---
title: 5.4 Network States and the Future of Governance
description: Defining and understanding the network state and its implications
---

# 5.4 Network States and the Future of Governance

The final lecture of the DAO module, focuses on one of the most exciting and disruptive concepts surrounding decentralized governance: The Network State. The context behind the theory of network state’s is as follows: 

DAOs are fundamentally political - after all, we are dealing with the governance of protocols, value, and mechanics of systems that inherently hold value on their own. This time, however, the politics is not one that traces back to a physical company or entity, but rather it's the digital polis with all of the enhancements of smart contracts, automated function calls, AI governed behavior, and trustless access / permissioning. In short, when self-executing code, intermingles with value-laden systems, we have the opportunity to create entire countries - online. 

No individual has advanced the Network State thesis more than Ex-CTO of Coinbase, and Ex-partner at a16z, Balaji Srinivasan. 

**_Balaji’s thesis on the network state can be summarized as follows:_**

In one sentence: 

**_“A network state is a 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.”_**

And a slightly more complex definition: 

**_“A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population, income, and real-estate footprint to attain a measure of diplomatic recognition.”_**


![](@site/static/img/bootcamp/mod-em-5.4.1.png)


Summarized succinctly, Balaji’s argument is the following: 

_Many countries around the world have less than 10mm people in total, with quite low GDP. Now that value can be maintained on the level of software itself - outside of any physical reality - or polity (in political terms), it is not that outlandish to believe that communities of participants in these value laden software systems will move to organize themselves into digital countries, that eventually manifest themselves in physical locations. In fact, it is likely that this will happen because of the common values, shared future, and disenchantment with existing nation-states._


![](@site/static/img/bootcamp/mod-em-5.4.2.png)


## The Seven Steps To Moving From Startup Society To Network State - According to Balaji


1. **Found A Startup Society:** An online community based upon a common mission, objective, or shared identity, from which followers can strengthen their vision of the future. 
2. **Organize It Into A Group Capable of Collective Action:** _“Unlike a social network, a network union has a purpose: it coordinates its members for their mutual benefit. And unlike a traditional union, a network union is not set up solely in opposition to a particular corporation, so it can take a variety of different collective actions."_[^3](https://thenetworkstate.com/footnotes#fn.3) Unionization is a key step because it turns an otherwise ineffective online community into a group of people working together for a common cause.” This is to say, while an online community is necessary, it requires further organization such that it can ‘coordinate’ its members for their mutual benefit.’ This is the ‘strengthening process’ that move beyond a simple online community. 
3. **Build Trust Offline and a Crypto-Economy Online:** With an organized group, then natural next step is to strengthen the economic rails of the in-group itself, while also deepening relationships in the real world from the different members. Balaji often references the following graphic below to indicate time frames for such communities:

![](@site/static/img/bootcamp/mod-em-5.4.3.png)


4. **Crowdfund Physical Nodes:** The creation of physical nodes can range in size from buildings, and apartments, to plots of land and physical space itself - to the extent of new towns. The point here, is that the digital community with a strengthened economy, has now manifested their values and vision of the future in a physical space that can then develop a culture and atmosphere of its own. 
5. **Digitally Connect Physical Communities:** With a strengthened internal economy, and a close-knit group familiar with one another in the physical world with designated spaces, the network state is able to begin developing their ‘digital archipelago’ - which is the slow process of creating physical spaces for the community in question. 

_“Link these physical nodes together into a network archipelago, a set of digitally connected physical territories distributed around the world. Nodes of the network archipelago range from one-person apartments to in-person communities of arbitrary size.”_


6. **Conduct an On-Chain Census:** The sixth point is somewhat more arbitrary, but the underlying thesis is that in order to become more legitimate, the network-state must make it clear based on the data of their community, their economy, and their geography that they are a legitimate community. Once this is done it further legitimizes the future of the digital country. 
7. **Gain Diplomatic Recognition:** Moving from a startup society, to a digital country transitions critically at the point in which at least one country recognizes the digital country in some manner. This should be understood as a multi-decade process from which more and more countries will see strategic benefits from recognizing the network states, and conversely, with the network state being able to trade, support, and even fight with an existing country. 

This pathway is Balaji’s thesis for how to move from a startup society to a digital country / network state. What is not as evident is how a network state is distinct from a startup community, a religion, or some other political organization. Such characteristics are what Balaji outlines further. 

## The Key Characteristics of a Network State

There are roughly a dozen characteristics of a network state that Balaji lists off - it should be noted that these are non-exhaustive, and most likely will evolve over time. However for the time being, Balaji has identified them as essential for being known as a network state. 

_A Social Network:_ One integrated community - that is primarily social and secondarily geographical. Membership can be removed, and members must abide by the rules of the community. 

_“The people of a network state form their nation online. Social rather than geographic proximity is the core organizing principle”_

_A Moral Innovation:_ “Missionary societies outcompete mercenary ones.” The idea here is that a network state must be grounded in a vision of the future that is fundamentally normative - that is to say, the reason there is a community that has acquired geographical space and attempts to become legitimized as a nation is for an improved understanding of ‘the good life’. This improved understanding is moral at root, and thus seeks to change the ‘status quo’ from the societies in which members are coming from.

_“Everyone within the society thinks some principle X is good that the rest of the world thinks is bad, or vice versa. This is the proposition part of a proposition nation.”_

_A Sense of National Consciousness: _National consciousness is defined by Balaji to mean, _“Everyone in a network state feels like they’re part of the same community, sharing the same values and culture.”_ The key emphasis on values and culture means that a network state identifies as one cohesive whole as opposed to multiple separate parts. 

_A Recognized Founder:_ A recognized founder, is akin to a leader willing to drive the direction and set the vision for the future of the network state. This is not necessarily one single individual - it could be a board, a multi-sig, or a collective - but the important thing is that there is unity around the person(s) and vision set by those persons, such that the direction of the network state can be set and improved over time. 

_A Capacity for Collective Action:_ Purpose + action determines the capacity for collective action. Closely related to national consciousness, this characteristic focuses on the capacity to set and create an envisioned future. This collective vision and enaction, has a unifying impact on the citizenry (According to Balaji). 

_“It’s a combination of collective purpose (which is like the mission statement of a company, but for a community) and the capacity to act on that purpose.”_

Example given by Balaji from the past include the following:

_“The Puritans wanted to build a “[City on a Hill](https://www.americanyawp.com/reader/colliding-cultures/john-winthrop-dreams-of-a-city-on-a-hill-1630/).” The Japanese after the Meiji Restoration replaced their previous mission statement of “Revere the Emperor, Expel the Barbarians” with “[Enrich the Country, Strengthen the Military](https://en.wikipedia.org/wiki/Fukoku_ky%C5%8Dhei),” turning their society around 180 degrees and thereby building the first non-white industrialized power.”_

_An In-Person Level of Civility:_ Decency and respect for fellow citizens requires civility. In order for a common consciousness and capacity for collective action to develop, the members of the society must be capable of interacting with one another in healthy and open manners. 

_“So whether one is coming from the left or right, pulling together a high-trust society means in-person levels of civility towards community fellow members, both offline and online. High trust in turn comes from alignment towards a collective purpose and a sense of national consciousness.”_

_An Integrated Crypto-Currency:_ An integrated crypto-currency is simply a modern version of saying, a shared system of value keeping. Beyond simply monetary value, an integrated crypto-currency can operate as the backbone for record keeping, identification, and data of all of the citizens inside of the society. 

_“It manages the internal digital assets, the smart contracts, the web3 citizen logins, the birth and marriage certificates, the property registries, the public national statistics, and essentially every other bureaucratic process that a nation state manages via pieces of paper.”_

_An Archipelago Of Crowd-Funded Physical Territories:_ The underlying point here is not just the ownership of physical property, but the integration of physical property with the digital network. Whether that means NFT gated access to certain buildings, visibility of certain flags with certain VR glasses, or some other digital-physical interaction point, a real network state requires land - that is integrated with the ‘network’. 

_“You network these clusters together using the internet into a network archipelago, eventually using newer technologies to make them more real.”_

_A Consensual Government Limited By A Social Smart Contract:_ This is the ‘legal’ ‘governance framework’ of the consensual government. Notably Balaji only puts this characteristic in, _after_ those dealing with collective action, national consciousness and leadership. This characteristic is the officially enshrined ‘code-base’ for how the network operates on an administrative and granular level. 

_“Many people make the mistake of thinking the laws (or the land) come first when starting a new state, but laws should only come after the formation of an organic people – of a network nation – not before.”_

However, the reality of a binding governance framework - that collects and manages one’s identity and reputation, is a very real and serious decision that citizens must be willing to take. The full scope of consensual governance by smart contract is outlined by Balaji below: 

_“when we say that a network state has “consensual government limited by a social smart contract”, we mean that it exercises authority over a digital (and, eventually, physical) sphere constituted solely of those people who’ve opted in to its governance by signing a social smart contract with their ENS names, in much the same way they might “opt in” to the governance of a centralized exchange by depositing coins there._

_A Virtual Capital:_ The idea behind a network state is ‘cloud first’ and ‘last’. And the virtual capital piece strictly refers to the ‘cloud last’ concept. In short, virtual capital means that the value inherent in the network state is predominantly virtual and accessible by the different members of the community - whether that is through VR glasses, a special metaverse, or an architecture engine. 

The final two characteristics of a network state are legitimizers of the digital nation, in the eyes of existing state criteria among countries: Demographics and data on the size of the country, and diplomatic recognition in the eyes of other countries. 

_An on-chain census that proves a large enough population, income, and real estate footprint._ Note this is not only for legitimacy in the eyes of the outside world but also for reputation among other emerging network states. In essence, this is the new frontier of ‘crypto products’ whereby there is not a list of the top tokens, but instead a list of the most successful, affluent and populated digital countries. 

_“By accumulating the censuses of all startup societies in a hypothetical nationrealestatepop.com site similar to coinmarketcap.com, you could track in real time the number of startup society members, the acreage of real estate owned by those members, and their on-chain GDP.”_

_Attain a Measure of Diplomatic Recognition:_ Diplomatic recognition finalizes the legitimacy of the network state, and enshrines their capacity to act not only amongst themselves, but on the global stage to some degree. 

_“Diplomatic recognition requires a putative state to have clout, and clout is in turn established by a publicly verifiable on-chain census of population, income, and real estate, to prove that your growing society is as large as you say it is.”_

## DAOs in the Context of Crypto

The Network State Thesis, when taken together with the Composability Thesis (as discussed in Module 2) turns the promise of crypto into an entirely new animal: Crypto is by definition political, as on-chain governance cross-pollinates with composable value systems, allowing individuals to autonomously govern themselves outside of the domain of the nation-state, legacy tech companies, and geographical boundaries. 

When one considers the political bent of crypto, in line with other emerging technologies such as Virtual Reality, the Internet of Things, advanced manufacturing and 3D printing, it becomes evident that composability of value, and coordination of decision making inherent to smart contracts, is a ‘general purpose technology’ much like the steam engine in its wide and vast array of potential applications. 

## Actively Building Network States and How L1 Ecosystems Can Understand Them

To conclude this module on DAOs, OO’s and specifically on the emergence of Network States, it is useful to look at some of the most promising and innovative examples of network states. For full visibility into the list, see [https://thenetworkstate.com/dashboard](https://thenetworkstate.com/dashboard):



![](@site/static/img/bootcamp/mod-em-5.4.4.png)




* **Afropolitan:** One of Africa’s largest communities spanning the entire continent (Pan-Africa) that is now organizing into a formal network state and working towards agreements with multiple African governments for visa-free travel and other benefits. 
* **Praxis Society:** Praxis is [focused on creating a new city focused around revitalizing](https://www.cityofpraxis.com/) how life is lived, in line with the technologies and values that will create a better future. It’s five step plan, only launching now in 2022 intends to migrate 10,000 residents to a new city in the coming decade. 
* **City DAO:** City DAO has set its sights on creating a digital city, of 10,000 people, built around a system of guilds. Its key metric of success is the [number of citizens ](https://city.mirror.xyz/OQ-VjksyKPgdswhN8vmnk3o_CNPym6PJ0EAFdX6h5TA)spending time on CityDAO property. Notably, CityDAO believes the city itself is the ‘product’ under construction from which multiple governance and social benefits can be derived. 
* **Nation3:** Aspires to build a [Solarpunk City from the cloud.](https://nation3.org/) Already backed with the $NATION currency, and[ its own manifesto](https://nation3.org/manifesto) on the power of crypto-communities creating a new frontier for political organization and individual sovereignty. 

Other mentions include [Porta Norte (Panama) ](https://en.portanorte.com/masterplan)and [W3ST](https://en.w3st.xyz/nodos). 

Some open questions that have yet to be addressed include: 



* **Timeframes:** How long does it take to progress from a startup society to a network state? Is there a playbook for managing and tracking the evolution from one into the other? 
* **Incumbent Reaction:** How will existing countries react to such entities? Including the United Nations and other Non-Governmental Organizations? 
* **National Opportunism:** Will existing stateless nations capitalize on such movements to organize into their own digital countries? Examples like Catalonia and Kurdistan, as well as Tibet are prime examples of cross-pollination between existing stateless nations, and emergent digital states. 

## Some inadvertent effects of Nation State’s Include the Following

* **Low Cost, High Impact:** They are low cost, and hold the promise of bringing entire communities and plots of physical land to an L1 ecosystem. Things like NFT infrastructure, robust data models, storage, invoicing, and identity management, are all presupposed for the ‘network state toolkit’. 
* **A revolution in political science:** The academic world has yet to comprehend or keep up with the vast revolution of digital governance - and how it challenges the traditional concept of the ‘nation-state’. Network States specifically, and DAOs more generally signal the transition from the Westphalian world order, into something entirely new. 
* **A new geopolitical opportunity:** Existing groups of peoples, religions, entrepreneurs, and existing countries all stand to benefit from leveraging the potential of network states and DAOs in clever ways - whether it is for tourism, financial benefits, or network benefits. From Wyoming’s DAO law to El Salvador promoting businesses in country, there is a large opportunity to educate and act quickly in this new framework of digital governance. 