Fair coins and basic income
Blockchains and cryptocurrencies have potential to change the world for the better. However, there is also a worst-case scenario — a dystopian future with a permanent underclass (thanks for the warning Luka_Magnotta). Rather than lead to the empowerment of the little guy and a more equal distribution of wealth, the cryptocurrency revolution could lead to a massive concentration of wealth.
What if Nakamoto gave everyone in the world 6,500 Satoshis?
The secret to Bitcoin’s success is that its prolific resource consumption and poor computational scalability is buying something even more valuable: social scalability (Szabo, 2017). If we measure social scalability by the number of participants in the system, fait money is still leading the pack (despite its numerous short comings). The average person values price stability over value preservation and accessibility. Despite the value of fiat money being eroded, it seems to be a cost willingly incurred in exchange for price stability.
It also seems that those who could benefit the most from adopting cryptocurrencies (poor people in developing countries — “the unbanked”) have most to lose from high volatility. Due to the fact that they are unsophisticated investors, they are highly susceptible to being manipulated into selling low and buying high through fear and greed. Also, the fact that these people are living pay check to pay check means they don’t have the luxury of being able to weather the downturns, as many of us do.
When it comes to cryptocurrencies, Bitcoin is leading the pack with Ethereum a close second. However, both have a more unequal distribution of wealth than most developed economies.
What is the downside to having a high concentration of ownership (despite the benefits of social scalability)? Market manipulation and artificial volatility — this results in less people willing to participate in the system and reduces the social scalability of the system. More disperse ownership should theoretically result in less market manipulation since individual actors are unable to influence the market as much.
How can we achieve hyper social scalability (a system where we have close 100% penetration) using blockchain technology, while minimising the negative effects of highly concentrated ownership?
If Nakamoto equally distributed 50% of his BTC amongst the world’s population, everyone would get 13,000 Satoshi. This would still leave Nakamoto with 490,000 BTC or US$4.9bn. Arguably a huge uplift in the value of BTC, through a wider distribution, would offset the reduction in the total number of coins he owns.
How to fairly distribute something of value?
The biggest obstacle to distributing anything of value, equally and fairly, is identifying individuals. We don’t really care who they are, in fact it’s probably best to preserve individual anonymity but we want to make sure that they are unique. Uniqueness is important as it prevents gaming of the system where individuals can register dummy accounts to receive more coins.
The most accurate and non-subjective way to verify an individual’s uniqueness is through biometric data. The most accurate being DNA.
Ideally the goal would be to setup a system with limited to no human interference — a network of open source IoT devices connected to the blockchain. Manual KYC checks are cumbersome and subject to manipulation. They would present a weakness in the system, since we end up needing to trust a third party to verify an individual’s uniqueness. A trustless system is ideal, one where you can develop open source hardware devices and distribute them around the world. These devices would quickly and cost effectively map an individual’s genome, encrypt it and upload the data to the blockchain. The underlying protocol would then check the data against all existing data on chain and if unique add the encrypted genome to the chain. The encrypted genome would represent the individuals “public key”, their DNA being the private key. To avoid the need to draw blood every time you want to transact, you could allow the individual to set up a spend key in the process.
Fair coins, how about fair shares?
The concept of fair coins was recently floated by Naval with Vitalik also weighing in on the topic. There are advantages to a coin with a wide distribution but after an initial “fair” distribution, there is still potential for wealth concentration and inequality in the long run. This would lead us back to our current predicament. A key to maintaining price stability, social order and maximising the advancement of our species, is a relatively normal distribution of wealth.
Rather simply fairly distributing coins, I propose a two-token system: give everyone a “share” which provides them with a “dividend” or income, in the form of a coin. During the initial set up phase, all wallets would have an Earth Share (untradeable) and a zero balance for Earth Coin. Once the number of participants reaches a certain threshold, say 50% of the world’s population, a genesis block could be mined transferring 1 coin to every wallet. From this point people are free to trade their coins for whatever they please. New entrants to the system would receive 1 Earth Share and 1 Earth Coin. Children could be added to the decentralised data base at birth and their wallet would be unlocked at age X via a smart contract.
A protocol with an inbuilt redistribution mechanism seems most appropriate to ensure disperse ownership in the long term. Along with a block reward for miners, there would be a variable income distributed to all individuals who hold an Earth Share to target a particular measure of wealth distribution (Gini Coefficient or other). If we uniquely identify all participants, we can easily compute this measure by checking the balances of all wallets. The distribution rate could be updated every X blocks to maintain a certain level of wealth distribution. With each block a fraction of an Earth Coin would be deposited into all wallets, depending on the target wealth distribution. For example, if Gini Coefficient at last snapshot (A) = 0.51 and the target wealth distribution (B) = 0.50 then inequality needs to be reduced and the income distribution should go up. If A < B then no need to create and distribute any new coins.
To be clear, I’m not advocating taking from the rich and giving to the poor. I’m also not advocating giving more to the poor and less to the rich. I’m proposing that everyone gets the same income with each block. Where does this income come from then? It would be built into the protocol, similar to a block reward, the new coins would be created. Wouldn’t this be inflationary? The assumption is that the new coins created for distribution are so negligible that they have little impact — similar to how the block reward for Bitcoin doesn’t seem to create any inflationary pressure. Assuming the Gini Coefficient is initially 0 (since everyone in the system would hold 1 coin each), targeting a Gini Coefficient of 0.50 (this much lower than the Gini Coefficient for the majority of nations) would mean that no new coins will be generated for some time.
Furthermore, one thing most people don’t acknowledge is that Bitcoin essentially implements a transaction-based tax on all participants, regardless of whether they are transacting. Every 10 minutes, a miner is rewarded with 25 BTC in return for keeping a record of all transactions from the last 10 minutes. Now since there are new coins created, everyone else’s percentage share decreases (this dilution of value can essentially be thought of as a tax), regardless of whether they transacted or not. Essentially the cost of keeping a record of transactions is socialised amongst all participants in the system. Why don’t people who transact less often, or don’t transact at all, complain? Wouldn’t a better system be one where individuals who transact, pay a percentage fee to the miners to record their transaction? People accept the system, as the mechanism of a block reward leads to a strengthening of the system and an increase in value for all participants in the system. Despite minting 3,600 BTC per day or 1.3m BTC annually (8% of total supply) the system is not inflationary. Similarly, I propose that distributing income with each block would strengthen the system by ensuring disperse ownership and large user base. This increase in value would offset any inflationary pressure.
Trickle up economics?
People naturally have a massive aversion to any meddling with the distribution of wealth or the T word, mainly based on self-interest. Let me outline why a more even distribution wealth is a good thing, from a self-interest point of view.
Firstly, the value of a system is proportional to the number of users.
Secondly, we don’t know when or where our next Albert Einstein will be born. They could have already been born and died of starvation in Somalia or they could be living in a slum in Mumbai. It’s in our interest, as a species, to maximise the probability that these individuals have the capacity to contribute to our species. Because when they do, it benefits us all.
In a decentralized open source world where anyone can contribute to the improvement of a system, the more people that can contribute to the system the better. Everyone wins.
A new way forward
As the decentralisation movement gains momentum, governments are going to become increasingly irrelevant. Their capacity to deliver basic services such as healthcare and education is going to become limited. Rather than take a centralised approach to delivering such services, a more efficient way would be to provide a means for individuals to receive an income and let the market provide these services. As governments will be unable to execute any kind of basic income policy, mainly due to their decreasing income, an alternate approach is necessary.
“Earth Share / Earth Coin” model approaches this problem from a pragmatic and philosophical point of view. There are benefits for all participants in a system when ownership is dispersed. These benefits increase as the number of participants increases.