2020 and 2021 have been exciting years for blockchain, with fortunes being made and lost at a breath-taking rate! Certik reported that the amount of money lost in DeFi hacks more than doubled to $ 1.3 billion in 2021, with centralization the most common vulnerability.
We all chuckled when Chef Nomi ran off with $ 14 m from Sushi Swap and sheepishly returned it. But was it really funny? That was someone’s money. Do we pause to think about the consequences of what we are doing in this growing ecosystem?
Last year, we asked that very question in Applied Ethics in a Digital World, and I tackled the ethical challenges of Blockchain and DeFi. Let me highlight some of these issues. The potent mix of automation and financial technologies powering faster transactions and accumulating masses of consumer data surfaces a plethora of ethical questions and demands new approaches and frameworks to ensure that ethics are baked into the design of these new and powerful technologies.
At the tech stack level, we need to ensure proper conditions and methods of data sharing in blockchain meet expectations in terms of security, privacy, efficiency, and system integrity. The key ethical question at the technology stack level is “how should data security, privacy, and accessibility be ensured ethically, and what ethical information management strategy should be applied in system development and use?”.
It is in the applications that are built on blockchains, that the biggest ethical questions emerge.
Cryptocurrency risks include consumer protection, money laundering, criminal abuses, volatility and tax evasion, among others. Bitcoin has been criticized for costly, energy-hungry and otherwise meaningless computations used in mining. Many are working on advances in the underlying mechanisms needed to make cryptocurrencies more ethical and sustainable.
DeFi presents an array of ethical challenges, many related to consumer protection. Most DAOs raise money and, in return, investors get back governance tokens, thus creating a high degree of centralization at the start of token distribution. As Protocols started using their governance tokens as “rewards” for users participating in the network, many users see tokens as yield, not voting rights.
There is usually no minimum number to initiate the governance, but in order for a system to be considered sufficiently decentralized, there needs to be a high minimum number of token holders. Thus, the economic incentives of providing liquidity in order to get rewarded with governance tokens, encourages competitive and speculative behavior which leads to a centralized governance structure, since tokens slowly concentrate in a few hands. Excessive centralization means parties with conflict of interest can push through proposals, and activist investors can acquire a significant number of governance tokens to help push through proposals profitable to them.
Smart contracts raise ethical questions about self-executing code that operates autonomously and raise questions of legal jurisdiction and issues of territoriality. There is no legal recognition of documents or financial instruments stored on or issued for blockchains. When a smart contract fails, under which law and in which jurisdiction can action be taken? The legal status of a DAO is also a gray area, as nobody owns the organization, who can be sued and who sues or in the case of liquidating a tangible asset owned by the DAO, what rules are to be followed?
Institutions and society
Challenges for regulators include decentralizing the financial system, managing economic stability, and protecting consumer interests. Cryptocurrencies are in direct conflict with the established monetary systems and inevitably create ethical challenges for monetary policy.
Blockchain, like all technologies, can be misused, especially when there are risks of authoritarian states, persecution, and unintended consequences. There are risks of bad actors using digital identities, bank accounts, and mobile phones that allow authorities to track people’s choices. Such control might allow authorities to increase surveillance over vulnerable or persecuted populations. An authoritarian state could use such data collected from refugees against refugees, or nations of the global North that have no sympathy for the movements of refugees and immigrants, to keep refugees in neighboring countries.
Data ethics studies evaluate moral problems related to data (including generation, recording, curation, processing, dissemination, sharing, and use, for example), algorithms (artificial intelligence, artificial agents, machine learning, and robots), and corresponding practices (responsible innovation, programming, hacking, and professional codes), to form and support morally good solutions (right conducts or values).
Key ethical issues include the re-identification of individuals through data-mining, linking, merging, and re-using large datasets, as well as risks for group privacy, when the identification of types of individuals, independently of the de-identification of each of them, may lead to serious ethical problems, from group discrimination to group-targeted forms of violence. Automation has significantly increased processing speed but also led to more ethical risks and the need to examine unintended consequences of an automated technology. Scott (2018) raises some powerful ethical questions related to automation, including what happens when there is a mistake or vulnerability in the code?
At the heart of ethical considerations for blockchain lies consumer protection. The vast amount of personal and private data stored creates a number of points for consumer vulnerability. Sensitive, personally identifiable information for some of the most vulnerable people in the world is also being generated and made accessible across agencies, inevitably introducing a greater risk of data breaches.
Decentralized autonomous organizations
While DAOs have been widely promoted by blockchain proponents as providing transparency and trust, it is increasingly evident that DAOs are still in an experimental stage; there are also a large number of information asymmetries that may exist in a DAO and participant ambitions, motivations, values, or priorities are not transparent.
When automatically executable contracts such as those that underpinned the DAO are exploited, there is little legal recourse for those affected. Goodell and Aste argue that for Blockchain to be widely distributed in any given investment community, there must be some degree of adaptation with traditional ways of operating by introducing regulation.
What does all this mean?
There is certainly scope for greater ethical reflection and purposeful consideration of ethics in the design of blockchain and DeFi applications. This should include:
- Encourage greater ethical reflection from developers during design.
- Connect developers more closely to the ethical outcomes of their decisions and algorithms.
- Encourage community and network to take a more active and demanding stance on ethics.
- Encourage community and network to understand what is happening behind the scenes with governance and decisions.
Blockchain can have ethical impacts at the technology, application, and societal levels. It is important that these are considered and built into system design with intentionality.
While the promise of automation and decentralization is attractive, it is important to avoid the inadvertent facilitation of unethical conduct. Blockchain technology is a conditional good; it is only as beneficial and useful as the care that is taken to make it. As Simon Langstaff said “get the ethics right and we will be able to look back at this time of decision without regret”.