The Priests, the Temples and the Blockchain Clearing Systems
Whilst by no means an entirely undisputed theory, ancient historians
generally believe that the emergence of civilised states such as Sumer
was closely connected to the centralised role temples played in
standardising, clearing and redistributing value in their societies.
Temple authorities, the theory states, kept account of the assets and liabilities of each individual, meaning citizens could only claim as many goods from the temple storage as the records permitted — something based on the amount of provable work they had done. Tangible money was consequently unnecessary. The accounting system was ubiquitous in society and dependable.
As Benjamin Foster, a Yale Assyriologist, has noted before, historians have speculated that the religious complex was essential for spurring the sort of non-rivalrous collaboration that allowed for the cultivation and settlement of land in the first place.
The military (protective) layer meanwhile was housed separately in adjacent palace structures and overseen by kings. It was the kings who authorised and oversaw the collection of bala payments (taxes) from the provinces — evoking in some way today’s practice of separating church and state, and even that of segregating the bank clearing system from political authority. But it was also the states which provided the key source of funds — usually in the form of sacrificial animals — to the temple system and, in particular, the temple shrine complex of Nippur (the Vatican of its day).
Some suggest, as a consequence, that humans only gave up their nomadic/predatory/hunter-gatherer existence when they were provided with a neutral territory and common religious purpose, something which in turn gave them an excuse to “opt into” a mutually beneficial subsidisation platform of their own accord and without the costly need of state coercion. It was, so to speak, an amphictyony, an association of neighbouring collective systems forged together to defend a common religious centre.
Furthermore, since surpluses were provided to the temple on a sacrificial basis, the added beauty of the system was that whilst there was always an expectation the gods would reciprocate favourably, there was never a guarantee that they would. The risk of non-performance by the gods, in other words, was borne entirely by the contributing agent, on a loss absorbing basis. So too was the cost of supporting the temple system, which included the cost of feeding, clothing and defending its administrators, priests and other social-welfare dependents — including widows, orphans etc. Performance, meanwhile, was entirely linked to chance (good weather, bumper crops, military victory etc).
Over time parts of this theory became known as the “temple-state hypothesis”, though these days it’s strongly disputed that the territories feeding capital into the temple system were ever explicitly owned by the gods. To the contrary, archaeologists believe a combination of private, institutional and common lands made up the Sumerian territories. If people subscribed to the central distributive bala centres they did so as private entities who believed they would get entitlements in return, and also because the ultimate remaining surplus fed back to a temple system, which offered the chance of godly outsized profits. The cultic element, in other words, provided an essential loss absorbing capital layer to the system, without which an administrative redistributive state could not have balanced its payments as precisely.
Given the sacrificial capital layer’s exposure to risk, it’s hardly surprising perhaps that in later eras such amphictyonies, especially those of the Delphic system of ancient Greece, became closely associated with oracles, prophecy and forecasting — but also with mystery, opacity, public festivals and behavioural codes which often encouraged moderation, productivity and fertility.
If for some reason a tragedy or a black-swan event occurred, the accounts didn’t balance and the supporting city complexes became famished, it wasn’t the priests who got blamed for misallocating resources or calling for the wrong level of sacrifice; the rationale instead was that the gods had been unhappy with the amount of sacrifice offered. To wit, more sacrifices were called upon immediately and an effective recapitalisation of the temple-based clearing system was achieved.
Sacrifice-free economic administration
This is a bold leap. But we think a worthwhile one.
The blockchain systems being developed by banking technologists today are ultimately aimed at one thing and one thing only: creating clearing/settlement systems which balance themselves so perfectly and so cheaply on a real-time basis they need never rely on expensive capital layers to protect them from the risk of imbalances or settlement delays, because in theory there shouldn’t ever be any.
Nor do they then need, in the minds of blockchain technologists, to rely on equally expensive collateral framework regimes, or any other form of capital buffering. To the contrary, the only permanent capital they require is that needed to cover their cost of operation in the form of fees — essentially sparing the economy the burden of having to sacrifice vast amounts of capital to a reserve system which ultimately sees much of that capital depreciate wastefully.
Indeed, this is precisely the sort of thinking currently being espoused by the likes of Blythe Masters, CEO of Digital Asset Holdings, who according to Morgan Stanley’s global financial teams has been quoting saying the following:
In recent months a whole slew of incumbent-led projects have begun pivoting on the technology they’re developing. In many cases, these projects have mutated so far from the original blockchain concept, they can’t authentically call themselves blockchain projects any more. To wit, the blockchain taxonomy now includes an expanded range of distributed shared ledgers systems, some being double-permissioned and others being partially distributed.
The more these projects pivot — usually for profitability, scaling, competition, capital or regulatory reasons — the more they regress to the standing systems of the day. And the more they do that, the more they abandon the security, streamlining and balancing enhancements which made the blockchain transition appealing in the first place, thus introducing all sorts of unknown risks.
Indeed, if these new-fangled blockchains which aren’t really blockchains fail even once, whether for security, operational or legal reasons, a need for a second layer of human-administered authentication and security will become obvious. As soon as that layer is added in, however, the cost advantages of the blockchain initiative disappear entirely. If that layer isn’t brought in, meanwhile, then the system ends up being exposed to an entirely new type of unknowable risk.
In recent weeks, blockchain enthusiasts may have been encouraged by an epidemic of successful experiments and trials in the blockchain space, suggesting these new systems are fool proof. Under reported, however, is the fact that none of these trials means very much at all. Almost any blockchain system — even one made of paperclips — can look viable in a controlled environment or when conducted at a small scale. To prove the technology really is cheaper and more secure than the standing system, the tests must run on a scaled up basis — a risk most financial institutions are unlikely to be willing to take because it involves the potential jeopardisation of real value.
As Morgan Stanley’s Global Financials team noted last week, referencing both the risks of betting everything on what remains an untested system and the incentive for these systems to quietly regress to standing centralised systems:
Indeed, the only reason the bitcoin blockchain — the only blockchain to ever be fully tested at any significant scale — has been so successful at clearing itself without a double-counting incident is precisely because it was designed to be capital intensive, something which now prevents it from being easily scaled to the point of universal use. If you want to influence the blockchain you must offer a corresponding sacrifice, and that will cost you, by design.
Given all that, the real genius of the bitcoin blockchain has nothing to do with its publicly distributed ledger, its cryptographic signatures, its inbuilt opacity or even its massively capital intensive proof of work authentication system. To the contrary, it has everything to do with having created the sort of cult mythology (the cult of Satoshi) which allows its energy intensive costs to be covered by unconditional sacrificial capital flows (i.e. charity) that demand nothing in return at all. Thus far, the bitcoin clearing network’s cost of raising TLAC has been zero.
Given that so much of that capital subsidy is drawn from the unbanked, black market or offshore sector that licensed banks aren’t easily allowed to tap anymore, it’s hard to imagine how the banking system can ever really compete with funding like that. (At least for as long as its core depositor base — unlike the bitcoin depositor base — demands the guarantee of par value.)
Whether a system based on pure unadulterated sacrifice from unwitting benefactors can ever scale to a point where it replaces the banking system, especially in its current energy-intensive form, is now the question. As it stands, however, the capital expense would be unfathomable, meaning some sort of trust-based hierarchal system (stemming from a core bitcoin mining priesthood perhaps?) would have to emerge.
Now, if those priests were prepared to live in the style of incorruptible ascetic monks or Jedi knights, who knows, such a system could become self-sustaining.
But, chances are, such a priesthood would eventually succumb (and in the case of bitcoin already has) to highly conspicuous displays of wealth and consumption.
If that happened trust would erode quickly, impacting the rate at which sacrificial funds flowed into the clearing-church coffers, bankrupting the system. Overly ostentatious behaviour might also attract priestly competition from kings and other authorities, schismatic frictions in the priesthood itself, or a move towards a more secularised administrative economic system — wherein the risk of imbalances was once again underwritten by a state-enforced taxpayer system or by the seniority of capital investments in a financial system underpinned by contract law and enticed by the promise of interest or dividend-based returns.
At which point, of course, we would have come full circle.
Related links:
RTGS, and the story of batches instead of blocks – FT Alphaville
The Romans always copy the Greeks (including the repo market) – FT Alphaville
Float management isn’t easy – FT Alphaville
The eurodollar as an economic no-man’s land - FT Alphaville
Angels and debtors – FT Alphaville
Temple authorities, the theory states, kept account of the assets and liabilities of each individual, meaning citizens could only claim as many goods from the temple storage as the records permitted — something based on the amount of provable work they had done. Tangible money was consequently unnecessary. The accounting system was ubiquitous in society and dependable.
As Benjamin Foster, a Yale Assyriologist, has noted before, historians have speculated that the religious complex was essential for spurring the sort of non-rivalrous collaboration that allowed for the cultivation and settlement of land in the first place.
To construct and maintain the necessary irrigation works, labor of the entire population was needed. Land could be exploited efficiently only if it was considered property of the gods, rather than of individuals or families. In the last quarter of the third millennium B.C., secularizing tendencies caused the Sumerian theocratic order to disintegrate.It’s tempting, as a consequence, to describe the Sumerian system as an industrial-religious accounting complex, kept in check by the all-seeing supervisory system of the Sumerian pantheon of gods (the ultimate financial supervisory panopticon).
The military (protective) layer meanwhile was housed separately in adjacent palace structures and overseen by kings. It was the kings who authorised and oversaw the collection of bala payments (taxes) from the provinces — evoking in some way today’s practice of separating church and state, and even that of segregating the bank clearing system from political authority. But it was also the states which provided the key source of funds — usually in the form of sacrificial animals — to the temple system and, in particular, the temple shrine complex of Nippur (the Vatican of its day).
Some suggest, as a consequence, that humans only gave up their nomadic/predatory/hunter-gatherer existence when they were provided with a neutral territory and common religious purpose, something which in turn gave them an excuse to “opt into” a mutually beneficial subsidisation platform of their own accord and without the costly need of state coercion. It was, so to speak, an amphictyony, an association of neighbouring collective systems forged together to defend a common religious centre.
Furthermore, since surpluses were provided to the temple on a sacrificial basis, the added beauty of the system was that whilst there was always an expectation the gods would reciprocate favourably, there was never a guarantee that they would. The risk of non-performance by the gods, in other words, was borne entirely by the contributing agent, on a loss absorbing basis. So too was the cost of supporting the temple system, which included the cost of feeding, clothing and defending its administrators, priests and other social-welfare dependents — including widows, orphans etc. Performance, meanwhile, was entirely linked to chance (good weather, bumper crops, military victory etc).
Over time parts of this theory became known as the “temple-state hypothesis”, though these days it’s strongly disputed that the territories feeding capital into the temple system were ever explicitly owned by the gods. To the contrary, archaeologists believe a combination of private, institutional and common lands made up the Sumerian territories. If people subscribed to the central distributive bala centres they did so as private entities who believed they would get entitlements in return, and also because the ultimate remaining surplus fed back to a temple system, which offered the chance of godly outsized profits. The cultic element, in other words, provided an essential loss absorbing capital layer to the system, without which an administrative redistributive state could not have balanced its payments as precisely.
Given the sacrificial capital layer’s exposure to risk, it’s hardly surprising perhaps that in later eras such amphictyonies, especially those of the Delphic system of ancient Greece, became closely associated with oracles, prophecy and forecasting — but also with mystery, opacity, public festivals and behavioural codes which often encouraged moderation, productivity and fertility.
If for some reason a tragedy or a black-swan event occurred, the accounts didn’t balance and the supporting city complexes became famished, it wasn’t the priests who got blamed for misallocating resources or calling for the wrong level of sacrifice; the rationale instead was that the gods had been unhappy with the amount of sacrifice offered. To wit, more sacrifices were called upon immediately and an effective recapitalisation of the temple-based clearing system was achieved.
Sacrifice-free economic administration
This is a bold leap. But we think a worthwhile one.
The blockchain systems being developed by banking technologists today are ultimately aimed at one thing and one thing only: creating clearing/settlement systems which balance themselves so perfectly and so cheaply on a real-time basis they need never rely on expensive capital layers to protect them from the risk of imbalances or settlement delays, because in theory there shouldn’t ever be any.
Nor do they then need, in the minds of blockchain technologists, to rely on equally expensive collateral framework regimes, or any other form of capital buffering. To the contrary, the only permanent capital they require is that needed to cover their cost of operation in the form of fees — essentially sparing the economy the burden of having to sacrifice vast amounts of capital to a reserve system which ultimately sees much of that capital depreciate wastefully.
Indeed, this is precisely the sort of thinking currently being espoused by the likes of Blythe Masters, CEO of Digital Asset Holdings, who according to Morgan Stanley’s global financial teams has been quoting saying the following:
We find that there are some vested interests of custodians,or potentially banks, where actually T plus two or three is quite helpful because they get the carry. Or is the benefit case of resilience and cost-cutting offset the nuisance of the carry. Generally, the reason why there are vested interests who need to, for example, earn the carry is because they’re operating a massively expensive infrastructure, without which the business would be completely unsupportable.But there’s a problem with that statement. A paradox even.
So the carry has to be there in order to justify the cost associated with inefficient process. And there isn’t really a custodian in the world that, when you get to the right level of seniority, doesn’t understand that problem. So they will give up the carry in a nanosecond if they give up a more than proportionate amount of the costs. And it’s as simple as that.
In recent months a whole slew of incumbent-led projects have begun pivoting on the technology they’re developing. In many cases, these projects have mutated so far from the original blockchain concept, they can’t authentically call themselves blockchain projects any more. To wit, the blockchain taxonomy now includes an expanded range of distributed shared ledgers systems, some being double-permissioned and others being partially distributed.
The more these projects pivot — usually for profitability, scaling, competition, capital or regulatory reasons — the more they regress to the standing systems of the day. And the more they do that, the more they abandon the security, streamlining and balancing enhancements which made the blockchain transition appealing in the first place, thus introducing all sorts of unknown risks.
Indeed, if these new-fangled blockchains which aren’t really blockchains fail even once, whether for security, operational or legal reasons, a need for a second layer of human-administered authentication and security will become obvious. As soon as that layer is added in, however, the cost advantages of the blockchain initiative disappear entirely. If that layer isn’t brought in, meanwhile, then the system ends up being exposed to an entirely new type of unknowable risk.
In recent weeks, blockchain enthusiasts may have been encouraged by an epidemic of successful experiments and trials in the blockchain space, suggesting these new systems are fool proof. Under reported, however, is the fact that none of these trials means very much at all. Almost any blockchain system — even one made of paperclips — can look viable in a controlled environment or when conducted at a small scale. To prove the technology really is cheaper and more secure than the standing system, the tests must run on a scaled up basis — a risk most financial institutions are unlikely to be willing to take because it involves the potential jeopardisation of real value.
As Morgan Stanley’s Global Financials team noted last week, referencing both the risks of betting everything on what remains an untested system and the incentive for these systems to quietly regress to standing centralised systems:
Financials cannot afford to reinvent their financial technology, nor take a massive punt on new technology until proven. Clearly blockchain technology will be simplest in markets which are already fully dematerialised with clear title (why Australia stock exchange is a focus) but an even larger win will be dematerialising complex Western markets too. One industry expert at a recent event (held under Chatham House rules) said that distributed management of digital signatures offered by blockchain technology might be separated from its indelible record keeping mechanisms in near-term capital markets implementations. This would be a form of “cheating” whereby new transactions would be added from a distributed set of nodes, but where the “golden copy” of this data would be maintained in a centralized repository, an example of a work-around for a desired use case; reference data.You might at this stage be wondering why a tendency to backtrack towards more traditional centralised and permissioned systems exists in the first place? Largely, it’s down to the core paradox of any true blockchain system: if it’s scaled it becomes too costly for the system to support, whilst if it’s affordable, it can’t be scaled. Which itself leads into the other core paradox of the financial system: if it’s scaled it’s insecure, if it’s secure it can’t be scaled.
Indeed, the only reason the bitcoin blockchain — the only blockchain to ever be fully tested at any significant scale — has been so successful at clearing itself without a double-counting incident is precisely because it was designed to be capital intensive, something which now prevents it from being easily scaled to the point of universal use. If you want to influence the blockchain you must offer a corresponding sacrifice, and that will cost you, by design.
Given all that, the real genius of the bitcoin blockchain has nothing to do with its publicly distributed ledger, its cryptographic signatures, its inbuilt opacity or even its massively capital intensive proof of work authentication system. To the contrary, it has everything to do with having created the sort of cult mythology (the cult of Satoshi) which allows its energy intensive costs to be covered by unconditional sacrificial capital flows (i.e. charity) that demand nothing in return at all. Thus far, the bitcoin clearing network’s cost of raising TLAC has been zero.
Given that so much of that capital subsidy is drawn from the unbanked, black market or offshore sector that licensed banks aren’t easily allowed to tap anymore, it’s hard to imagine how the banking system can ever really compete with funding like that. (At least for as long as its core depositor base — unlike the bitcoin depositor base — demands the guarantee of par value.)
Whether a system based on pure unadulterated sacrifice from unwitting benefactors can ever scale to a point where it replaces the banking system, especially in its current energy-intensive form, is now the question. As it stands, however, the capital expense would be unfathomable, meaning some sort of trust-based hierarchal system (stemming from a core bitcoin mining priesthood perhaps?) would have to emerge.
Now, if those priests were prepared to live in the style of incorruptible ascetic monks or Jedi knights, who knows, such a system could become self-sustaining.
But, chances are, such a priesthood would eventually succumb (and in the case of bitcoin already has) to highly conspicuous displays of wealth and consumption.
If that happened trust would erode quickly, impacting the rate at which sacrificial funds flowed into the clearing-church coffers, bankrupting the system. Overly ostentatious behaviour might also attract priestly competition from kings and other authorities, schismatic frictions in the priesthood itself, or a move towards a more secularised administrative economic system — wherein the risk of imbalances was once again underwritten by a state-enforced taxpayer system or by the seniority of capital investments in a financial system underpinned by contract law and enticed by the promise of interest or dividend-based returns.
At which point, of course, we would have come full circle.
Related links:
RTGS, and the story of batches instead of blocks – FT Alphaville
The Romans always copy the Greeks (including the repo market) – FT Alphaville
Float management isn’t easy – FT Alphaville
The eurodollar as an economic no-man’s land - FT Alphaville
Angels and debtors – FT Alphaville
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