A Replacement for the Nation-State?

Two technologists argue that Web3 will allow new forms of organization to supplant traditional governments.

Farewell to Westphalia: Crypto Sovereignty and Post-Nation-State Governance, by Jarrad Hope and Peter Ludlow, Logos Press, 370 pages, $19.99

"The real problem of humanity," the biologist E.O. Wilson once said, is that "we have Paleolithic emotions, medieval institutions, and godlike technology."

In their new book, Farewell to Westphalia, Jarrad Hope and Peter Ludlow argue that such technology is precisely what can take our institutions out of the medieval doldrums.

The authors premise the book around the 1648 Peace of Westphalia, a set of treaties that ended Europe's 30 Years' War and established state sovereignty as the principle for international relations. They argue that while this new order was effective at toppling monarchies, religious despots, and other so-called medieval institutions, the new nation-states haven't been perfect either. At worst, they further inflamed tribal tensions by drawing arbitrary lines around them. At best, they produced mediocre governance. The authors use government-issued currency as an example, noting how nations have destroyed theirs by overprinting rather than resorting to fiscal discipline. Other nation-state problems include high taxes, censorship, political oppression, and the fact that some of them still invade each other, violating the spirit of Westphalia.

Nation-states are "technologies that are nearly 380 years old," the authors write, and should no more be honored than we would blindly follow centuries-old medical advice.

Nation-states are also, they argue, already getting disrupted by alternative forms of governance, some preferable to others. These include large corporations, nongovernmental organizations, cartels, special economic zones (SEZs), and homeowners' associations.

It is within this disruption that new, anarchic Web3 technologies enter. The authors focus on four main ones. 

Blockchain is best known as a cryptocurrency ledger, but it could also be useful for governance, by safely storing tax payments, property titles, voting results, and more. One destabilizing aspect of nation-states is the way that competing political forces destroy or conceal one another's documents. This would presumably no longer be possible if they were on-chain.

The second technology is smart contracts, which can be coded to automatically balance budgets, ensure service delivery, and trigger large payments (thereby replacing escrow accounts or reserve funds). The third technology is cryptocurrency, which—along with stabilizing the money supply—can enhance user privacy. 

The fourth is Decentralized Autonomous Organizations (DOAs). These are community-run entities governed by code and collective voting, with the number of shares that individuals own often determining their voting power. DOAs can replace the need for legislative bodies, Hope and Ludlow argue. If DOAs are set with smart contracts, the authors add, they can automatically trigger outcomes based on shareholder votes. DAO management can be outsourced to neutral global networks, helping guard against the corruption of on-site actors.

The biggest hurdle to implementing such tech is that it's just not embraced by legacy governments. While Estonia puts records on the blockchain, most bureaucracies have no incentive to innovate like that.

Rather, such technologies are likely to be used in newly formed systems of governance. The authors insist that this can include online "cyberstates" (or "network states") that group together like-minded individuals. Even if these have no physical location, they can wield influence by directing political pressure onto and resources away from legacy nations.

Web3 technologies can also be used in physical locations with special administrative status. There are various terms for these locations—my favorite is "startup cities"—but they all fall under the rubric of "competitive governance." They tend to sit in existing countries but with some degree of governing autonomy, which leads to their having lower taxes and regulations, more modern legal systems, and an openness to new ideas. Thousands of such places exist, but according to Thibault Serlet, an SEZ consultant, most of them are fairly basic industrial parks that house factories. A handful, most famously Prospera in Honduras, want to grow into bona fide cities with large residential populations. But they've had trouble gaining residents, partly because they get harassed by their host governments.

Which brings me to the initial part of E.O. Wilson's quote, about mankind's "Paleolithic emotions." Whether digital or physical, these new institutions are liable to be undermined by legacy states that don't appreciate the competition. An international order is already forming against them, with bodies like the European Union and the Organization for Economic Cooperation and Development blacklisting so-called tax havens as "non-cooperative." That should remind good-governance types that, beyond the bubble of ideas, the world's resources and territories are still very much controlled through the brute force of nation-state legality.

But Web3 can help there too. While the authors write extensively about how these technologies guard internally against human corruption, they don't much cover its utility against outside threats. A decentralized government that runs on smart contracts, blockchains, and cryptocurrencies becomes, almost by definition, one that's ungovernable and can't be hacked. Even if legacy institutions don't like the growth of dissenting online forums or competing cities, it's harder to stop them if the backend code can't be undone.

Farewell to Westphalia did not convince me that nation-states will end anytime soon. But it was a good explainer of the tech that will help emergent community models grow. The more such communities pop up in coming decades, the more these technologies should advance—and the more obsolete that legacy nation-states will look in comparison.