean a new government. Number three, war.

The third conventional way to form a new state is to win a war. We don't advise attempting this either. A war is, of course, not independent from the other two. Indeed, both elections and revolutions can lead to wars that end up carving out new policies. Like a revolution, a war is infrequent and undesirable, but it is a means by which to redraw state borders. Number four, micronations. Now we get to the unconventional.

The most obvious of unconventional approaches and the one most people think of when they hear the concept of starting a new country. Occurs when an eccentric plants a flag on an offshore platform or disputed patch of dirt and declares themselves king of nothing. If the issue with elections

is that too many people care about them, the issue with these so-called micronations is that too few people care. Because a state, like a currency, is an inherently social affair, a few people in the middle of nowhere won't be able to organize a military, enforce laws, or be recognized by other countries. Moreover, while an existing state may be content to let people harmlessly larp a fake country

in their backyard, an actual threat to sovereignty typically produces a response with real guns, whether that be the Falklands or Sackoline. Number five, Seasteading. Here's where things start to get interesting. Conceived by Patry Friedman and backed by Peter Thiel, seesteading essentially starts with the observation that cruise ships exist and asks whether we could move from a few weeks on the water at a time, to semi-permanent habitation in international waters, with frequent docking, of course.

If the cost of cruise ships falls, this approach becomes more feasible. But while there are individuals who live on cruise ships year-round, we haven't yet seen a scaled example. Number six, space. Perhaps the most prestigious of the start a new country paths is the idea of colonizing other planets. Unlike sea-steading or micronations, space exploration started at the government level has been glamorized in many movies and TV shows, so it enjoys a higher degree of social acceptability. This path is typically received. is temporarily technically infeasible rather than outright crazy.

Elon Musk's SpaceX is one entity seriously contemplating the logistics of starting a new state on Mars. Number seven, network states. And finally, we arrive at our preferred method, the network state. Our idea is to precede cloud first land last. Rather than starting with the physical territory, we start with the digital community. We create a startup society, organize it into a network union, crowd fund the physical nodes of a network archipelago, and in the fullness of time eventually negotiate for diplomatic recognition to become a true network state.

We build the embryonic state as an open-source project. We organize our internal economy around remote work. We cultivate in-person levels of civility. We simulate architecture in VR, and we create art and literature that reflects our values. When we crowdfund territory in the real world, it's not necessarily contiguous territory, because the underappreciated fact is that the internet allows us to network enclaves. Put another way, a network archipelago needs to be. not acquire all its territory in one place at one time. It can connect a thousand apartments,

a hundred houses, and a dozen cul-de-sacs in different cities into a new kind of fractal polity with its capital in the cloud. Community members migrate between these enclaves and crowd-fund territory nearby, with every individual dwelling in group house presenting an independent opportunity for expansion. And with a thousand such enclaves rather than four directions to expand, north, east, south, and west, there are more like four thousand. What we've described thus far is much like an ethnic diaspora, in which emigrants are internationally dispersed but connected by communication channels with each other in the motherland. The twist is that our version is a reverse diaspora, a community that first forms on the internet, builds a culture online, and only then

comes together in person to build dwellings and structures. In a sense, you can think of each physical outpost of this digital community as a cloud embassy, similar to the grassroots Bitcoin embassies that have arisen around the world to help people better understand Bitcoin. New recruits can visit either the virtual or physical parts of a network state, beta test it, and decide to leave or stay. Now, with all of this talk of embassies and countries, one might well contend that network states, just like the aforementioned micronations, are also just a LARP. Unlike micronations, however, they are set up to be a scaled LARP, a feat of imagination practiced by large numbers of people at the same time, and the experience of cryptocurrencies over the last

decade shows us just how powerful such a shared LARP can be. Minimum Necessary Innovation Let's pause and summarize for a second. The main difference between the seventh method, network states, and the previous six, election, revolution, war, micronations, sea-steading, and space, is that the seventh straddles the boundary between practicality and impracticality. It is now feasible to build a million-person online communities, start billion-dollar digital currencies, and architect buildings in VR, to then crowdfund into reality.

The network state concept stacks together many existing technologies, rather than requiring the invention of new ones, like Mars-capable rockets, or permanent habitation cesteads. At the same time, it avoids the obvious pathways of election, revolution and war, all of which turn ugly and none of which provide much venue for individual initiative. In other words, the network state takes the most robust existing tech stack we have, namely the suite of technologies built around the internet, and uses it to route around political roadblocks without waiting for future physical innovation. What counts as a new country? Having outlined these seven methods, the careful reader will notice that we have played a bit

fast and loose with the definition of what a new country is. First, what do we mean by a new country? One definition is that starting a new country means settling a wholly new territory, like colonizing Mars. Another definition is that simply changing the form of government actually changes the country, like France moving from the Second French Republic to the Second French Empire. Rather than using either these strict or loose definitions, we will use both numerical and societal definitions of a new country. The numerical definition begins with visualizing a hypothetical nation-realestatepop.com, site similar to coinmarketcap.com, which aggregates the cryptographically audited census of startup societies aspiring to become network states. This dashboard would show in real time the number

of community members, the acreage of real estate owned by those members, and the community's on-chain income, a startup society with 5 million people worldwide, thousands of square miles of discontiguous community-owned land, and billions in annual income would have indisputable numerical significance. This in turn leads us to the societal definition. A new country is one that is diplomatically recognized by other countries as a legitimate polity capable of self-determination. A state with enough such bilateral relationships would have the social significance to gain a session to a group of free-existing states like ASEAN, the OAS, the African Union, the EU, or the United Nations. This combination of numerical and societal metrics matches the emergence

of cryptocurrency, initially ignored, then mocked as an obvious failure. Within five years after its invention, Bitcoin attained a billion-dollar market capitalization, a numerical success, and was subsequently listed on CNBC in Bloomberg alongside Bluechip's stocks, a form of societal recognition. At each step, Bitcoin could keep ascending numerically on its own, with greater societal recognition following in its wake. By 2020, it had changed the trajectory of the People's Bank of China, the IMF, Goldman Sachs, JP Morgan, and the World Bank. By 2021, Bitcoin became legal tender in El Salvador, a sovereign state, and by mid-2020, the Central African Republic had followed, with dozens more considering Bitcoin as legal tender, including Panama.

Most countries are small countries. Cryptocurrency could achieve these heights because money has both numerical and societal aspects. The numbers could be piled up before the societal accolades followed. Once Bitcoin had proven that it couldn't easily be counterfeited or hacked, the shared belief of the millions of cryptocurrency holders worldwide, was enough to get BTC from a value of zero to a market cap of billions. And from there to a listing on every Bloomberg terminal and exchange. Societal traction of this kind paved the way for more numerical traction and a virtuous cycle followed.

Could a startup society follow a similar path? Yes. A cryptographically auditable census could prove that a growing startup society had one to ten million committed digital citizens, large cryptocurrency reserves, years of continuous existence, and physical holdings all over the earth. That numerical traction could then be used to achieve the societal traction of diplomatic recognition. Why? Because most countries are small countries.

A new state with a population of one to ten million would actually be comparable to most existing states. That's because of the 193 U.N. recognized sovereign states, 20% have a population of less than 1 million, and 55% have a population of less than 10 million. This includes many countries typically thought of as legitimate, such as Luxembourg, 615,000, Cyprus 1.2 million, Estonia, 1.3 million, New Zealand, 4.7 million, Ireland, 4.8 million, and Singapore, 5.8 million. These user counts are surprisingly small by tech standards. Of course, mere quantity is not everything. The strength of affiliation to our hypothetical network state matters, as does the time on the property, the percentage of net worth stored in the currency, and the fraction of contacts

found in the community. Still, once we remember that Facebook has 3 billion plus users, Twitter has 300 plus million, and many individual influencers have 1 million plus followers, it starts to not be too crazy to imagine we can build a 1 to 10 million person startup society. with a genuine sense of national consciousness, an integrated cryptocurrency, and a plan to crowdfund many pieces of territory around the world. With the internet, we can digitally sew these disjointed enclaves together into a new kind of polity that achieves diplomatic recognition, a network state. So there you have it, the network state in one essay. Now, for me, there are so many questions that this brings up. First and foremost is, of course, to what end?

what do we believe that a network state offers that current states don't? I can think of a variety of answers, but I'm really excited to see how Bology and all the other people who read this start to dig into that conversation. What excites me, of course, about this type of discussion is that this is one of the ultimate peaks in big picture power shifts, or at least possible big picture power shifts. If one goes back in history, it is clear that the nation state model we have is not preordained, but was evolved in specific ways based on specific ways. conditions. It's not necessarily that those conditions don't apply anymore, but the internet, of course, fundamentally changes how much geography must be at the center of human connection. I think all of you guys listening to this have an intuitive sense of the truth of that, what that means for how we organize, whether and how it manifests in politics or just in business and social life, these are going to be

some of the interesting questions of the coming decades. I wish I could read this entire book to you guys, but like I said, it's available on the networkstate.com, or you can buy it wherever you buy books. For now, I want to say thanks again to my sponsors, nexo.io, chain aliasis, FtX, and Ava Labs for supporting the show. Thanks to Bology for always making us think. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.