ACADEMIA Letters

A Formal Model of Bitcoin as a Social-Ecological System

(SES)
Edward de la Rey

The following exposition is a brief overview of the current theoretical model I am con-
structing as part of my PhD thesis. The work is in progress and must still be fully evaluated.
This letter argues that SES Theory in general, and a formalized SES domain model in
particular can be employed to productively model the entities, relationships and outcomes
that together constitute the Bitcoin ecosystem.
Bitcoin is currently printing new all-time highs against fiat currencies (Mourya, 2020) and
institutional interest is intensifying with hundreds of millions of dollars being committed in
investment (Tamuly, 2020). Blockchain-based cryptocurrency systems can in general be re-
garded as a new form of institution capable of coordinating the economic actions of groups
of people (Davidson et al., 2016). Bitcoin, and the cryptocurrency alt-coins it has spawned,
have created an entire new financial industry, yet there is as no extant framework for the
academic study of these systems. There remain many unanswered questions related to gover-
nance (Tapscott & Tapscott, 2017) and the long-term social economic sustainability of these
systems. Existing institutions are regulated and subject to judicial authority, whilst many new
blockchain ventures such as Initial Coin Offerings (ICOs) have operated outside of regulatory
structures (Tapscott & Tapscott, 2017). Is regulation the answer, or should the Community
provide its own guidelines and oversight (Tapscott & Tapscott, 2017)?
Self-regulation has been described as impossible in the e-commerce market, however,
Bitcoin is the result of self-organisation from an open-source community. It has successfully
bootstrapped itself through its social contract based on consensus building and voluntary as-
sociation (Elliott, 2018). Any framework applicable to the cryptocurrency domain must be
capable of conceptualising the human and technological aspects of such self-organised cryp-
tocurrency platforms.

Academia Letters, April 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Edward de la Rey, edelarey@gmail.com

Citation: de la Rey, E. (2021). A Formal Model of Bitcoin as a Social-Ecological System (SES). Academia
Letters, Article 527. https://doi.org/10.20935/AL527.

1
 Fortunately, self-organization is an integral part of the study of commons based social-
ecological systems which successfully avert the “Tragedy of the Commons” scenario (McGin-
nis, 2011; Ostrom, 2009). There is substantial scientific benefit in accurately modelling the
complex interactions around common pool resources and property regimes (Ostrom, 2007),
and property rights are a form of institution in-and-of themselves (McGinnis, 2011). Bitcoin
is intimately connected with self organisation and property rights as bitcoins are produced
and secured via a common platform that is privately provisioned.
My research applies the Social-Ecological Systems (SES) Framework (Ostrom, 2009) for
analysing the sustainability of SESs to the Bitcoin ecosystem. It applies a diagnostic procedure
(Hinkel et al., 2015)
and the Formalised SES framework (Hinkel et al., 2014) to create a formal UML (Unified
Modelling Language) based domain model of Bitcoin as an SES. The model is ultimately in-
tended to facilitate the study of governance interventions on the Likelihood of Self-Organising
(LOSO) to improve and maintain the ecosystem. Successfully fostering or increasing self-
organizational activities is held to positively influence system sustainability (Ostrom, 2009).

Figure 1 - Simplified Formal Model of Bitcoin as an SES

An SES system consists of a Resource System which produces Resource Units for appro-
priation by provisioning Actors. By creating a business process model (not shown) of a Bit-
coin peer-2-peer payment mechanism it was possible to identify the main components of the
Resource System and the mechanism of producing and distributing Resource Units (bitcoin).

Academia Letters, April 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Edward de la Rey, edelarey@gmail.com

Citation: de la Rey, E. (2021). A Formal Model of Bitcoin as a Social-Ecological System (SES). Academia
Letters, Article 527. https://doi.org/10.20935/AL527.

2
For Bitcoin, the Resource System is comprised of four high level conceptual entities which
exist as software processes viz. the Wallet, the Ledger, the Network Routing Node and the
Miner. Each of these entities (processes) carries out a set of critical functions (sub-processes)
and provides associated information which is critical to maintaining the Likelihood-Of-Self
Organising (LOSO).
The Wallet allows the End User Actor to create addresses for sending and receiving bit-
coin. It allows the End User to spend bitcoin by creating a properly structured Resource Unit
(RU) transaction consisting of Unspent Transaction Outputs (UTXO) which is then broadcast
to peer-nodes to validate. The Network Routing Node provides transaction and block val-
idation and broadcasting capabilities. The Miner competes to find a valid block and in so
doing secures the transaction process by producing a valid PoW. Finally, the Ledger main-
tains the history of all valid blocks and transactions by linking each block to its chain of valid
predecessors, thereby creating the immutable blockchain.
The business process model (not shown) contextualised the Roles various Actors play in
relation to the Resource System and Resource Units. Actors are conceptualised as belonging to
one or more specialisations viz. End Users, Watchers, Doers, Executives or Czars. End Users
are those who hold and transact bitcoin. The remaining Roles are related to the activities
carried out by the software processes (high level entities) comprising the Resource System.
For further detail on these conceptual Roles in relation to Blockchain in general, see the work
of Gutmann et al. (2020)
The set of Interactions between high-level entities results in a number of different actual
and possible Social and Economic Outcomes. Both Social and Economic Outcomes are re-
lated to the Benefits which the various classes of Actors accrue for participating in the Bitcoin
Ecosystem. In terms of Bitcoin’s system Operational Rules, the Executives, through the ac-
tivity of mining, are the only Actors to receive direct economic instrumental benefits. These
instrumental benefits are in the form of Block Rewards and Transaction fees, which the Ex-
ecutive issue to themselves after mining a block, which is accepted as legitimate by its peer
nodes. Other Social and Economic benefits may also accrue to Actors through association
with the Bitcoin ecosystem. For example, individuals contributing to the Bitcoin source code
base may acquire social benefits such as prestige or respect, better access to jobs etc.
The final entity of an SES is the Governance System whereby rules are created that de-
termine the possible Interactions between the Resource System, Resource Unit and Users.
Bitcoin’s operational rules are algorithmically enforced, but these rules are determined by
those Actors (Czars) who determine the ruleset. In Bitcoin’s case the majority of Operational
Rules are determined by the eponymous author of Bitcoin, Satoshi Nakamoto (Nakamoto,
2008). However, these rules in theory are open to change according to the Collective Choice

Academia Letters, April 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Edward de la Rey, edelarey@gmail.com

Citation: de la Rey, E. (2021). A Formal Model of Bitcoin as a Social-Ecological System (SES). Academia
Letters, Article 527. https://doi.org/10.20935/AL527.

3
Rules which are determined by the voluntarily participating Actors as part of the Governance
System.
The Interactions between high-level entities take place as complex process relationships
between respective 2nd level variables. These 2nd level variables and resultant process rela-
tionships have not been shown on the diagram due to the need to simplify the presentation.
These process relationships are the target for Governance rule making, and any changes to
participating variables can have complex non-linear Outcomes (Ostrom, 2009). For example,
changing any of the variables such as the block-size, the number of possible bitcoin or the
difficulty adjustment formula, could have serious implications for the Ecosystem as a whole
because of complex feedback relationships.
The model as described aims to capture the relationships that exist between the Actors
and the actual network constitution and operation. This means that the architecture of the
blockchain, both physically and conceptually as the Resource System and its Governance Sys-
tem rules are correlated through the actions of the Actors which either lead to a more or less
sustainable outcome. Actors through participation perpetuate the system, any changes to the
operating rules and thus the reward mechanisms or start-up parameters (such as block-times
or block rewards) will undoubtably influence the participation (Likelihood of Self Organis-
ing) of the Actors and thus influence the sustainability of the network. The influence may
be either positive or negative depending on how it influences the distribution of Intrinsic or
Instrumental Benefits within the ecosystem.
Looking beyond Bitcoin to other ecosystems, it is expected that the constitution of the
Resource system may vary in terms of protocol and rewards etc. However, the system would
need to nonetheless have similar high-level domain relationships among the Actors, Gover-
nance System and Outcome Indicators. All cryptocurrency Resource Systems will have a
Wallet, NRN (consensus protocol), Ledger and Resource Units. It is the manner in which
these are constituted in terms of 2nd level variables (issuance, block-times, rewards etc) and
the social relationships between the Actors and Governance System which determines Sustain-
ability. The social interdependency of the various types of Actors, the Governance System,
the Resource System its reward system (intrinsic and instrumental) is captured in this model.
The ability to codify these variables (parameters) into a formalised model will contribute to
the study of cryptocurrency blockchain ecosystems within the domain of SES theory.
In summary, through formalization it becomes possible to model existing systems, and
also once the model is further developed and matured to simulate the effects of changes to
system critical variables. My proposed model will contribute to the study of such ecosystems.
It will also promote intra- and inter-disciplinary study of commons-based cryptocurrency sys-
tems, as the formalised model is compatible with existing tried and tested SES theory.

Academia Letters, April 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Edward de la Rey, edelarey@gmail.com

Citation: de la Rey, E. (2021). A Formal Model of Bitcoin as a Social-Ecological System (SES). Academia
Letters, Article 527. https://doi.org/10.20935/AL527.

4
References
Davidson, S., De Filippi, P., & Potts, J. (2016). Disrupting Governance: The New Institutional
Economics of Distributed Ledger Technology. SSRN Electronic Journal, 1–27.

https://doi.org/10.2139/ssrn.2811995

Elliott, S. (2018). Bitcoin : The First Self-Regulating Currency ? LSE Law Review, 3(1995),
60–91.

Gutmann, P., Naccache, D., Palmer, C. C., Sherman, A., Javani, F., Zhang, H., Golaszewski,
E., Strawn, G., Kshetri, N., Andriole, S., Villela, K., Groen, E., Doerr, J., Pflaum, A.,
Golzer, P., Sheth, A., Yip, H., & Shekarpour, S. (2020). Computing Edge: Blockchain,
Cryptocurrency, Digital Transformation, Internet Of Things. Computing Edge, 22(1), 1–
68. www.computer.org

Hinkel, J., Bots, P. W. G., & Schlüter, M. (2014). Enhancing the Ostrom social-ecological
system framework through formalization. Ecology and Society, 19(3). https://doi.org/
10.5751/ES 06475-190351

Hinkel, J., Cox, M. E., Schlüter, M., Binder, C. R., & Falk, T. (2015). A diagnostic proce-
dure for applying the social-ecological systems framework in diverse cases. Ecology and
Society, 20(1). https://doi.org/10.5751/ES-07023-200132

McGinnis, M. D. (2011). An Introduction to IAD and the Language of the Ostrom Workshop:
A Simple Guide to a Complex Framework. Policy Studies Journal, 39(1), 169–183.

https://doi.org/10.1111/j.1541-0072.2010.00401.x

Mourya, E. (2020, December 20). What will Bitcoin’s price discovery beyond its latest ATH
look like? - AMBCrypto. AMBCrypto. https://ambcrypto.com/bitcoin-price-discovery-
latest-ath/

Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. www.bitcoin.org

Ostrom, E. (2007). Elinor Ostrom, Understanding Institutional Diversity. In Princeton Uni-

versity Press. Princeton University Press.

Ostrom, E. (2009). A general framework for analyzing sustainability of social-ecological

systems. Science, 325(5939), 419–422. https://doi.org/10.1126/science.1172133

Academia Letters, April 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Edward de la Rey, edelarey@gmail.com

Citation: de la Rey, E. (2021). A Formal Model of Bitcoin as a Social-Ecological System (SES). Academia
Letters, Article 527. https://doi.org/10.20935/AL527.

5
Tamuly, B. (2020, December 22). What you should know about Bitcoin’s growing 1000+
club - AMBCrypto. AMBCrypto. https://ambcrypto.com/what-you-should-know-about-
bitcoins growing-1000-club/

Tapscott, D., & Tapscott, A. (2017). Realizing the Potential of Blockchain: A Multistake-
holder Approach to the Stewardship of Blockchain and Cryptocurrencies.

https://www.weforum.org/whitepapers/realizing-the-potential-of-blockchainaa

Academia Letters, April 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Edward de la Rey, edelarey@gmail.com

Citation: de la Rey, E. (2021). A Formal Model of Bitcoin as a Social-Ecological System (SES). Academia
Letters, Article 527. https://doi.org/10.20935/AL527.