#6 Social Scalability
Observations on how social groups scale
Happy new year to all our readers! Yes, we are finally out of hibernation and have returned to continue the series. We’d like to start the year with this very juicy topic that we’ve been trying to wrap our head around for the last few days - Social Scalability. Though not often discussed as much as other fundamental enablers of web3, we strongly feel that its understanding is key to developing a native web3 intuition. Let’s jump right in!
Nick Szabo (who many consider as the most likely identity of Satoshi Nakamoto) popularized the term social scalability through this essay:
Social scalability is about the ways and extents to which participants can think about and respond to institutions and fellow participants as the variety and numbers of participants in those institutions or relationships grow
He argues that this is the secret to bitcoin’s success. At the surface, bitcoin’s computationally intensive proof-of-work and its inability to process as many transactions per second as traditional networks makes it seem like an unscalable phenomenon. These limitations help bitcoin achieve social scalability which is much more valuable. Social scalability of an institutional technology can be measured in two ways: by the number of people that can beneficially participate in it and by the additional benefits that existing participants receive.
Before we break this down further, here’s the best bitcoin explainer on the internet if you’d like to quickly understand the above mentioned tech limitations:
A significant portion of all the major tech breakthroughs over the last few hundred years has centred around communication. Stuff like the printing press, the radio, telephone, computers, internet, social networks etc., have enabled exchange of information like never before. If you think about it, we are the only species that can coordinate our actions (ex: enforcing a lockdown) at a planetary level. It has not always been this way. Without institutional and technological innovation, our ability to coordinate meaningfully with others would be limited to around 150 people - the famous Dunbar’s number. The idea is that the number of people with whom an individual can form meaningful social relationships, where they know every individual and their relationship with one another, is limited to 150. This study was based on the correlation between the primate brain size and the respective average social group size. Maintaining intimate groups requires cognitive capacity and overcoming this natural cognitive limit to coordinate with more people requires innovation.
Different kinds of innovations solve different kinds of social scalability problems and here are the 3 major ones we will cover today:
Matchmaking: This is all about mutual discovery of mutually beneficial participants. It could range from finding the best service provider, the best movie to watch, the best stuff to buy etc. The internet and web2 has traditionally been very good at this through social networking, content discovery, e-commerce etc.
Information flow: This involves accurate transmission and documentation of information between participants of a network and includes spoken / written words, laws, market prices and so on. We can all agree that we currently have pretty good tech for this.
Trust minimization: As the size of a network grows, there is an increasing need to secure its participants from vulnerabilities to each other and from outsiders or intermediaries. Through cultural evolution, institutions tend to develop laws and tech to protect themselves against these vulnerabilities. These innovations can only partially take away existing vulnerabilities and there is no such thing as a completely trustless institution. Having said that, blockchains have traditionally been good at this.
Let’s take a small detour and explore how money and markets enable social scalability today. Markets enable matchmaking by connecting mutually beneficial buyers and sellers while money acts as the reliable medium of exchange / store of value that eliminates the problem of double coincidence of wants. Money and markets also incentivize reliable information flow as it helps reduce negotiation costs and other transaction costs. In summary, money and markets involve matchmaking, quality information flow, trust minimization and scalable performance.
Ever since the dawn of the industrial revolution, producing even the most basic products has involved direct / indirect coordination between a wide variety of people with different skillsets. This has massively accelerated division of labour and rather than trusting the altruism of so many strangers to deliver on our needs, money and markets create pairs of mutually beneficial exchanges that incentivize individuals to act on their self interest. This results in a large network of oblivious people to effectively act in everyone’s interest to deliver on the products and services that we all need.
As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market
Another notable observation about money and markets can be found in Friedrich Hayek’s essay - The Use of Knowledge in Society. In a large system with many diverse players, knowledge is often distributed across different groups of people. He argues that in such systems, prices can act to coordinate the actions of these people. The fact that there exists a single price for any commodity (or rather that these prices can be locally determined by factoring in elements like transportation costs etc.) makes it seem like it could have all been facilitated by one single planner processing all kinds of information to arrive at it but we know that this is not the case. Also consider a case of scarcity of a particular raw material for a particular product. Prices adjust to incentivize everyone to use the product more sparingly while only a handful of people know the cause of the shortage. In summary, the observation is that:
Through [the price system], not only a division of labor but also a coordinated utilization of resources based on an equally divided knowledge has become possible…a solution is produced by the interactions of people each of whom possesses only partial knowledge
-Friedrich Hayek
But what does all this economics have to do with web3?
Blockchains and cryptocurrencies facilitate social scalability through trust minimization. This was bitcoin’s breakthrough with money - it replaces a single fully trusted intermediary (like a bank’s server) with a set of partially trusted intermediaries. Nick argues that this is what proof of work and broadcast-replication of bitcoin are all about - sacrificing computational scalability for social scalability. Today, the number of people that can participate in an online institution and the variety of ways in which they can interact / benefit from the institution has far less to do with limitations of computers than it has to do with limitations of the brain (to function in social groups). As demonstrated by Satoshi, it is often a better idea to sacrifice computational efficiency and scalability to better leverage the great expense in human capital required to maintain social relationships in markets and institutions.