If It Happened Onchain, Did It Happen In Real Life?
If It Happened Onchain, Did It Happen In Real Life?
Code, the state, and high-stakes vs low-stakes law
A quick prelude before the essay:
I write about a broad set of topics, one of them is crypto.
I’ve gained a fair amount of subscribers recently, and many of you are more politically and philosophically inclined. You’re interested in substantive discourse, not talking about digital tokens bouncing around. Good. Me too.
This essay applies to crypto, but not just crypto. The way I view and address crypto is as a political and social vehicle, with a financial veneer. Crypto is fundamentally a conduit for political aims; if you distill down what’s really being built here, that’s the only reason for this industry to exist. “Decentralization” is a deeply political statement, masquerading as an engineering decision.
When I discuss crypto, it’s game-theoretic analysis with heavy political implications, and crypto is simply the monetary means to accomplishing what’s actually a shift in power. It redistributes power by way of changing who controls the financial plumbing. This is a topic I break down in essays like The Vietnam Thesis and The US Dollar: A Proof of Violence Network, among others.
Crypto is an unavoidably political technology, with puppy coin and monkey picture scaffolding. It’s a Fourth-Turning-style disruption of state soft power, but it has a nasty habit of donning a clown suit and not taking itself very seriously. It’s the first new major asset class in history where retail got there first, maybe this is why.
I address this industry on the serious grounds it deserves. So, if you have no interest in crypto or see it as a nihilistic casino, good, I think you’ve come to the right place. It’s a whole lot more than that, and it’s understandable why you bucket it that way. The vast majority who work in this industry don’t understand the social and political repercussions of what they’re building either.
There is a well-known maxim in crypto: “code is law”. This means that what the code executes and what happens on the blockchain is final. The system produces the outcomes it’s supposed to via the code it rigidly follows. When I say “code is law”, I’m referring to this philosophy.
If It Happened Onchain, Did It Happen In Real Life?
Nearly everything is reversible except death or disfigurement.
The permanence of an outcome directly correlates with the legitimacy of the entity who decided it. Legitimacy is simply a more dignified proxy for force. Might makes right, because force dictates the rules; if it follows the rules, then the decision is legitimate. If a rule is imposed only by asking nicely, then it is neither imposed nor a rule. A law is only as good as its enforcement.
What does enforcement look like? It means you have to do it, otherwise there is physical retaliation. “Violence is the supreme authority through which all other authority is derived.”
Laws are created by the violence monopolist. If there is no violence monopolist, then there are competing laws; this creates schisms, fighting, instability. Peace through strength is very real; when there isn’t overwhelming strength, there is less peace, because there is constant jostling for who gets to decide what’s legitimate.
Violence is not wrought onchain. This means that if it happened onchain, it didn’t necessarily happen in real life. Let’s unpack what “happening in real life” means, and instances when code can sometimes be a default judgement.
Finality
“Finality” in the crypto sense means a transaction was enshrined onchain, and was there long enough to become a canonical part of the chain’s ledger. A blockchain is simply a decentralized database; a ledger that no single entity controls. A corporate database is a centralized ledger that one party controls. “Who updates and maintains the database" is a surprisingly politically-disruptive question!
For practical purposes, this finality definition is fine for crypto. However, in the domain of intense disagreement with many millions of dollars on the line, blockchain finality is not at all necessarily final.
In this situation, the party that gains by defecting to state judgement, will do so. If the state disagrees with what happened, and it can identify the parties involved, it’s getting reversed, and your “finality” was not actually final. If it happened onchain, it didn’t necessarily happen in real life.
The answer to "can it be undone?" is always "yes"; the real question is what degree of coordination effort will it take to reverse, or what kind of physicality will it take to undo it. Who else opposes the event? Will the state support my side if I escalate? If enough people with force behind them agree with you, the transaction is reversible.
This is what true finality looks like. Violence is always the final baselayer if fleshy humans are involved. However, violence is costly to impose, and there are practical considerations for inflicting it. Thus, force isn’t necessarily the arbiter of every decision. Namely, when the stakes are low…
High-Stakes and Low-Stakes Lawmakers
If the stakes are low, code is law. If the stakes are high, men with guns is law.
(I know men is plural and it should be “are law”, but I like the symmetry of the phrases with both being “is law”)
How do we quantify “stakes”? The answer to this comes down to the monetary value of the transaction in question. The greater the economic value of a disputed event, the greater the likelihood it will be challenged, physically.
Onchain, in the world of decentralized finance (DeFi, the real domain of crypto), the more trivial the transaction, the more final it is, and the more code is de facto law. Simply because it's not worth physically disputing. Even if your grievance is justified, there are many steps and costs to getting state-backed violence to effect a reversal. Litigation, lawsuits, cross-border enforcement… these are all quite expensive and time consuming.
What constitutes a disputed “high stakes” event is essentially a cost-benefit analysis of what goes into getting your money back, and if the ROI of that effort is positive.
The cost to litigate and enforce is basically the hurdle rate for high-stakes vs low-stakes outcomes and which law it follows. If the onchain transaction is below the hurdle rate, code is law; if it’s above the hurdle rate, men with guns is law.
Even if an event was illicit, if it was for less than several million dollars or so it’s probably final. Code is law for the small stuff, because it’s not worth the cost and effort to recoup it, so it slips through the cracks. The pragmatics just aren’t there to escalate.
For small-to-medium-size potatoes, code is law; because code is essentially a default judgement that cannot be practically undone by men with guns.
The state has resource constraints. You have cost constraints. When the stakes are low, code decides the outcome, because what are you going to do about it?
Onchain is Not Real Life… When the Stakes Are High.
If it can’t withstand physical disagreement, then it didn’t happen in real life.
This is fundamentally commentary on property rights, using crypto as the medium. It draws from natural law reflections you’ll find in Property Rights, Toilets, and the Way of the Dog.
Illegal transactions worth tens of millions or more will get escalated to the courts. The state will allocate resources to these disputes. Men with guns will get deployed to enforce the real law.
“Guys with guns can’t undo an Ethereum transaction, do you even know how crypto works?”
Oh? And where do you live? Onchain with your tokens? Is your house onchain? All your belongings? To get what they want, they don’t need to roll back the state of the chain, they only need to get you.
Picture this proposition: “That money you have, send it back or we stick you in a concrete box for a decade.” Which law do you abide by in this instance? Code law or law law? What is the supreme authority?
Your code will not protect you here. The state doesn’t need to accomplish any feat of blockchain technical prowess to undo a transaction, it just needs to put forward a sufficiently convincing argument with a gun that you should undo what happened yourself. A $5 Wrench Attack, but more decorous. This is how the state imposes finality.
A pricey contentious event will eventually be sent to the courts when someone will gain from reversing it. Because at a certain degree of distress (or financial gain), people will defect from ideological allegiance if they stand to benefit from doing so. There are no atheists in foxholes, and no “code is law” libertarians who just lost 20% of their net worth in an onchain hack.
$10M+ transactions will not slip through the cracks. If someone feels aggrieved and that the onchain interaction was illegitimate, they will escalate. The legal system will be their recourse to undo it. If they show it to The System and they agree it's invalid, then the transaction did not happen in real life, even if it occurred onchain, because it will be reversed. How it's reversed will depend on how big it is.
If the The System agrees with the onchain event, then it truly happened in real life. Because now its digital existence is reinforced, physically.
So long as humans are involved in this process, then the physical will inform the digital, because even though your assets are onchain, you are not. True finality for property rights is dictated by what can be done to you, not how many blocks have passed since a transaction.
The digital permanence of a DeFi event essentially boils down to a cost/benefit analysis of the effort required to undo it.
Implications for DeFi Projects
This means projects that transfer large amounts of financial value where all parties are identified, must be legally pristine, because then it happened in real life. If it works in the most hostile environment, then it always works.
I'm working on something that facilitates high-stakes transactions for crypto projects. It must be designed assuming each transaction will be adversarial for it to have permanence, for it to have happened in real life. For high-stakes interactions, violence will always be the true settlement layer.
Likes, shares, and subscribes always appreciated. I’m on Twitter as @BackTheBunny
ETH L1 isn’t the settlement layer; the legal system enforced by men with guns is