Wuwei

In which I do something stupid and am punished accordingly

The classical Chinese concept of wuwei (無為 - usually translated as “effortless action”) tends to be viewed by modern interpreters primarily through a Daoist lens. It is taken to refer to a flow state under which the subject exists in a serene harmony with his environment. Coloured to a degree by later Buddhist ideas, it is a sort of earthly nirvana, whereby the serenity inherent in an individual’s mind transmits itself to his environment via his actions (or non-actions), allowing the two to act in unison, revolving around one another without ever colliding.

This article is about the other kind of wuwei.

In early texts, individual-level wuwei is, in fact, a relatively minor concern. More often than not, when the term is used, it is another - more political - sense that is intended. In political contexts, wuwei is used to describe organisations that minimise the amount of human decision-making required for their functioning. Thus, for example, a system in which every legal case must go before the king for him to express his personal opinion is not wuwei, while one in which he deputises magistrates to judge according to pre-established rules is wuwei. The one doing the wuwei-ing is not the king but the emergent entity that is created via his procedural rules, which is getting the maximum possible output from minimal input.

The goal in setting up wuwei systems is not merely to maximise efficiency, however. The more subjective human decisions a system requires, the leakier and more fragile it becomes. A non-wuwei system, even when run by the best and brightest, has a higher probability of failing faster and more devastatingly than a wuwei system. While most of the decisions they make may be good, the more of these there are, the greater the likelihood will be that one will turn out to have been fatally flawed - and no amount of good decisions can counterbalance a single existentially bad one. On the other hand, if decisions are made only according to tested mechanisms, the chance of a non-trivial failure is much lower. This is the closest thing to an iron law of organisational psychology, but it is one towards which most people feel an instinctive repulsion. Just as the vast majority of plaintiffs would rather have their cases judged by a human than an AI, even after having been provided with proof that the AI will do a better job[1], there is an instinctive reaction against organisations in which decisions are made by procedures rather than people.

This is all somewhat abstract, so it may be better illustrated with two thrilling and dramatic real-world stories of organisations that adopted different approaches…

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Organisation One

Founded by a group of Ivy League philosopher princes, the goal of this organisation was to raise money that would be spent on philanthropic projects selected to provide the maximum possible benefit for humanity as a whole.

The founders, having benefited from the best mathematical and scientific educations available, formulated a trading strategy inspired by their humanitarian principles. While those who trade purely for personal gain tend to be relatively risk-averse, Organisation One, trading on behalf of the beneficiaries of its anti-poverty programmes, would be more aggressive in its pursuit of gain: the worst that could happen would be that the founders would lose their initial capital, while the potential benefits of a successful vaccine for malaria or economical clean energy are enormous. In other words, the beneficiaries would bear no risk and stood to gain quasi-infinite rewards. This being so, the managers of the organisation had a fiduciary obligation to adopt a high risk martingale (“double or quits”) trading strategy to maximise the amount of good that they would be able to do in the world.

Despite beginning their operations during a historic bull market, the founding team encountered some short-term bad luck. Their investment arm made more than one unfortunate trade. These were of no existential consequence, but posting losses while everyone else seemed to be making record profits would have damaged the organisation’s image, reduced its client base, and thus adversely affected the amount of good it would be able to do in the future. Following their strategy, the management team decided to double down: only by taking such an approach would they be able to recoup their losses. However, in order to do this they required additional funds. They would need to find collateral for a loan. Fortunately, they already had a portfolio of various minor cryptocurrencies, and given their market influence they would be able to inflate the value of these before putting them forward as their guarantee. This might cause problems later if the value dropped, but by that point they would surely have earned enough trading income to cover the shortfall. They were safe.

Or relatively safe. The transactions in which they had been forced to engage were not illegal, but would have looked bad in the event that they were publicised. If outsiders realised that the trading desk was being propped up using injections of cash from other parts of the business, this would be off-putting to investors and clients alike. If Organisation One’s reputation suffered a hit, it would be in much more serious trouble. The obvious solution was to establish a set of specialised internal accounting procedures for the purpose of handling these transfers, and thereby prevent any unfortunate misconceptions about the organisation from spreading.

Their bad luck did not end there, however. Doubling down on their trades failed to produce the gains hoped for, and soon the loans they had received would be called in, thus further worsening their position. If they could only get past this obstacle they would be able to clamber out of the hole they were in and return to their original plan to fight poverty and disease. Fortunately for the management team, it had ready access to a significant source of funds in the form of client deposits. While using these to cover business expenses is technically illegal, it would only be necessary for a brief time - only as long as it took to pay off the existing loans and raise further funds. In the long term, everything would be fine.

For those who have not yet recognised the details of this story, Organisation One is an amalgamation of FTX and Alameda Capital. Their collapse is now a matter of public record[1].

Organisation Two

Over the past year, I have been involved in building DAObi, a web3 simulation of Han dynasty politics, in which users fight to build the largest factions and thereby win the right to increase or reduce the supply of the in-game currency .

A few days ago I stupidly clicked on a link I should not have clicked and compromised two of my Ethereum wallets, one of which was the owner of the game’s smart contracts.

In many of today’s pseudo-decentralised web3 projects, losing control over the management wallets would spell the end of the enterprise. In the case of DAObi, the management wallets had no effective control over the system to lose. The game functioned entirely as it always has done, and of the 460 players holding approximately $13,700 worth of game currency, the only ones who noticed anything unusual going on were the four or five who had been watching the dev channel on Discord as I attempted to work out what what happened to my wallets. From the beginning, the game was designed such that the only single individual with any significant power is the leader of the largest in-game faction, and even he can be removed at any moment in the event that his followers judge him to be under-performing. Infrastructure and development funds are handled by a multisig wallet and a DAO, ensuring that even if one developer loses control over his account, any changes that may be attempted via his wallet must be done in the full glare of on-chain transparency and can be blocked by other voters. The contract owner cannot make contingent changes in the event of an emergency, but it is this very fact that ensures that there will be no emergencies requiring contingent changes.

Tldr: I lost about $70 in MATIC and had a small Uniswap position emptied, with this being the sum total of the consequences for everyone involved in the project, players and developers alike.

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It is hard to fault the FTX founders: they had a thoroughly laudable humanitarian goal, and made reasonable-seeming decisions given the information available to them at each stage of the process. By contrast, DAObi is a silly little online game, and I freely admit that clicking on the suspect link was extremely unwise. Nevertheless, FTX is dead and DAObi continues pootling along as it always has.

Insofar as our positions are comparable, I am significantly worse off than 75% the FTX founders, who are still free at and wealthy at the time of going to press (they at least had the good sense to donate large amounts of money to both major US political parties, after all). On the other hand, the DAObi game still exists and its users have all of the funds they began with (plus some extra, as the value has increased a bit recently), while FTX is bankrupt and anyone who had money in it when it collapsed no longer has access to their funds.

Why is this?

Because FTX was not, in fact, a system. It was the preferences of a few fallible individuals loosely masquerading as a system. It contained no feedback mechanisms to force it into compliance with its environment, only the directors’ best attempts to tweak it in response to the unreliable signals they received. Because they were acting altruistically (or as moral tyrants, depending on your viewpoint), the managers did not even have their own instinctive danger signals upon which to rely. They made an arbitrary estimate of the utility functions of those worse off than themselves were assumed to possess and then graded their own performance in satisfying them. DAObi, by contrast, is a pure preference aggregator. It assumes nothing on the part of its beneficiaries, but merely seeks to reflect their own preferences as faithfully as possible, enabling it to respond quickly and accurately to environmental changes in a way that no individual (even an MIT-educated individual) can manage. The most skillful financial manager - as assessed via his ability to reward his followers - is selected as its leader. While he exerts arbitrary authoritarian power, his actions are governed by the knowledge that he will lose his position as soon as his performance flags.

The key difference between web3 and web2 lies in the fact that in web3 code is law. This means that if you need to know who is in charge to know whether a project is a good, then it is by definition bad, since this means that it has vulnerabilities hard-coded into it. This argument will not sway most investors, however. They may know it to be true in an abstract, intellectual sense, but gut feeling is a powerful counterweight. For most people it is better to have a genius in charge than to build a system that either obviates the need for geniuses or cultivates its own according to system-specific metrics.

It’s a depressing prospect for anyone building a wuwei organisation, but we do have one major factor on our side: attrition. FTX had everything its side, and still it failed. Wuwei organisations may not attract investment, but they have an extremely high degree of Darwinian fitness. Many more FTXs will rise and fall in the years to come, but DAObi will outlive them all.

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[1] Yalcin, Gizem, Erlis Themeli, Evert Stamhuis, Stefan Philipsen, and Stefano Puntoni. "Perceptions of Justice By Algorithms." Artificial Intelligence and Law (2022): 1-24.

[2] The information here is a simplified and fictionalised version of the account given by FBIFemboy in his excellent summary.