GALACTICA NETWORK INSTITUTIONS

In what follows we will give a brief overview of institutional arrangements that shape human society, argue that Sybil resistance is a prerequisite for web3 space to meaningfully mimic such arrangements on-chain, and give a deep dive into how Galactica Network’s stack enables an elaborate design space for social, economic and political institutions.

As one wise man once said: “To fully absorb the lessons of the Internet, and urge Internet-centrists, we need to reshape our political and social institutions in its image.”[1] It does seem like web3 is the platform where institutions of the past will emerge altered and is a perfect design space for the institutions of the future, those unlike any of the existing ones.

Introduction

Let us start with defining institutions as this is a much less trivial task than it might seem at the outset.

Any human society is characterized by complex and overlapping networks of regular social interactions — cultural, economic, or political. These repeated interactions require agreed-upon (i.e. predictable) rules. Sets of such rules constitute institutions. More complex interactions require more sophisticated institutions. For example, money is a relatively simple institution that in its basic form requires a commodity divisible enough, yet scarce and a status quo about its status as legal tender (e.g. shells). Derivative contracts trading on CBOE is a much more sophisticated form of socio-economic arrangement that requires a developed legal framework, property rights, market infrastructure, and other institutional arrangements.

In general, things like national labor markets, unemployment insurance systems, and the educational systems are all governed by rules or institutional arrangements. Economic activity such as the operation of the stock market, requirements for opening a business or process of getting a loan as well as virtually any other non-trivial human activity that conditions the evolution of our civilization can be traced back to a set of institutional arrangements that enable and uphold it.

Informal institutions consist of values, social norms, and widely accepted ways of operating, deeply embedded in traditional practices and culture, which in many cases are practically binding. Formal institutions are constituted by binding laws and regulations.

In short, institutions are sets of rules forming explicit and implicit taxonomies covering all forms of human interactions; it is a blueprint of human society. “As in geology, so in social institutions, we may discover the causes of all past changes in the present invariable order of society.” — Henry David Thoreau[2]

For the purposes of this article we will focus on economic, social, and political institutions — formal and informal alike as these are the institutions that have the highest propensity to be altered by the web3 stack. We will argue that albeit as DeFi and DAOs have demonstrated, political and economic institutions can exist in isolation from the social substrate and as such not constitute subsets of social institutions, they can only do so in a redacted and overly simplistic form. We will also echo the seminal article by Weyl, Ohlhaver, and Buterin — Decentralized Society: Finding Web3’s Soul[3] in that Sybil resistance is a property simple to understand yet highly non trivial in implementation that if achieved would enable a design space infinitely richer for modeling institutions economic, social and political alike.

Social Institutions

We shall start with defining social institutions as following the taxonomy common in sociology, economic and political institutions manifest its subsets.

A social institution is an established practice, tradition, behavior, or system of roles and relationships that is considered a normative structure or arrangement within a society. It is the set of abstractions and relationships between them that defines rules for interhuman interaction. A family, religion, political system, economic system and media are all examples of social institutions. Social institutions exist as abstractions over subjects, or humans and define rules of their interactions. Humans within a society are defined by their societal institutional roles and are “quantified” person to person and person to state by the reputation they possess within each institutional role.

“Social institutions are attempts by societies to create costs for social signals such as wealth, status, and competence that make them more difficult to fake. Such costs can include resources to acquire symbols of status and competence, as well as sanctions for falsely asserting trusted so­cial signals. As executive fraud, credit rating fiascos, infomercials, and one’s own junk email box so eloquently testify, many signals of social and financial ‘health’ are easily and profitably spoofed. The prescript of Socrates — ’The way to gain a good reputation is to endeavor to be what you desire to appear’ — seems to be more honored in the breach than in the observance.”[4]

Albeit in sociology, economic and political institutions are considered to be subsets of social institutions, for the purposes of this article we will consider them separately as web3 has demonstrated that barebones economic and political institutions (e.g. DeFi and DAOs) can exist in virtual isolation from any societal substrate.

Economic Institutions

Generally, three categories of economic institutions can be outlined — (a) those that facilitate transactions (i.e. financial institutions); (b) those which enable economic cooperation; and © the ones which establish and protect property rights.

Economic institutions are created and developed in response to uncertainty as well as information costs present in an imperfect world, the one we live in. These institutions are the natural response mechanisms designed to ameliorate market frictions (e.g. reduce information asymmetry between principles and agents). Credit, insurance, and exchanges are all examples of financial institutions that exist to enable humans to optimize their utility functions in the presence of scarcity, uncertainty, and market imperfections.

Political Institutions

In broad terms, Political institutions are sets of arrangements that define the rules of distributing and allocating political capital — i.e. the power.

Political institutions help delineate limits on the arbitrary exercise of power by politicians by determining the property rights between the private sector and the state. In other words, these institutions are intended to be organizations that develop and enforce formal laws and regulations — i.e. regulation is a political institution.

Political institutions as mechanisms for power and resource distribution within a state implicitly stem and gain their complexity and sophistication from the social substrate they exist to regulate. In other words, an argument can be made that society is an obvious pre-condition for political institutions to exist and so is the case for economic institutions. These three sets of arrangements are intimately intertwined and strictly speaking cannot be viewed nor analyzed in isolation as society makes up the list of subjects to be governed.

Or can they?

DeFi

DeFi building blocks are prime examples of protocols that defy the notion of impossibility of isolation mentioned above. Notwithstanding front-ends (i.e. web2) and team profiles (web2 social) presented therein, assuming an anonymous team setup, credit, insurance, and exchange institutions do exist on-chain in isolation from any social and political substrate. But is it ultimately an improvement over the TradSoc (both, pre-web and web2) arrangements? Blockchain has been envisioned as a pseudonymous system. Pseudonymous systems with permissionless account creation are by definition not Sybil resistant.

Firstly, it comes at the expense of efficiency and breadth.

“The lack of a native web3 identity makes today’s DeFi ecosystem unable to support activities ubiquitous in the real economy, such as undercollateralized lending or simple contracts, like an apartment lease.”[3]

Secondly, it comes at the expense of centralization.

“While DeFi overcomes explicit forms of centralization — where specific actors have an outsized level of formal power within a system — it has no built-in way to overcome implicit centralization through collusion and market power.”[3]

Thirdly, it comes at the expense of regulation.

“The permissionless and pseudonymous architecture of DeFi generates formidable challenges for tax enforcement, aggravates issues of money laundering and other kinds of financial malfeasance, and as a result creates externalities on the rest of the economy. If entry into the system is not monitored by intermediaries but happens completely anonymously by setting up an address on a blockchain, KYC norms and AML laws would need to be regulated at the transactional level. In many cases this could be prohibitively costly, or impractical, and therefore lead to an in-transparent environment that facilitates illegal transactions. ”[5]

DAO

A similar notion applies to decentralized governance systems, also known as DAOs, that do mimic the most trivial forms of political institutions by enabling some basic primitives defining the distribution of power across anonymous entities. One token one vote systems are most common on the contemporary web3 landscape and while offering a peculiar conundrum to those adept in sociology (as these are political systems where subjects are tokens, rather than humans) are a far cry in terms of complexity from the systems that have proven themselves effective in regulating human societies.

“Distributed autonomous organizations (DAOs) are virtual communities that come together around

a common purpose, coordinated by voting through smart contracts on a public blockchain. While DAOs offer great potential for coordination of global communities across distance and difference, they are vulnerable to sybil attacks where a single user can have multiple wallets to accrue voting power — or in less sophisticated one-token-one-vote style governance, simply hoard tokens to accrue 51% voting power and dispossess the other 49%.”[3]

As we have argued elsewhere[6], Sybil resistance is a prerequisite for the emergence of social institutions. SImilar to their economic counterparts, political institutions in the absence of social primitives are doomed to be limited to their most simplistic implementations.

Sybil Resistance and the DeSoc

Interestingly, there are no web3-native widespread forms of social institutions. As is better argued elsewhere[7], this comes primarily from the susceptibility of blockchain protocols to low-cost Sybil attacks. This leads to the impossibility of modeling human subjects on-chain and in turn renders useless the concept of reputation and alongside it the entirety of social substrate that could otherwise enrich the attainable use cases within web3.

Unpacking this thought backward, it is clear that enabling persistent identities, a term introduced by us elsewhere[6], would enable more sophisticated economic and political institutions to exist on-chain as well as would enable the entire realm of social institutions that are currently web2 — based if used at all.

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Galactica Network Institutions

Putting it all together

Galactica Network achieves a reasonable form of Sybil resistance by introducing the concept of zkKYC that drastically increases the cost of Sybil attack. This cost grows as protocol progresses due to the inevitable emergence of persistent identities. Refer to our Guardians & zkCertificates article[8] for more details.

Due to the existence of persistent identities and their web3 footprints, one can start building DApps and other primitives contingent upon the merit or reputation. This is the basis upon which social institutions can be established as a persistent identity is the closest one can get to representing a human.

Once there are subjects to regulate, the DeSoc shall emerge.

DeSoc, DePol and DeFi

Galactica Network Institutions are abstractions modeling social, political and financial institutions that can be leveraged when building DApps on Galactica Network and interacting with the protocol itself.

These are substrates that can be leveraged to frame agent interactions within the network.

Figure 5: The Galactica Network Technology Stack

Galactica Network Institutions are abstractions modeling social, political and financial institutions that can be leveraged when building DApps on Galactica Network and interacting with the protocol itself.

The Derivative Institutions are protocol mechanisms at the mutual intersections of DeFi, DeSoc, and DePol. Together they instill meaning in the concept of Galactica Citizenship providing a forum and a framework for wealth and power distribution within the network.

Galactica Network Technological stack is a set of primitives that enable strong Sybil resistance, account level privacy and zkKYC compliance. These properties enable the protocol to be a platform for modeling non-trivial social and political primitives and institutions.

Enabling DeSoc

As has been stated in a paper that has been among the primary sources of our inspiration:

“Web3 today centers around expressing transferable, financialized assets, rather than encoding social relationships of trust. Yet many core economic activities — such as uncollateralized lending and building personal brands — are built on persistent, non-transferable relationships. […] non-transferable “soulbound” tokens (SBTs) representing the commitments, credentials, and aliations of “Souls” can encode the trust networks of the real economy to establish provenance and reputation.”[3]

In a broad sense, reputation is the fabric that holds human society as we know it together. As argued above, akin to social institutions of a pre-web society where humans are defined through their reputation, DeSoc is built around the institute thereof.

As has been mentioned above, reputation is a pre-web counterpart to the notion of Web3 footprint. Meaningful Web3 footprint can only exist following the emergence of primitives enabling persistent identities. zkCertificates in general and zkKYC in particular as well as RRC are such primitives within the Galactica Protocol.

“Web3 aspires to transform societies broadly, rather than merely financial systems. Yet today’s social fabric — families, churches, teams, companies, civil society, celebrity, democracy — is meaningless in virtual worlds […] without primitives representing human souls and the broader relationships they support. If Web3 eschews persistent identities, their patterns of trust and cooperation, and their composable rights and permissions, we see, respectively, Sybil attacks, collusion, and a limited economic realm of wholly transferable private property — all of which trends towards hyper-financialization.”[3]

Some of the important notions that are hardly implementable without this deeper societal substrate are meritocratic governance and economic mechanisms, emerging social networks, celebrity-centric content networks, new security models, and far beyond that. Strictly speaking, the reputation-augmented DeFi mentioned above is the product of the intersection of DeFi and DeSoc dimensions of Galactica’s institutional fabric.

Consider the following examples:

1. Persistent identities: zkKYC massively increases the cost of sybil attacks, while not requiring disclosure of personal data. Primitives like quadratic voting and quadratic funding can now be realized natively (see meritocratic governance).

2. Social media and Web3 footprint: Karma of one’s on-chain social media account now has relevance due to the existence of Persistent Identities. As time goes by, web3 footprint grows enabling further account heterogeneity.

3. Social key recovery: one can program a dynamic whitelist of accounts (closest friends from decentralized social network, DAOs that one interacts with the most, etc.) that can restore one’s private keys.

4. Media reputation: The use cases for journalism are especially intriguing as a reporter under this system should have a social score of accuracy/quality of journalism, while the same score could be aggregated across journalists of a given media outlet.

One can define a Cypher State as a blockchain protocol that allows for reputation-centric primitives and composability thereof.

Augmenting DeFi

We begin with the financial aspect of Galactica’s institutional setup. We expect that the basic set of DeFi primitives built on Galactica Network will resemble that of virtually any other EVM-compatible chain in terms of the economic institutions they enable. The models of agent interaction, however, will be massively augmented with selective disclosures and Web3 footprint contingent interactions.

1. Enabling transactions contingent on one’s Web3 footprint implies making accounts heterogeneous. Heterogeneous accounts will be the basis for enabling meritocratic finance and Reputation-augmented DeFi. Reputation-augmented DeFi is a set of societal primitives that enable business models of, say, undercollateralized DeFi. Adding reputation as a property of a blockchain account is akin to reintegrating social dimension back into the web3 economic institutions. This solves all the issues with DeFi we have highlighted above for the exception of one: regulation and compliance;

2. Compliant privacy preserving DeFi. The second way in which financial institutions are augmented in the setup of Galactica Network follows the idea introduced in our previous article[9]. zkCertificates enable a variety of use cases for on-chain compliance, all while not compromising user privacy. Every DApp and account can be inspected with mathematical certainty and at any time for its interaction with non-KYC’ed accounts or liquidity pools. This means that Galactica Network offers an unprecedented level of compliance even when compared to some of the TradFi institutions and financial systems. At the same time, no KYC data exists in any form other than a cryptographic hash, on-chain, and cannot be associated with the real-world person even in the case of the KYC center being compromised.
An important note on regulation: at the outset of the protocol, regulation will be confined to the code-is-law mantra. As time goes by, however, we will expect the emergence of Web3 footprint-augmented regulation. In other words, in the presence of persistent identities and selective disclosures, regulatory statutes and compliance can be meaningfully represented on-chain.

Adherence to said standards will obviously be optional from the user’s perspective but can be enforced on the level of any DApp through fine tuning the logic of contingent transactions.

TradFi products and services are designed to apply to or exclude certain user profiles, and frequently for a good reason. The following use cases are enabled within the Galactica Network:

1. Compliant privacy: Compliant privacy roll-ups and DApps whereby users can retain the privacy of transactions without compromising compliance. For example, if a privacy roll-up is accessible exclusively to KYC’d users and supports generation of arbitrary proofs about transactions settled therein;

2. AML proofs: Fast generation of proofs that all the accounts registered under one’s name have only interacted with liquidity of KYC’ed users without revealing any other information. One can generate programmable proofs of compliance without giving up one’s privacy;

3. CeDeFi: Direct integration into traditional banking — the coexistence of DeFi and CeFi in a public ledger setup can be symbiotic as by all means it would offer higher degree of transparency than any of the two paradigms today;

4. RWA on-ramps: Ability to put up Real World Assets (RWA) as collateral: today, the vast majority of liquidity of non-financial asset classes remain entirely off-chain primarily due to compliance reasons. Held by institutional players, it cannot be deemed prudent to tokenize and expose to the DeFi liquidity;

5. Security tokens: Forward enterprise financing of security tokens and availability of said tokens on decentralized trading venues available only to accredited investors;

6. Heterogeneous account DeFi: DeFi where terms of interactions are different for every user depending on one’s web3 footprint.

7. Undercollateralized DeFi: A major use case not attainable in non-reputation augmented web3: < 100% collateral rates with certain history of transaction and social interactions.

8. Dynamic-access DeFi: Dynamic access to DApps depending on any dimension of one’s web3 footprint such as being an early adopter of an LP in a DApp enables access to a 0% collateral pool of a different DApp.

9. TradFi compliance on-chain: Galactica Network as a platform for TradFi interactions of arbitrary complexity:

10. Interbank liquidity pools accessible only to registered financial institutions and their institutional clients;

11. Institutional DeFi with programmable compliance, such as complex derivatives only available to subaccounts of institutional accounts of various regulated financial institutions with >15% Tier 1 capital ratios;

Keep in mind that these use cases would require exactly zero user PII to be disclosed to a DApp. Enabling compliance and PII contingent transactions without compromising user privacy is among most prominent use cases of Galactica Network tech stack.

Augmenting DAOs (DePol)

Persistent identities and the broader notion of DeSoc can be leveraged to design reputation-augmented or merit-driven governance mechanisms far more elaborate than those possible without explicit modeling of primitives enabling the protocol’s societal substrate.

These governance mechanisms can exist on the level of any given DApp, however, there is nothing preventing the same principles to be applied to the protocol itself. The distribution of power and economic resources of the protocol itself can be institutionalized to replicate the framework of any state governance or, better yet, any alternative distributional logic expressible through a Turing complete language.

The notion of meritocratic distribution of power and wealth as applied to a decentralized protocol and the actual mechanisms of doing so is the DePol dimension of the Galactica Protocol. Of course, DePol can be built around principles other than meritocracy.

Examples of use-cases that can leverage the DePol design include:

1. Merit-weighted voting power: User merits build up one’s reputation over time. Those adept in applied cryptography are more likely to have an educated opinion when voting o a respective topic. Hence, their voting power must be higher.

2. Merit & relevance: Selecting only individuals who have attended over particular hackathons and have positive attestations to have the veto rights within a developers DAO.

3. Quadratic distributions: projects that favor decentralization in governance and economic power could employ quadratic funding and voting mechanisms that are well known to be extremely vulnerable to Sybil attacks.

4. Retroactive funding: it is known to reduce moral hazard, among other things, yet it involves a highly subjective evaluation/pricing phase. Reputation-weighted votings can solve the guardian problem.

5. Expert forums: Sufficient “karma” across social media DApps and cryptography-oriented forums enable one to gain higher voting power in cryptography related votes.

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Conclusion

In this article we have addressed the theoretical foundations and relevance of social, economic and political institutions. These constructs are at the heart of human civilization and enable it to exist and evolve at the unprecedented pace it does today. There is no reason to believe that alternative systems we are building in web3 today could benefit from the absence of said institutions. On the contrary, the contemporary thinking about the web3 design space suggests that many shortcomings of DAOs, DeFi and other web3 applications can be directly traced back to the absence of sufficiently feature rich infrastructure for modeling non-trivial social institutions in the ether of the rapidly evolving crypto space. This, in turn, can be traced back to the low cost of Sybil attacks. Galactica Network zkKYC design among other things enables us to bootstrap Sybil resistance and enable persistent identities to start working on aggregating their web3 footprints enabling continuously increasing heterogeneity of accounts within the network.

This, in turn, will lead to an entire plethora of new use cases, currently unattainable in web3.

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