Network States – Revolutionary Idea To Potential New Asset Class

Interconnected World


In 2022, Balaji Srinivasan, serial entrepreneur and former Chief Technology Officer at Coinbase, published his seminal book entitled “The Network State: How To Start a New Country”, which presents a revolutionary idea in the realm of governance. The book challenges the traditional notions of nation-states, proposing a future where online communities can crowdfund territory and transform into sovereign entities – so called Network States.

SAN FRANCISCO, CA: Balaji Srinivasan (L) and TechCrunch moderator Brian Heater speak onstage during … [+] TechCrunch Disrupt SF (Photo by Steve Jennings/Getty Images for TechCrunch)


As Balaji condenses the idea 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”.

At its core, the Network State is a digital-first entity. Unlike traditional states defined by geographical boundaries, a Network State is formed on the basis of shared ideas, interests, and goals, primarily cultivated through online platforms. It’s a community that starts virtually but has the potential to acquire physical characteristics, such as land and governance structures. These states are not merely theoretical constructs; they represent a practical reimagining of how communities can organize and govern themselves in the digital age. In practical terms, this would require an online community to form a DAO
DAO , or a decentralized autonomous organisation (sometimes referred to as a chat-group with a shared bank account) crowdfund enough capital to be able to set up a physical presence and from there work towards becoming a nation state pursuing sovereign recognition. Everyone can agree that it sounds simpler than the actual endeavour, but in today’s chaotic world – with geopolitical clashes, wars and an increasing digital economy – it sounds more realistic than ever before.

Without going too much into the thought-provoking ideas of the book, in this article I wanted to highlight some of the projects that are working towards that vision, albeit in very different ways, and speak about some of the developments of this emerging ecosystem and potential new digital asset class, as have been discussed as part of the inaugural Network State Conference in October.

There are now various companies and individuals working towards the idea of a network state, with initiatives ranging from building a decentralized court system like the team at Nation3 is envisioning to network-gated communities organising events from supper clubs to annual festivals, as the DAO FriendsWithBenefits has been pursuing, as well as Vitalik Buterin’s “pop-up-village”, Zuzalu, focused on bringing together a like-minded community across countries.

From Idea to Reality

These initiatives are not just theorizing but actively working towards realizing such digital-first sovereign communities – some of the leading network state initiatives, include:

1. Praxis: Praxis is looking to build a new city on the Mediterranean coast, governed and built by the community. The team has already gained significant traction with over 12,000 community members, significant funding from the likes of Winklevoss Capital, Benchmark Ventures, Paradigm and others, and hired a leading team including a former G7 prime minister to support negotiations and city planning. The aim is to have the first citizens move to the new city of Praxis this decade.

2. Zuzalu: A project incubated by Ethereum
ETH co-founder Vitalik Buterin, which created a pop-up village to bring together leading innovators in crypto, AI, governance, decentralized science and culture to co-work, breakdown siloes and socialise. Zuzalu already hosted its first pop-up village in Montenegro and a second instance in Istanbul in 2023 alone.

3. Prospera: Located on Roatán Island in Honduras, Prospera is a special economic zone that experiments with autonomous governance. It offers a legal and regulatory environment distinct from the Honduran government, aiming to attract businesses and residents. Prospera is an example of how network state principles can be applied within the jurisdiction of a traditional state.

4. Nation3: Led by Aragon
ANT founder Luise Cuende, Nation3 aims to create a new nation state on the cloud, aimed at launching an online-first, zero-tax nation with its own internet-native jurisdiction and solarpunk society powered by Web3 technology. The project allows individuals to acquire “citizenship” and a digital passport by committing Ether to the nation’s treasury and staking the projects native $Nation token.

5. AnotherNation: The mission of AnotherNation is to bring fully fledged network states closer to reality by running a social experiment aimed at proving that governance of physical infrastructure can be scaled through a decentralized community. The idea is to lay the foundation of a network state, by incubating spaces that are created, owned and governed by the community, for the community. The aim for these spaces is to act as a network of global embassies and to provide a platform for Web3 communities to come together to work, socialise and connect, in cities like Dubai, London and Miami, whilst benefitting from the city’s existing infrastructure, removing the need to go greenfield and build new cities in remote locations, which requires significantly more capital, time, and commitment. The project is planning to go live in 2024 with its first embassy.

Building the future of governance

These are some of the proliferating examples that illustrate the varied approaches to realizing the concept of Network States. From blockchain-based governance platforms to special economic zones, each project contributes to the evolving narrative of decentralized, digital-first communities with a physical nexus. While they are at different stages of development and still face unique challenges, their collective efforts signify a growing interest in redefining governance in the digital era. As these initiatives progress, they offer valuable insights into the feasibility and impact of the revolutionary idea behind the Network State.

Disclosure: I am actively researching and investing in Network State initiatives, hold a Nation3 passport & am personally affiliated to AnotherNation.

The Stablecoin Wars – A Dominant Force In The Digital Asset Ecosystem

Stablecoins are at war for dominance, with major stablecoins accounting for around 10% of the total market cap of digital assets, amounting to over $120 billion at the time of writing.

11 July 2022, Baden-Wuerttemberg, Rottweil: The logo of the stablecoins Tether USDT and USD Cohn … [+] USDC can be seen on the screen of a computer in an office. Photo: Silas Stein/dpa (Photo by Silas Stein/picture alliance via Getty Images)

dpa/picture alliance via Getty Images

Whilst not all stablecoins are created equal, generally falling in two distinct types, they are continuing to accelerate adoption and play an increasing role in the digital asset ecosystem. Stablecoins can be differentiated by the underlying asset they hold and way they are managed, but in most instances, these are in some way pegged to the value of the US dollar on a 1:1 basis.

Without going into much detail on the operational workings of stablecoins, as these have been extensively covered by my fellow contributors, I wanted to look at the current stablecoin market and offer some insights into the latest developments taking place in this fundamental segment of the digital asset industry.

Stablecoins – not always stable

Over the past year, stablecoins have gone through a number of challenges, from regulatory developments to market fluctuations and stability tests. The industry was rattled by an example for a major stability test in March when USDC
USDC de-pegged from 1$. The reason for the de-peg was that Silicon Valley Bank failed and Circle – the issuer of USDC – had around $3.3 billion in reserves tied up at SVB
VB . After causing significant distress in both digital assets and traditional markets, which led to the FED having to step in to secure customers of SVB, Circle was able to gain access to the reserves and the peg slowly restored back to $1. However, since the USDC de-pegging event, the market cap of the stablecoin has continued to decrease, with investors moving to USDT. This move is reflected in the fairly even distribution of loss in market cap of USDC versus USDT, with USDC moving from $42 billion in market cap at the beginning of March to around $24 billion at the beginning of December this year, whilst USDT has grown from $71 billion to around $90 billion throughout the same period. Another instance this year saw Binance halt operations of its native stablecoin BUSD
BUSD following action from US regulatory authorities, which led to fintech firm Paxos ending relations with the firm due to its litigation with the SEC. Historically, BUSD was one of the largest stablecoins, reaching a total market capitalization of $23 billion in November 2022.

USDT , the company behind USDT, announced $1.48 billion in net profits in the first quarter of 2023 and “more than $1 billion” in operational profits in the second quarter, proving the lucrative business model of stablecoin issuers, which generate revenue through earning interest on the underlying reserves, but notably don’t pass any of the interest to their end-users.

Competition is coming

This lucrative business model has led to a new wave of initiatives looking to take some market share from the incumbents, notably before the arrival of much anticipated Central Bank Digital Currencies, the not-so-secret projects of various central banks around the globe. Over the past year the market has seen a wider entrance of stablecoin issuers, from crypto-native players like newly licensed M2 exchange, which is launching USX, and more traditional players like Paypal launching PYUSD, or France’s 3rd largest bank, Société Générale, launching a euro-pegged stablecoin, EUR CoinVertible.

National and international regulators and standard setting bodies globally have started to reinforce regulation and operating principles around stablecoins and issuers, with the financial stability board publishing a paper on the regulation and supervision of global stablecoins to cite one of them.

It is fair to say that stablecoins will continue to play an increasingly important role in digital assets and regulated stablecoins will be required to proliferate to unlock the full potential of tokenised assets.

How The UAE Became A Crypto Hub Poised For Explosive Growth

Burj Al Arab with flag, Dubai, UAE

Moment Editorial/Getty Images

Following a long bear-market cycle, digital assets are (once) again gaining momentum, driven by increased institutional participation, regulatory clarity, and a challenging macroeconomic environment.

One region has catapulted onto center stage and is now poised to take advantage of a new wave of digital asset investment driven by institutional investors searching for regulatory clarity and a favorable market environment. According to the 2023 Crypto Oasis Ecosystem report, there are already more than 1,800 organizations employing 8,650 people across the digital asset industry in the Middle East and North Africa.

Whilst historically buoyed by oil reserves, in recent years the United Arab Emirates has gone through a strategic shift towards diversification, with technology and finance at the forefront. Recognizing the potential of digital assets, the UAE government has been proactive in creating a regulatory environment that is both robust and flexible. Over the past two years the region, and individual Emirates – with Abu Dhabi and Dubai driving most change – has supercharged its regulatory efforts to attract a global set of businesses focusing on digital assets, bringing significant talent, investment, and positive exposure to the region.

The UAE’s journey in regulating digital assets reflects its broader ambitions to become a global innovation and technology hub, and the region has emerged as a thought-leader in the digital asset space, adapting swiftly to the challenges and opportunities presented by this new paradigm.

I will highlight key efforts spearheaded by the UAE to demonstrate how the combined efforts of individual Emirates have allowed the UAE to emerge as a leader in the digital asset ecosystem — creating a set of regulatory frameworks that are both robust and flexible, aiming to attract global businesses while ensuring consumer protection and financial stability.

Abu DhabiTradFi’s Future

Abu Dhabi Global Markets, via its Financial Services Regulatory Authority was among the first to introduce guidelines on cryptocurrencies and digital assets with its initial guidance for regulation of crypto asset activities being published in 2018 (and dynamically updated several times since then) setting a regulatory benchmark.

In many areas, the FSRA has extended existing regulatory frameworks for traditional financial products to include digital assets. One example is custody, whereby the FSRA has taken a similar approach to that of other custodial activities permitted within ADGM to ensure the same protection offered to “traditional” custodians. The regulator has thus widened the scope of definitions for providing custody, client assets and client investments to include a definition for digital assets, which includes virtual assets, digital securities, stablecoins and derivatives/funds, as per a recently published brochure.

Another area ADGM is innovating is in the regulation of digital asset exchanges through its regulation for multi-lateral trading facilities, granting licenses to MidChains, M2, Matrix and others operating in the region.

Recently, ADGM has also focused on digital asset native activities, introducing the world’s first DLT Foundations Regime, providing a framework in collaboration with industry participants to create a legal structure for blockchain foundations and decentralized autonomous organizations, allowing entities to set-up without bylaws, enabling a variety of governance methods, including token voting and the use of smart contracts.

DubaiInnovation In Motion

Dubai stands out for its dynamic and forward-thinking approach to digital assets. The establishment of the Dubai International Financial Centre as a tax- free zone with 100% foreign ownership has been a financial services magnet for more than a decade, and digital asset businesses have followed. DIFC’s independent regulatory authority, the Dubai Financial Services Authority, has been proactive in developing a regulatory framework that balances risk with innovation. As Jaques Visser, Chief Legal Officer at the DIFC noted in September, DIFC has proposed to enact a new Digital Assets Law and new Law of Security regime, working closely with industry participants “to set out legal characteristics of digital assets, its proprietary nature, how it may be controlled, transferred, and dealt with by interested parties”. Recently, DIFC approved Toncoin
and Ripple
to its recognized list of tokens, joining Bitcoin
, Ether
, and Litecoin
allowed to be managed by financial institutions within DIFC and continues to constructively engage with industry participants to further enhance the Digital Assets Law.

Outside of DIFC, Dubai has also created a new regulatory authority focused exclusively on digital assets with the launch of the Virtual Asset Regulatory Authority in 2022, which is responsible for regulating and overseeing the provision, use, and exchange of virtual assets. Over the past year, VARA has published a set of rule books setting out a comprehensive framework for digital asset activities, designed to specifically cater for the provision of permissible activities and services to customers and investors, including for the provision of custody services, advisory services, broker-dealer services and exchange services among others. By pioneering the world’s first independent regulator for virtual assets, VARA has attracted a wide range of established and new businesses to the region, creating a vibrant ecosystem of digital asset firms, which is continuing to grow. To date there are already several firms regulated by VARA, ranging from exchange service providers like Binance (MVP Operational license), to firms providing management and investment services, including Laser Digital, as well as custodians, including Komainu (my employer). VARA is expected to regulate more than 100 new entities in the coming quarters, further strengthening the expanding digital asset ecosystem in Dubai.

Other Emirates – Emerging Contributions

While Dubai and Abu Dhabi lead the charge, other Emirates like Sharjah and Ras Al Khaimah have also started to embrace digital assets. Sharjah, for example, has been exploring various blockchain applications, while Ras Al Khaimah is positioning itself as an attractive destination aiming to attract blockchain businesses, creating the UAE’s first Web3-focused free zone, dubbed RAK DAO.

UAE flag day in Dubai on November 3, 2023. (Photo by GIUSEPPE CACACE/AFP via Getty Images)

AFP via Getty Images

Finally, at the federal level, the UAE Cabinet has issued a decision which brings into force a new regulation for virtual assets and virtual asset service providers, adding another layer of oversight to its virtual asset sector. The new regulation came into effect on January 15 and is forming the UAE’s primary supervisory regime for virtual assets designed to both protect investors and supervise the industry.

A golden opportunity now awaits UAE regulatory authorities to now establish a harmonized layer across all the Emirates, ensuring consistency, collaboration and passporting among local authorities and the federal regulatory body — the UAE’s Securities and Commodities Authority. This will lead to its long-term competitive edge and place further daylight between its offering and others aspiring to truly build the financial hub of the future.

It has become clear that the UAE is in a leading position to benefit from the next phase of growth of the digital asset industry.

The Institutional Guide For Securing Digital Assets

Photo: Silas Stein/dpa (Photo by Silas Stein/picture alliance via Getty Images)

dpa/picture alliance via Getty Images

In today’s connected world, it has never been more important to safeguard your digital assets from malicious actors and fraudulent counterparties.

According to the blockchain analytics company Chainalysis, 2022 was the biggest year ever for digital asset hacks, leading to the tune of $3.8 billion in thefts. Unfortunately, lessons were not learned, and poor cybersecurity controls and bad practices have again resulted in the loss of hundreds of millions of dollars’ worth of digital assets. On the flip side, so far in 2023, hacks have predominantly moved from centralized venues to decentralized protocols, most predominantly the $197 million exploit of Euler Finance, a permissionless borrowing and lending protocol built on Ethereum, and more recently the $200 million hack of Mixin Network, a digital asset bridge designed to make cross-chain transfers cheaper and more efficient.

However, social engineering has also led to high-profile individuals and corporations being targeted, with Mark Cuban falling prey to a $870,000 crypto scam when his MetaMask wallet was compromised, and centralized exchange HTX (formerly Huobi) experiencing a security breach leading to the loss of $8 million worth of user funds.

Security breaches are only one of the many ways personal or customer assets can be lost. In the world of digital asset fraud, the comingling of assets and misappropriation of customer funds have also led to significant losses, as is surfacing throughout bankruptcy proceedings for FTX, Celsius, and other once prominent and trusted digital asset service providers.

Here are the best practices that both retail and institutional investors should adopt to better protect their assets and avoid cyber-security breaches, misappropriation, and fraud.

The Golden Standard For Self-Custody

Individual users involved in the digital ecosystem have various options to store and manage digital assets, including through exchange wallets, browser wallets, and hardware wallets.

If you hold digital assets as an individual investor, the most secure and proven method to store your crypto and NFTs is by using hardware wallets. Leading companies such as Ledger have spent years developing sophisticated software and hardware technology to ensure user protection and security. You can think of this like storing your gold bars in a bank vault, where you are in full control, but in a more scalable and secure manner due to the use of advanced security technology.

If you also interact with browser wallets (i.e. MetaMask, WalletConnect, Solflare) to manage your digital assets, it is always recommended to synchronize these with a hardware wallets to store cryptographic key material securely and only connect for transactional requirements. You can think of the cryptographic key of your wallet address to be the same as the pin to your credit card and therefore very sensitive information you want to keep secure and shielded from bad actors.

As an individual investor you need to be aware that while these best practices cover most cyber-security risks, if digital assets are committed to liquidity pools or other decentralized applications, there remains a risk of smart contract hacks. A best practice is therefore to use decentralized applications with a solid track record and independent, verified security audits. Some examples include Uniswap, a decentralized exchange and AAVE, a decentralized borrowing and lending platform.

The Institutional Guide To Digital Asset Custody

Digital asset custody services from reputable custodians are becoming increasingly important in meeting fiduciary duties and avoiding compromise, especially as an increasing number of asset managers, from financial advisors to brokerages and banks, are gaining exposure to digital assets. As regulatory frameworks have begun to emerge in key global jurisdictions, regulation is playing a key role in establishing clear rules and guidance around custody requirements for any institution dealing with digital assets at scale.

Third-party custodial services, as offered by leading service providers including Komainu (my employer) and others are becoming the norm for institutional investors who prioritize security, professional management, regulatory compliance, and insurance coverage; attributes that are becoming particularly important for the accelerated adoption of digital assets by institutions across the globe.

Depending on the size and scale of your organization there are different options around the custody of digital assets, which can be split between self-custody and third-party custody options.

Not all third-party custodians are created equal, and as a reputable institutional asset manager, you should focus on selecting a custody partner that meets the following requirements:

  • Custodian adopts advanced, institutional-grade technology and security protocols, including Hardware Security Modules, Multi-Party Computation (MPC) technology, or a combination thereof.
  • Custodian has adequate security and privacy certifications, including those from the Security Operations Center and International Organization for Standardization.
  • Custodian keeps assets segregated, separating funds on a client-by-client and client-custodian basis and evidences a bankruptcy remote structure.
  • Custodian offers third-party insurance on digital assets in custody.
  • Custodian has the right regulatory licenses to operate its custody business in relevant jurisdictions.

Some small institutions also choose to rely on the same best practices as individual investors by leveraging hardware wallets. As an institution grows the risks and requirements around governance, transparency, and auditability intensify, posing challenges to retail hardware wallets, including limitations around segregation of duties and disaster recovery management.

Ultimately, the most secure and compliant option for custody of digital assets will always be through a third-party trusted custodial partner that meets the institution’s operational, legal and technical requirements.