Please note that this post isn’t intended as an attack on Balaji. In fact, I recommend reading his book. It’s simply good manners to critique the strongest version of the ideas that one disagrees with.

In his book The Network State, published earlier this year, Balaji presents a new vision of the future of our civilization. He proposes that, rather than relying on traditional methods of reform to address problems in our ossified political system, we should instead consider establishing new states as an alternative to existing ones, much like how startups offer an alternative to established corporations.

Balaji defines a network state as follows:

A network state highly aligned online community with a capacity for collective action that crowdfunds territory around the world and eventually gains diplomatic recognition from pre-existing states.

To reach this goal, we have to go through a number of steps, beginning with a startup society:

Turning a startup society into a network union makes it a digital community capable of collective action. Turning that network union into a network archipelago manifests that collective action in the real world, as the community crowdfunds physical properties around the world and connects them via the internet. Finally, an impressive enough network archipelago can achieve diplomatic recognition from an existing government, thereby becoming a true network state.

The final network state envisioned by Balaji will look something like this:

We immediately notice one interesting property: the territory of a network state is decentralized. As Balaji explains in the book:

a network state isn’t physically centralized like a nation state, nor limited in scale like a city state. It’s geographically decentralized and connected by the internet.

His proposal suggests that a network archipelago, made up of decentralized physical properties around the world with a significant population and income, would, at some point, be recognized as a legitimate state by existing states. Since a state is defined as an administration that holds sovereignty over physical territory through the monopoly of violence, this would mean that existing states would need to relinquish sovereignty over parts of their territory. At the risk of stating the obvious, let me point out that the exemplary network state shown above would require the United States of America to give up sovereignty over one of its largest cities, New York (or presumably over parts of it). Let me be clear: that will never, not in a million years, happen. The idea that if only your dashboard shows a high enough income and population, and then you asked nicely for it, you might get sovereignty over New York is absurd.

No Fun Without Sovereignty

Without sovereignty over some territory, a startup society is severely limited in its goals. This becomes evident in Balaji’s appearance on the Bankless podcast, where he discusses how a Bankless nation (or a Bankless network state) could function. Balaji explains that they could begin to organize around their one commandment – “Banks bad, Bankless good.” They would then try to introduce laws in various countries in order to, for example, legalize private banking.

Note that the lack of sovereignty makes changes like this a tedious process. Instead of being able to declare private banks legal, the startup society would have to become a lobbyist or activist group that tries to bribe existing politicians, just like everyone else. Now such a group may be useful for a particular case, but it is not, and never can be, a state.

It seems that Balaji may have overestimated the feasibility of achieving certain goals without sovereignty. This is evident when, in the same podcast, he discusses the role of violence, a topic that is not addressed in the book. War and the ability to defend territory are crucial to the concept of sovereignty and the state. Put simply, without being able to defend a territory, there is no sovereign state. Balaji, drawing on his intuition informed by Bitcoin and Ethereum, comes to a non-violent solution: we don’t need to defend our territory because it will be decentralized. In other words, the U.S. won’t be able to attack our network state for the same reason it can’t shut down Bitcoin. Balaji argues:

All the tanks and the planes and the nukes and stuff don't work in the cloud in the same way; they don't work on the internet. You cannot just hit a button and bomb Bitcoin or Ethereum. […]

Think about, logistically, what it would mean to bomb something like that [a network state]. First, you have to find all the nodes. That itself is non-trivial because a network state or network archipelago doesn't need to make all of them public. It doesn't, in fact, need to make any of them public.

Of course, we cannot exist solely on the internet. Most of the changes one would want to make to the existing system – most (perhaps all) of the reasons one would start a new country – touch the physical world. And once we leave the purely digital realm, we have to deal with those annoying tanks.

What Balaji proposes appears to be more akin to a secret society than a new state. And there is nothing wrong with forming a secret society (just as there is nothing wrong with being a network archipelago), but it limits the possibilities. The Bankless example illustrates this point quite well. While it might be possible to found a startup society and crowdfund a decentralized, physical (and even secret) territory that the U.S. government would have difficulty attacking, that would also make the territory almost completely useless. Imagine owning such a secret territory and then starting to open private banks. How do you think that would work? The answer is that it wouldn’t work at all – it would be illegal.

The Burning Man Dream

In the book, Balaji provides one example of a full network state under the headline Examples of Parallel Societies: Recognized Network States:

Now let’s do a more difficult example, which will require a full network state with diplomatic recognition.

This is the medical sovereignty zone, the FDA-free society.

You begin your startup society with Henninger’s history of FDA-caused drug lag and Tabarrok’s history of FDA interference with so-called “off label” prescription. You point out how many millions were killed by its policies, hand out t-shirts like ACT-UP did, show Dallas Buyers Club to all prospective residents, and make clear to all new members why your cause of medical sovereignty is righteous.

But to actually achieve personal medical sovereignty, your startup society would need some measure of diplomatic recognition from a sovereign outside the US — or perhaps a state within the US. It would need to actually be what we call a network state, as it would need legal recognition from an existing government.

For the case of doing it outside the US, your startup society would ride behind, say, the support of Malta’s FDA for a new biomedical regime. For the case of doing it within the US, you’d need a governor who’d declare a sanctuary state for biomedicine. That is, just like a sanctuary city declares that it won’t enforce federal immigration law, a sanctuary state for biomedicine would not enforce FDA writ.

With this diplomatic recognition, you could then take the existing American codebase and add one crucial new feature: the absolute right for anyone to buy or sell any medical product without third party interference. Your body, your choice. That’s how you’d get an FDA-free zone.

Again, this is less a new state and more a group of people who lobbied politicians of existing states not to enforce a certain law on a part of their land. Even if such a zone could be created within the U.S., it would not be a new sovereign state, but a place where people can take all the drugs they wish. In short, it would be a recreation of Burning Man.

The example also aptly illustrates the tension between the usefulness of the territory and its secrecy. You can either have a useful territory (in this case, a place where people can take all the drugs they want) or a secret territory (that the U.S. can’t attack because it’s hidden), but you can’t have both. The moment you ask the government to exempt your territory from a particular law, you have to specify where that territory is, which makes it both public and vulnerable. Finally, if the government changes its mind, it can simply revoke the special privileges it granted you – party over.

The Traditional Way

So how can we create a new sovereign state that is able to legalize private banking and let everyone take all the drugs they want? Unfortunately, I don’t think that’s possible. (Otherwise, I would be building it.)

The best opportunity is to establish a new private city in a rural area of a state that pledges not to bother you. As far as I can tell, that is the approach of Praxis. First, you create an online community with people who share a vision for a new society. Then, you raise funds to build a new (centralized) city in a state that promises to let you do whatever you want – presumably in exchange for a fee.

That plan may work, but it probably won’t for the reason Balaji mentions in How to Start a New Country:

Moreover, while an existing state may be content to let people harmlessly LARP a fake country in their backyard, an actual threat to sovereignty typically produces a response with real guns, whether that be the Falklands or Sakhalin.

Having abandoned our previous defense strategy – decentralized territory – we are back to the war problem; “You and what army?” as they say. Note that even though Praxis is listed on Balaji’s network state dashboard, they’re not trying to become a network state. Instead, they’re following the traditional private city approach that many others before them have tried. The reason they might succeed where others have failed is that they built an online community of motivated people first. A city is an inherently social affair that partly works via the network effect, making starting from scratch difficult. But having a pre-established online community may help them overcome the initial hurdle of gathering enough people. Still, the issue of defense remains. Without sovereignty, the state the city is built in can decide to change the contract, charge more taxes, or take over the city at any point. Worse, this danger increases the more successful such a project becomes.

(I have already written one other post on the subject of private cities and new countries called Cloud Countries, without the warm glow.)