Building the frontier

A network state primer for those who are new to this world (as I once was)

The below is my first foray into Network States, first published as part of Digital Frontier’s magazine in February 2024 and later on their website but actually researched and written at the end of 2023.

I’ve made some changes, mainly to change the name of Niklas Anzinger’s layer two network state from Vitalia to Infinita, as it’s now called. Prospera’s struggles with local government, as outlined below, continue but are set to come to a head this month, as the Honduran general election looms closer.

“Every free human being dreams of founding an independent state,” reckoned Giorgio Rosa, founder of the short-lived micro nation, Rose Island.

Tired of the bureaucracy of everyday life, Rosa constructed an artificial platform just outside of Italy’s territorial waters with the idea to “build something that was free from strings and ties and didn’t cost much.” It had its own post office, government, a bar and a souvenir shop, using Esperanto as its national language.

Rose Island’s creation coincided with the Paris Riots of May 1968 and the cries of “It’s forbidden to forbid”. Coloured by a quest for freedom and a rejection of government-imposed restrictions, the project tapped into a zeitgeist of disaffected change makers.

Almost six decades later, so-called techno-optimists – fuelled by suspicion of governments and cross-border crypto payments – are looking for that same freedom. And, like Rosa, they’re building their own utopias to make it happen.

The appeal of Prospera

As a budding entrepreneur, Niklas Anzinger became increasingly frustrated. He wanted to create startups that could make “bigger changes” in the healthcare and finance industries. “I found that many of the solutions that are needed, we can’t build, or they’re extremely hard to build for artificial constraints or reasons that have to do with regulatory and compliance overhead,” he says.

His solution to these governance issues was radical: he would create a whole new society. Earlier this year, Vitalia (now renamed Infinita) opened its doors as a “pop-up city” in Prospera, on the Honduran island of Roatán. The project has a bold mission to “make death optional,” aided by such delights as a breakfast menu inspired by longevity enthusiast Bryan Johnson.

Anzinger, like many others, has taken to heart the call to action with which venture capitalist Marc Andreessen ended his October 2023 Techno-Optimist Manifesto – “It’s time to be a Techno-Optimist. It’s time to build.”

The essay on the restrictions of modern centralised governance has become a touchpoint for those looking to build their own cities and states. It outlines a rosy vision for a technology-driven, “inherently philanthropic” future upheld by free markets. According to Andreessen, the only obstacles are “centralised planning”, bureaucracy and restrictions imposed by techno-pessimists.

“Tech optimism says we need to place great faith that technology is just going to make the world better,” Dave Karpf, internet politics professor at George Washington University, tells me. “Part of that ideology is: government and governance should just stay out and let the innovators innovate.”

‘Countries that are clean’

The founders of new, tech-friendly countries see an opportunity for rapid progress by building a society where innovation can thrive, free from the supposed roadblocks of government regulation.

“We’re living in a world where we get guys like Elon Musk that are talking about going to Mars,” says Andrew Starr, a real estate investor and creator of the Country Founders Telegram community, a discussion group for anyone interested in building startup countries with just over 250 members. “We talk about people in Silicon Valley that are trying to live for 120-150 years or forever, abolishing death.”

“It’s time to be a Techno-Optimist. It’s time to build.”

MARC ANDREESSEN

“If there are people out there doing that, why is it so crazy, so insane, to contemplate the creation of brand new countries that are clean, that are fresh, starting from zero, if you will, without perhaps a baggage of colonialism, slavery, debt, war, all that nastiness and ugliness? Why is that totally nuts? It’s not,” continues Starr. “How realistic it is, who knows. We’ll find out.”

As Giorgio Rosa did before them, the techno-optimist country founders have concluded that the only way to reduce the challenges imposed by established institutions is to start from scratch. But is it a dream that can ever be fulfilled?

The digital town hall

For centuries authors, urban planners and economists have devised utopias to solve the perceived problems with society. Nowadays, the hotbed of these ideas is online.

One toe dip into the hundreds of online forums on the topic uncovers a world of keyboard urban strategists convening to discuss their ideas for a “better” future. It is here they find their strength, amassing “e-residents” from all over the world, who come together over shared values.

Debates in these digital communities drift from fundraising to innovation, from religion to the need for a military, from abortion rights to economic strategies all mixed in with a scattering of memes and trolling. Many of the forums are primarily made up of men, a concern several members have highlighted. Others have dismissed the issue arguing that new settlements have always been heavily male to start with.

“While all people do is talk for the most part, the individuals that are actually doing this, they’re not online talking, they’re actually doing these things,” says Craig Lewis, who’s involved in a project building prototypes for “sea pods”, habitable structures that can be constructed in the ocean.

“[Creating a new community] isn’t difficult, but we make it difficult because most people are living in fear and worry. And that’s all they’re concentrating on, instead of actually building something.”

‘Land is great’

Not all such communities have their sights set on physicality. Some are happy to remain in the digital realm. While Starr expects some of the “country founders” to create three-dimensional communities, his main aim on the Telegram channel is to bring people together to discuss ideas and solutions. “Country Founders is a bit of a primordial soup, there are many people working on many different approaches and angles,” he says.

“Land is great. Land is, for sure, something that many people in Country Founders, myself included, are keen on. But there could also be another dimension insofar as having a virtual jurisdiction.”

He references Bitnation, a digital-only crypto nation project founded in 2014 which is now defunct. It relied on a blockchain governance system and economy, allowing participants to become citizens by choice. In an interview with Vice in 2016, founder Susanne Tarkowski Tempelhof explained that the approach could “give agency to groups who have been ignored or repressed by modern nation-states.” Some saw it as an experimental way to solve statelessness created by the migrant crisis.

For Starr, the online community allows for an alignment of minds, and possible connection that may not need a physical element. “My hope is that people will find each other and realise they’re not alone, they’re not as crazy or eccentric as they think, and that there may be others that are on a similar wavelength to them and will go into these directions. As long as it’s voluntary, it’s peaceful, it’s cooperative, I’m going to do what I can to be supportive of different initiatives, even if it might not be the exact approach that I would choose.”

The Network State

Another member of the Andreessen Horowitz cohort, Balaji Srinivasan, a former general partner at the firm, has fanned the flames of a physical movement. In his book, “The Network State”, he argues that our current cities were built for another era, lacking the innovation and potential for growth that could exist if built for today.

“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,” he told Lex Fridman during a seven-hour podcast interview in 2022.

Just as Bitcoin is a decentralised currency, the network city advocates see potential for a decentralised state-like entity. It relies on two main attributes: an idea and the internet. The legitimacy of the idea is measured by the amount of community it manages to rally behind it and the end goal is diplomatic recognition.

The reasoning behind taking the community offline? “We’re still physical creatures, you can’t reproduce yet digitally.” And of course, there’s the hope that physical spaces dedicated to techno-optimism will drive real-world innovation.

The Praxis vision

One highly publicised project that has taken “The Network State” almost as gospel is Praxis, a Srinivasan-backed techno-optimist city that has yet to make it out of the digital sphere.

Praxis’s founders, Dryden Brown and Charlie Callinan, say they have been in talks for some time with governmental bodies to find a physical home– but details continue to be scarce. While the conversations continue, the founding team have launched a series of “visas” and business registration forms as an “entry point” to the Praxis Legal Framework, although what that framework consists of is still unclear. Brown did not respond to my requests for comment.

“Why is it so crazy, so insane, to contemplate the creation of brand new countries that are clean, that are fresh, starting from zero?”

ANDREW STARR

However, despite Praxis’s issues with making the physical dream a reality, its digital Telegram and Discord communities are highly active, with enthusiasts conversing on theoretical strategies and policies that they feel align with the “country’s” manifesto. Some of these make it into Praxis’s system. In one conversation within the digital community, a member suggested Praxis should launch a crypto token with a “live-to-earn” model. Three days later, Praxis made it happen.

While Praxis tries to find a foothold in the real world, some digital communities have mobilised to become nomadic pop-up cities, residential communities and, for a tiny few, venture-backed urban developments.

The legal groundwork for paradise

Prospera is one of the poster children for this more physically based movement, attracting the investment of Marc Andreessen and billionaire entrepreneur Peter Thiel through Pronomos Capital, a VC firm founded by Patri Friedman.

The charter city, nestled on the Honduran island of Roatán in the Caribbean, is driven by the goal of creating “prosperous” new developments with governance systems that help humans “reach their full potential”. Prospera says its developments will also feed into the general economic growth of the surrounding area.

Unlike the theoretical network states, the company behind Prospera, Neway Capital, focused first on finding “diplomatic recognition” for its first physical city, which would let them create their own governance system. They have since turned to building an online community of “e-residents” and hosting other online projects.

“What our system does is it provides clarity,” says J Robertson, vice president of development at Prospera. “Which is really the most important thing. It’s not that people don’t want to be regulated. In fact, most of them do, they just want to see very clearly what that is and how they can comply.”

Prospera has been able to create its own diplomatically recognised labour laws, regulation and tax system after eight years of negotiation and planning with the Honduran government. That makes it attractive to people like Anzinger, who chose to have Prospera host his pop-up city Infinita, instead of building a new jurisdiction himself.

“The step to get jurisdiction can take years, and you can lose momentum,” says Anzinger.

Prospera has been able to start building in the real-world where others haven’t beacuse it has a secret weapon: the Honduran Zone for Employment and Economic Development (ZEDE) framework. Much like special economic zones elsewhere, ZEDEs are areas governed by a separate economic and regulatory framework to the Honduran government. They were approved by the government as a way to bring economic growth to stagnant areas.

While representatives from a Honduran government-led oversight committee are appointed to be part of the governing body of the ZEDE, the zones can operate with a high level of autonomy. Residents pay an annual fee of $260 for Hondurans and $1,300 for foreigners and taxes are low, amounting to 5% for personal income and 1% for businesses. Its regulatory framework allows registered startups to subscribe to rules of their choice – while ignoring others. Many businesses registered with Prospera’s Roatán Financial Services Authority (RFSA) have “Common Law” listed as their regulatory framework but can customise the regulations they use.

An innovation hub in Honduras

The existence of ZEDEs has allowed Prospera to break ground on a first development, in an area of Roatán called St John’s Bay. With white sands and coral reefs at the doorstep, it provides the perfect setting for an innovation utopia.

“When I heard about Prospera for the first time, it sounded too good to be true,” says Infinita’s Anzinger. “And when I visited for the first time it exceeded my wildest expectation. It is really a tremendously great community here of really forward thinking people, both international and local.”

Attracted by the innovative approach to governance, Anzinger found what he felt was the answer to his frustrations with the regulatory system in Europe and the US for innovation. “I found that many of the solutions that are needed, we can’t build, or they’re extremely hard to build for artificial constraints or reasons that have to do with regulatory and compliance overhead,” he says.

As well as setting up his pop-up city there, he is an e-resident of Prospera and has also registered both of his startups with Prospera’s governance system. Right now, he and his wife are living near the Prospera development while they wait to move into Duna, the first residential complex to be built for Prospera.

“I saw how much potential it had and what it could do for the country, but also for the world for many of these areas and technology that could do better if they have a more rational regulatory approach,” he says.

Beyond residential property, Prospera has constructed “The Circular Factory”, a robotic workshop for producing building material and a coworking space called the Beta Building, supposedly the first building constructed entirely under Prospera regulations. Prospera has also bought the next-door golf resort which he explains is where some of Infinita will be.

“The cool thing about building a new governance system in the 21st century is that we can build much of it online”

J ROBERTSON, PROSPERA

While the Duna building isn’t yet finished, the website depicts a blissful high-rise nestled into the surrounding forest, with an infinity pool and a gym, quite unlike the single-story wooden houses in the neighbouring village of Crawfish Rock. While the contrast is stark, it is not uncommon in the area. “Roatán is basically like Malibu Beach for much of Honduras, it’s very hard to afford,” Anzinger says.

“We’re transforming it over time. We’ll, of course, keep some of the facilities because Pristine Bay is really impressive and really beautiful. But over time, we want to build density, we want to build more affordable housing.”

Creating a blockchain economy

Within this apparent paradise, registered businesses are subject to regulation by the RFSA. However, US investors would still prefer to see a Delaware address company filing. Financial institutions, in particular, have had issues registering Prospera as their primary jurisdiction. A scan of the companies listed on the Prospera marketplace shows several fintech firms that are active in Prospera but have their headquarters registered elsewhere. Those that aren’t, are blockchain-based dealing primarily in crypto.

For companies in industries like web3, which face unclear or constraining regulation, Prospera’s framework is attractive. But their involvement in Prospera also provides critical infrastructure for the nascent development.

A crypto ecosystem has developed to ease business operations including crypto payroll and payments solutions, all featured in the city’s “business marketplace”. Open projects have also been posted in Prospera’s community forum to create a universal financial infrastructure that uses crypto-backed debit cards and includes ways to streamline crypto usage for everyday payments. Prospera is home to a Bitcoin centre that houses a bitcoin ATM and provides educational services for those wanting to learn more about the cryptocurrency.

It doesn’t work for everyone, though. Anzinger says that some of his employees still prefer to be paid in the local currency as they have found it difficult to live within the wider Roatán economy with cryptocurrencies as their main income.

Taking citizenship digital

All of the services needed to be a resident or run a business in Prospera are available online, via the eProspera platform. Founders and their businesses can be registered as e-residents to take advantage of the flexible regulations and tax benefits despite living and working in other parts of the world.

“The cool thing about building a new governance system in the 21st century is that we can build much of it online,” says J Robertson. “We’re not stuck with the antiquated way of doing things. And it gives us an opportunity to grow it and bring it to other places.”

E-residency is an approach even more established countries have taken to boost their startup communities . Launched first by Estonia in 2014, it has allowed the nation to boost its economy by €200 million ($215 million), attracting businesses and individuals that want access to the European market as well as minimal bureaucracy to run their business. The programme got a boost in the aftermath of Brexit, as Estonia experienced a rush of e-residency applications from individuals who wanted to keep access to the EU market.

In Palau, a small grouping of islands in the Pacific with only 20,000 citizens, a web3-based digital residency programme using rns.id, a digital identity platform, was launched in 2022, allowing holders benefits like access to the US market and low tax rates. The residency programme has appealed to crypto and tech entrepreneurs, attracting digital residents such as investor Tim Draper and Ethereum creator Vitalik Buterin.

For Prospera, the e-residency programme has allowed it to grow its ecosystem before completing the physical infrastructure and buildings. According to the company’s website, the project has already attracted “thousands of members” and “100+ companies”. Robertson told me that in total, Prospera calculates over 1,000 jobs have been directly created and 4,000 jobs indirectly created through registered startups and contractors.

The ZEDE framework enhances Prospera’s ability to grow physically along with its digital community as they are not constrained to a specific geographic location. The same ZEDE with the same management can build developments in different jurisdictions around Honduras. The locations have to be sparsely populated areas or zones that have agreed to be converted to the ZEDE framework. Prospera’s plans for two additional projects, a manufacturing development and another “new frontier” called Port Royal are already featured on its website.

Brewing storms

Yet a storm has been brewing in the mainland that threatens the project’s sunny ideals. Since the election of the new Honduran government in 2021, ZEDEs have faced an existential crisis.

Prospera, and other ZEDEs like it, claim that they have already had a positive effect on local populations, with higher-than average wages, and access to educational opportunities with the construction of a Montessori school. The testimonials portion of the Prospera website is dedicated to glowing reports from local workers of its positive effects on the community.

However, there has been some local resistance. Members of the Crawfish Rock community, located very close to the construction site of Duna, have voiced particular concern. One resident, Vanessa Cardenas, says she has seen sketched plans of the development that come even closer to her village, either absorbing it or cutting it off from the rest of the island. The development has reportedly already had run-ins with residents from the village, at one point, in 2021, resulting in Prospera’s cutting off villagers’ access to running water from the well on Prospera’s land.

Prospera’s residents say that the “bad PR” and “scare stories” have been blown out of proportion and that local villagers against the development are typically in the minority.

The Charter of Prospera outlines pledges such as setting minimum wages to be 10% higher than that of Honduras, low income tax, and mandatory contributions to be made to a “fund”, much like a pension fund, that can be accessed any time by the employee. But critics have suggested that the freedom afforded by the ZEDE framework in general could be used to the detriment of Hondurans. According to one report, only six of Honduran’s 379-article national constitution must remain within the ZEDEs’ tailor-made frameworks. Amongst those that are excluded are articles preserving rights against unlawful imprisonment and press freedom. Others say the framework could allow for the sale of land to ZEDEs in sparsely populated areas without citizens’ consent.

The existence of an oversight committee does little to soothe worries about a ZEDE’s authority. Honduras is perceived to be one of the most corrupt countries in Latin America, according to research from Transparency International.

A new government in Honduras

The growing concern came to a head within the country’s most recent election, in 2021. The new president, Xiomara Castro, used ZEDEs as a pivotal issue of her campaign and has since moved to repeal the ZEDE law. While the initial vote to repeal was upheld, meaning that no new ZEDEs could be created, a later one was not, leaving existing ZEDEs’ futures in limbo.

In response to Castro’s moves against ZEDEs, Prospera sued the Honduran government for $11 billion, an action that has been criticised by commentators as an act of “corporate colonialism”.

“Prospera is party to the Central American Free Trade Agreement (CAFTA) between the US and Honduras, which says that any expropriation that takes place results in huge damages to the government,” says Robertson when asked about the lawsuit. “So, we filed that suit to ensure those protections were honoured.”

If existing ZEDEs were to be outlawed, the future of Prospera could be jeopardised. Existing ZEDEs are, however, protected by 50 years of immunity to government changes, so Prospera may legally be allowed to continue, albeit for a limited time.

Despite the 50-year protection clause, the Prospera community has already started to feel the strain of ZEDEs’ uncertain future. On their online “builders” forum, there are open projects calling for community collaboration. One, looking for mortgage financing to help stimulate real estate purchases in Prospera’s first residential development, highlighted that banks were reluctant to grant long term loans “in light of the unfavourable government rhetoric.”

For those already living and working in St John’s Bay, the conflict is perceived as threatening, but their position on the island has sheltered them from the worst of the storm. “This has much more of a threat perception on the mainland. Luckily, on the island, we have a bit less,” says Anzinger. “We have very good relations with local communities and with our neighbours working a lot together with other businesses involved. They really liked the idea of what we’re building, not necessarily on the big, world-changing scale, but simply the fact that it brings jobs.”

“I feel we’re in a very fortunate position on the island. But of course, it does affect us. I do think it does materially lead to fewer people coming as a result, because they’re afraid or they read something negative about it in the press, or that makes them more wary to invest.”

Bringing realism to the optimists

Many of the physical projects stemming from the communities of country founders are bound together with ideological purpose. Joining Prospera’s quest for prosperity are those looking for longevity, individual freedom and “human flourishing”, each with their own plan for advancing humanity and many harnessing “inherently philanthropic” technological solutions to do so. Perhaps if the vision was not so far reaching, it wouldn’t inspire the level of action required to migrate out of the digital realm.

However, Prospera’s ongoing struggles may highlight the issues of turning this idealism into a physical reality that will be recognised like Dubai or Hong Kong. Despite years of legal legwork with the Honduran government, Prospera has been left somewhat at the whim of its host country, and they are not alone. Like Rosa’s tiny island off Italy, projects have turned to international waters and unclaimed land to reach autonomy, each facing government interference and demolition. Those to date that have survived, often remain as small residential developments or nomadic communities, doing little to strive for diplomatic recognition and threaten the status quo of country governance and tech regulation.

“All these cities will eventually need a bunch of city-like things that they’re pretending they don’t need to exist...What will undermine the idea is none of that actually works.”

DAVE KARPF

Even so, the ultimate end goal for Srinivasan’s techno-optimist vision of a network state is diplomatic recognition, without which network states, and the innovative potential they may bring, will be vulnerable to failure. “That means any government can invade you at will, and the others will just shrug,” he writes. “You likely can’t buy many goods and services that corporations or states sell only to other states, because you’re not considered a legitimate government by the rest of the market. You certainly can’t write new regulations for your jurisdiction, because others do not recognize your lawful authority over that jurisdiction and can (again) invade you at will.”

But the question still stands: can it even be done?

“The Prospera example is both inspirational and a cautionary tale. You have to be really careful who you go to bed with,” says Starr, the admin of the Country Founders group. For him, a key factor for success is the partnerships the digital communities make when trying to build. “What’s so dicey about the world of building new cities, especially economic zones and even countries, is that you don’t want to necessarily do a deal with a country that’s so desperate that could change on a dime. You’re also not going to get a deal from a really wealthy country that doesn’t really need you either. So it’s a really fine line.”

Prospera’s legitimacy issues

Prospera, despite striving for diplomatic recognition from the outset, has already come up against issues with banking and legitimacy. To deal with these problems, startups have had to lean on established states in order to function. Blockchain technology has eased some of that dependency, but even with a network of blockchain-based solutions, employees still sometimes need payment in fiat currency.

“All these cities will eventually need a bunch of city-like things that they’re pretending they don’t need to exist,” says Karpf, internet politics professor at George Washington University. “Because in modern society, or a society of any scale, you actually need all of that stuff. What will undermine the idea is none of that actually works. It’s just a goof.”

In addition to the jurisdictional issues, investment and what is done with that investment, can cause barriers to the network states’ realisation.

“One of the big issues is that anything that gets put together can only bootstrap so far,” says Starr. “At a certain point it needs to be investment grade. It has to be a transparent situation. The team has to have a solid reputation. It has to be treated like a business. You’re not going to be able to attract serious investors if your entity is not itself as serious.”

While Prospera has gained investment and been able to break ground, the issues with its host government may hinder further investment. Praxis, despite raising two successful rounds amounting to $19 million in March 2022, and having a number of recognised backers, has done little fundraising since. Communication about the next steps of building the city are vague, focusing instead of the launch of a token that measures community contribution and a business registry.

The dream of new cities persists

Yet the idea of founding new states persists despite the challenges. With every failed attempt, three more projects seem to pop up in its wake.

Chad Elwartowski and Supranee Thepdet, two pioneers of seasteading, the idea of creating built communities in international waters, were infamously run off their tiny nation by the Thai government in 2019, for some sounding the death knell for the movement. Yet five years later, the seasteading community is alive and well, with ideas multiplying across coastal areas. Those same seasteaders have since started Ocean Builders and installed a series of “sea pod” prototypes off the Panama coast.

Prospera may still have the potential to be the first techno-optimist state, a haven for innovation and technology. Perhaps its sheltered position on an island and true Silicon Valley tactics of ignoring government intervention will eventually pay off. Within the network state community, Prospera is still regarded as a success story, and in the November 2023 network state conference, many flocked to learn more, despite the project’s uncertain future.

The position of new countries’ communities online has allowed their reach to spread far beyond their geographical borders. What may be the deciding factor for Prospera’s future is the strength of the digital community that carries its dream.