Tokenizing Public Infrastructure Pt 1: Incentives and Commoditization
Innovation Through Creative Cryptoeconomic Recombination
I’ve been thinking a lot about America and how we can improve our country while things socially and politically continue to trudge forward in a state of apparent dysfunction. I tweeted this, and that got me thinking, so here is where my thoughts have progressed with the help of Kyle Forkey, previous Civil Engineer/Project Manager & now GP at Amentum. Special thanks to Alex Evans for proofreading and his assistance.
Much like the banking industry, the public infrastructure and city-planning projects and initiatives that would help to spur innovative new products and best-practices, ones that would improve conditions for the average consumer, is stagnant.
As a generation comes to a close, there is ample room for improving many aspects of utilities and systems we interact with on a daily basis; ones that lie outside the normal realm of decentralized payments and computing that we’ve become accustomed to.
Matching private companies/contractors with the public sector which doesn’t typically have time to innovate and work on new initiatives to improve conditions, is the core basis of this stagnation. The process of procurement and funding can be a bureaucratic mess; one plagued with legal jurisdictional headache and copious amounts of scope creep. But, that bureaucracy is a necessary evil that enables public infrastructure to expand and flourish.
Publicly accessible goods are ripe for innovation from the crypto-sector, we just need to be creative.
Take for instance the American Interstate Highway System. You’ve interacted with it if you’ve ever travelled between state borders in the U.S. — it’s a modern marvel that directly impacts citizens everyday. The core aspect of public goods is that they are non-rivalrous in nature as they are able to be used by a multitude of different individuals at one time; they’re non-excludable and don’t disallow access based on race, gender or religious affiliation. This ultimately means that no citizen can be barred from utilizing them (does this ethos sound familiar?).
Everyone wants to benefit from access to public goods and services, however, no one wants to be the sole individual responsible for their maintenance — quite the Catch 22 (quick aside, did you know Elon Musk raised money for his tunneling transportation company, The Boring Company, by selling hats? Yeah…2017 is something else, the greater crypto community should be ashamed).
It’s great to have access to public goods, until there’s a pothole that goes un-repaired on your commute to work for 6+ months until a random city/federally-funded contractor comes to make quick work of it, like magic. Then when the bureaucratic repair magic begins, people gripe about having to take an alternative route (we’re a fickle bunch, huh?).
People expect this public goods/utility magic, the same way they expect clean water from their tap, and electricity to power their smartphone. The cycle doesn’t end, because centralized authorities garner the means necessary to expedite both innovation, and continued, iterative improvements (even if that means an extra 10 minutes to your commute)…
What If There’s A Better Way?
If we seek to co-opt with local state/city government officials, we can augment how this process is handled entirely. Crypto allows us to create market incentives utilizing the best aspects of cryptography and game theory (learn more on this here); by creating unique tokenized systems that are self-correcting thanks to externalized market supply and demand forces.
Utilities and public infrastructure have a lot of potential when combined with the game theoretic nature that crypto innately enables. Companies like Grid+ are already working to create an alternative market for energy consumption in a peer-to-peer nature; if you haven’t already, this is a great read to understand the motivations behind their project.
Building alternative systems atop legacy ones is one of the fastest ways to iteratively co-opt the public sector, and slowly get them to adopt these new blockchain-based systems instead. Ones that would enable increased transparency and efficiencies, while evolving a utility to the next generation of usability.
What I propose is a way to incentivize the investments in public infrastructure for both the private and public sector, by creating market incentives for the creation, bidding, and overall completion of major infrastructure related projects like high-speed rails, Hyperloops, toll-roads, underground tunnels, and other future innovative forms of public transportation.
Challenging But Worth Exploring
When I began to think about what aspects of this new major overhaul to infrastructure funding would look at, it was easiest to first research/learn about the roadblocks that exist in the present; while re-imaging those same systems built on a publicly accessible, transparent, global ledger.
If we’re going to explore this potential there are few things we have to get right, first being the overall structure. What I imagine would be the lowest hanging fruit as a far as implementing this, would be to begin with a public token sale. To do that, we have to also take into account jurisdictional variances, and the private property of private individuals who may lay in the way of a new public good (i.e. a farmer, where a portion of a railway or road would run through their private land, etc).
After those fine details are hammered (let’s assume we’re incorporating in a jurisdiction with defined regulations, and token sales are legally permittable to maintain scope), we can begin.
What We Have To Get Right
To maintain scope, and not inundate you with fine details, lets just focus on the core components that are more important when looking to architect the most sound and feasible system to facilitate this idea. Keeping scope small and manageable is important; while also taking into account the unique complexities public infrastructure introduces, combined with the already complex nature of crypto.
Public & Private Accessibility
To create a public good or infrastructure on crypto, you’ll need to ensure it’s accessible. What this means is you should not disallow public citizens from participating (even low income families); but you should also ensure that you don’t alienate private individuals and corporations as well.
By allowing both the public and private sector, you get a larger potential pool of capital, but also a diverse group of individual stakeholders who will eventually benefit and utilize this public good. This is also essential when getting local political attention to ensure a distributed array of support as the project scales (increasing it’s overall likelihood of success and timely completion).
Depending on the public good too, once it is completed, stakeholders can utilize their token to access that good forever, at a discounted price thanks to the price appreciation of the underlying token. Whether its a new underground rail system, autonomous shuttle fleet, or a tolling system, public individuals that invest can then be more deeply ingrained and invested in their local communities; while at the same time private corporations (like say Amazon building a new HQ in your local city) can enjoy funding public transportation and services that mobilize their workforce.
Outside individuals from different localities and countries would then just purchase the liquid tokens at a terminal, just like any other system; or purchase token credits for their wallet to use with the system from a mobile app. If they hold the tokens overtime, they could even appreciate. Imagine your autonomous bus pass making you money due price deflation as the system buys back tokens programmatically on market as its used in realtime.
Game Theoretic Incentives/Disincentives
This tokenized system, and it’s subsequent crowd sale needs to have double-sided incentives/disincentives to create a balance. A clear example of game theoretics applied here would be with project bidding. Thanks to smart contract based auctions, we can have contractors and firms submit bids in realtime. After the initial whitepaper is complete and in the public, firms can then begin assessing and estimating job costs, and completion times.
We would then programmatically ensure that the winner of the bid is also allocated X % of the liquid tokens, locked in the smart contract as well. We would allocate tokens on both a cliff, and a set series of milestones. Example being if a firm says they can complete the project in 6months, there should be an additional bonus pool of tokens that are available to incentivize timely construction. On that same note, you also want to ensure there is an inherent penalty pool as well that says if the firm takes X days past the completion day, their eventual bonus would be deducted based on the $ value of additional work (i.e. Cthulu lives in the path of this tunnel, and we then must dig deeper).
These additional rulesets help lessen the potential for scope creep, but also leaves funds on the table to handle any unforeseen costs. Once the project has begun construction, tokens should then be made liquid on exchanges. This means the stakeholders have to actively monitor their investment and the construction progress, creating a collaborative ecosystem of contractors/stakeholders. Delays in the project or obstruction to its completion would reflect in the markets, and the additional liquidity and price influx due to speculation enables us to subsidize the development of a project that is iterated on in realtime, as tokens can be sold at the high of price jumps to essentially lower cost of development (if it is successful during each major construction phase).
Every project manager’s most dreaded phrase, “scope creep”. It’s the bane to any project’s eventual success. However, issues like delays, or expansion in scope can be mitigated thanks to the transparent nature of the system.
All project expenditures would essentially be public record; the real value that transparency creates here is also mitigating the potential for kickbacks, and special treatment for certain contractors. Everyone getting paid is publicly accounted for, and should serve to expedite the completion of the project over longer time scales thanks to greater accountability.
It’s no secret that the complex nature of public infrastructure (power grids, water treatment facilities, toll-roads, etc) is also a gaping attack vector on our public infrastructure. By rebuilding some of our most crucial systems atop cryptographically secured systems that are funded, built, and maintained by the underlying token assets, we can greatly reduce the potential for large scale disruption and malice on the public goods we depend on everyday — while simultaneously expediting the pace of public good creation.
Security should be at the forefront of any researchers/engineers mind when creating such systems, as the public good will be in service generating returns for years to come.
When approaching a potential project of this scale, its important to remember that humans interacting with a system will never be flawless. That’s just the reality of humanity, we’re only as strong as our weakest link (which is typically the human aspect).
This is only an initial thought exploration regarding the potential here for tokenization as a means to reduce inefficiencies, and mitigate unnecessary spending; while creating a transparent process from beginning to end, alleviating long-standing issues in systems that aren’t going away.
Crypto will be key to bringing public infrastructure to the 21st century.
[This post was originally published in late-2017, and was migrated to this newsletter for archival purposes]