Localcoins and micro economies

Useful application of programmable money

My exposure to virtual currencies began with video games. Eve Online, Runescape, Guild Wars and Diablo offered a wonderful world not just of gameplay, but of economics as well.

Anyone who played Diablo 2 knows about the legendary Stone of Jordan.(SoJ) Due to various unforeseen factors, the game’s main currency, gold, became functionally worthless. Players organically started denominating value in SoJ’s since they were a more liquid, stable and valuable form of currency.

Eve online’s virtual economy is so epic and storied it has become the topic of dedicated history books. The game company employs professional economists to balance and design the in game economy.

What can we learn from virtual worlds?

For the longest time, economic policy has been solely controlled by central banks. Virtual economies, and the study of crypto-economics shows us that economic policy can be as fine grained and specific as we want to make it. The US Dollar will behave as the central bank dictates, but with smart contracts, we can create and design micro economies which suit that given environment best.

Want to disincentivize people hoarding money? Program in an exponential wealth tax.

Want to create social safety nets? Put a minuscule percentage of transactions into an escrow for hard times.

This type of mechanism design is very tough to get right. It becomes increasingly difficult as you design the system for more people, or for more general problems.

This is where I think the concept of micro economies have tremendous power. Creating a mechanism which works as intended for your board game group is much more of a tractable problem than trying to solve something for a nation.

ETHDenver

These concepts started to gain some form while working with the ETHDenver team to design the crypto-economics of the event. The design goals for the event are:

  • We want to give out money to attendees to spend on food, swag and art.
  • It is very important to use actual crypto. “Food credits” stored in a database don’t cut it.
  • We want attendees to spend their money locally, supporting food truck vendors, crypto artists and any cool emergent use cases.

One solution is to just airdrop everyone 30 DAI and call it a day. However this suffers from the tendency for people to just send this money to cold storage, and not spend it locally.

Another is to mint a valueless ERC20 token for the event, and just tell vendors that they have to give people hotdogs when they get the correct amount of this coin. This is subpar because it breaks the crypto-idealism of the system. The vendors don’t actually want to accept this token, they are just doing so because we promised them we’d settle up with cash at the end of the event.

Localcoins

Here’s where programmable money starts to be really useful. Because we have such a self contained ecosystem for ETHDenver, we can design a currency to accomplish our unique goals.

For ETHDenver, we created a localcoin called buffiDai.

BuffiDai is an ERC20 token that for the most part is completely standard. You can load it up in metamask or your status wallet, you can send it to your friends etc. However, we provide one key anchor point which gives this currency its value. We allow whitelisted vendors the ability to cash buffiDai out 1-to-1 for Dai.* This simple feature aligns people’s incentives to meet our design goals.

The vendors actually care about getting this token. To them, it’s just as good as a dollar. Because these vendors are selling real goods for this token, the attendees have good reason to value it as well. And crucially, because the token has no value to the attendee after the weekend is over, they are incentivized to participate, to play and to share.

Cypherpunk Speakeasies

This isn’t just theory either, Austin Griffith and I have been running “Cypherpunk Speakeasies” using exactly this system for the last few months. We give users $10 worth of this event token, BURN. Users happily spend their first 6.50 BURN on a beer. Then, after looking down at the 3.50 BURN remaining, quickly realize that they could partner up with someone else to eek out another beer.

Network graph of the BURN token after 2 speakeasies.

This all works wonderfully in practice. While normally a person might just decide that they would rather just pocket the $3.50. We’ve found that because the token is only valid for beer that night, users go out of their way to find creative ways to pool money. One person haggled with Kevin Owocki convincing him to send a Gitcoin Kudos in exchange for their BURN.

Just the beginning

The BURN token and ETHDenver’s BuffiDAI are very simple implementations of this concept. You can imagine all kinds of ways to directly extend this functionality:

  • Whitelist vendors to withdraw only up to some maximum limit to DAI.
  • Modify the exchange rate of the system. Eg. Instead of limiting the withdraw cap of a vendor, just lower the exchange rate, requiring 2 tokens per DAI.
  • Tax accounts with large balances, redistributing to accounts with less tokens.

The sky is the limit, there are really infinite ways to extend this concept of smart, programmable money in highly targeted ecosystems.

How to get involved

First off, if you haven’t applied for ETHDenver yet, go do it now! It is going to be one of the best events of the year, you really don’t want to miss it.

If you are interested in building something which interacts or integrates with buffiDai, reach out to me asap. Leave me a comment here, message me on twitter or email me: brian (at) solidcoin.co .

I’m calling the implementation of the localcoin interface a “VendingMachine”. You can check out the code here.

The main wallet for the event will be a fork of Austin’s Burner Wallet.

Many Thanks

This project is the work of many hands.

Thanks to MakerDAO for sponsoring Cypherpunk Speakeasies and their grant program for helping fund the development of this project.

Thanks to Rich from MakerDAO for being an awesome cat herder and being critical for this project getting done.

Thanks to Austin Griffith for creating the Burner Wallet, and being an awesome Cypherpunk Speakeasy planning partner.

Thanks to POA Network and Sky Minert for helping with the xDai side of things.

Thanks to Jonathan Palmer for being a coin magician and awesome partner on Solidcoin.

Thanks to ETHDenver, and the awesome state of Colorado for being the best place to work on crypto!

*Technical notes

I didn’t dig deep into the specific architecture of the system in this post. And many things said were simplified to explain the more abstract concept.

We launched buffiDai on the xDAI network. xDAI is a proof of authority network adhering to the Ethereum protocol, but diverging on the consensus mechanism to sacrifice increased centralization for high-speed/low-cost transactions.

There will be another post with gory tech details, stats and graphs, but until then hit me up on twitter to discuss if you are curious.