Half-baked is a new collection of articles that cover some ideas I’ve thought of, but haven’t fully worked out, or even researched. The majority, or perhaps all of these, will be bad ideas. Many will not be technically viable. But on the very slight chance they inspire better ideas, I figured they were worth publishing.
Rewarding In-group Preference in Decentralized Finance
It’s pretty cool being your own bank, deploying liquidity to various markets and protocols for interest, and swapping funds without intermediaries.
But it would be even cooler if every time I made a trade on Uniswap, the fees I paid went to people I agreed with. Or if every time I routed a Lightning transaction, I was attempting to route through, and reward, friends and family before strangers.
What if I could interact with decentralized finance while only supporting people that signaled that they believe in free market capitalism?
I think this type of in-group preference network, or dare I say marketplace, could result in some pretty interesting use cases.
A Natural Solution to Off-chain (i.e. Lightning) Networks Becoming "Too Centralized”?
While critics of Bitcoin’s Lightning network point to the possibility of a tendency towards large network hubs that collect a significant proportion of routing fees, the ability to prioritize routes based on non-economic factors may provide an alternative outcome that favors decentralization.
In a well-connected Lightning network, it is likely that multiple possible routes exist for the average payment. When simply assuming that each payment initiator will seek an optimal route based on a network graph of fees and reliability (past success), a tendency towards fewer large, reliable hubs is likely.
However, when provided with multiple payment routes, it is possible that a user might prefer one route based on non-economic parameters. This may include whether or not the nodes are within the initiator’s personal network, whether the nodes have signaled certain ethical positions such as “taxation is theft” or whether on-chain, the node has signaled a vote for certain network changes.
For simplicity, let’s call the preference to route based on an array of parameters “in-group preference”.
When a multitude of non-economic routing factors are considered, a complex routing economy may emerge, with room to incentivize nodes according to a potentially infinite set of in-group preference sets.
A Natural Effect of Seeking Transaction Fees in a Competitive Landscape?
As a routing network becomes well-connected, transaction fees will (in well-connected zones) level out to an efficient market rate. While the competition may only promote reputation-based rewarding of nodes, it may also be a driver for innovation and secondary value propositions. One such value proposition could be in-group preference routing to reward people you want to support or that share a common interest for routing your payments.
What Percent of In-Group Preference Enabled Nodes Would Allow for Reliable Alternative Routing Decision-Making?
Enough for the user to believe there is a meaningful chance of fees going to in-group nodes. However, this could begin hyper-locally. For example, people rallying around a cause, a shared app, or with any other in-group preference could begin prioritizing in-group payments.
On-chain Signaling and Probabilistic Filters
One possibility is that larger nodes attempt to differentiate themselves by signaling certain information on-chain. For example, if a node were to signal ‘FreeTaiwan’ on-chain, and had done so for the last two years, the user would be fairly certain of the resolute ethics of the node.
Large Networks: Partial Networks Based on Certain Parameters
Though a few proposals have been published on how to scale lightning network beyond its current ‘limits’, one possibility is that “in-group preference hubs” arise, or tightly-knit groups of nodes with similar ethics. If this were to ever occur, it would generate a distributed graph of shared ethics partially determined by economic behavior.
Discussion
Would user-driven economic feedback help move the needle towards or away from truth? Are there critical mass tipping points where this might become more clear?
Could this lead to a “put your money where your mouth is” economy?
Would users ever care about anything but the cheapest, most reliable routing, even if provided with the ability to prioritize other in-group preferences?
Could this be a way of bootstrapping new networks? Early signalers might be more likely to become well-networked for their in group preference set?
Conclusion
As with most of my half-baked ideas, I don’t see any great way to monetize this, but perhaps it will inspire some other iteration on the idea, especially given our mutual interest in predictions and helping source facts in an increasingly info-rich world.
We can’t tell the future, and a world where in-group preference and ethics are intertwined by the fabric of every small transaction may be unlikely. However, with a new level of economic interconnectedness, we will for sure see experiments and exploration that incorporate realms of human consciousness into which we have not before been able to easily tap.