Norms, Institutions and Digital Veils of Uncertainty – Do Network Protocols Need Trust Anyway?

Abstract

In large and complex human groups, social rules reduce individuals’ uncertainty about their own choice set, including through these rules’ simultaneous influence on the choice set of other individuals. But uncertainty varies as to the extent to which it is knowable and quantifiable ex-ante. Therefore, different classes of social rules deal with the future uncertainty of individuals’ conduct in structurally distinct ways, with institutions and norms being the hallmark example of this distinction. Institutions, through their costly definition and enforcement by a known organization, require specific delineation of behavior and penalties ex-ante, meaning they of necessity confront “known unknowns” (risk), or the conduct of members of an organization that can be predicted ex-ante. Norms, in contrast, are only effective in shaping behavior if sufficiently shared within a community, which means their application is automatic in expectation to an individual ordering their conduct considering potential norms. This makes norms apply to ex-ante known and unknown situations alike, relative to the precision that the articulation of institutions requires with respect to human behavior. Although digital governance carries the benefits (and costs) of considerable institutional “completeness”, governance by protocol is nonetheless incomplete in the face of the complex set of exogenous shocks and human actions that a given digital networked organization will experience. This means digital institutions need to mimic the adaptability of institutions more generally, through the institutional mechanisms of flexibility detailed in this analysis. More generally, though, the fact that norms can serve as a complementary gap-filler in contexts where institutions do not reach suggest that digital organization designers cannot avoid simultaneous consideration of the human community of network users that will define the norms that become crucial in periods of true uncertainty for any organization.

Keywords: Governance, Institutions, Norms, Uncertainty, Digital Governance, Blockchain Governance, Cryptocurrency, Blockchain, Bitcoin, Smart Contracts, Incomplete Contracting

JEL Classification: B52, P48