Introducing COMMON Cents

Cryptocurrencies can enable communities of people to safely collaborate, create shared value, and share in that value equitably.

Abstract

With the advent of cryptocurrency and blockchain technology we believe it is possible to create a new economic space in which:

1. Individuals and businesses do better for themselves by collaborating and helping one another, rather than competing.
2. Individuals make a good living by doing what they are best at — and what they most love to do — without spending time or money on overhead or “grunt work”, and without having to “get a job” in someone else’s company.
3. Individuals are financially rewarded for being generous and philanthropic, without having to “keep score”, ask for return favors, or otherwise feel like a “transaction” has occurred.

At COMMON, we are experimenting just such a system. If you’d like to join us, you can apply for membership here.

Background

For the past 10 years, I have been collaborating within various communities, experimenting with alternative forms of finance and economics. Examples include personal investment contracts, invest-it-forward, charitable profit pledges, incentive prizes, equity crowdfunding, and startup index funds.

What all of these models and technologies have in common is that they either enable positive-sum transactions, or they are entirely “post-transactional.” By post-transactional, I mean that they are based not on agreed-upon transactions but rather on gifting, karma, trust and goodwill (see here and here). By contrast, most of our modern economy is based on transactional markets, and competition for scarce resources. I will call these two forms Cooperative Finance and Extractive Finance respectively.

Visualizing Different “Economic Spaces”

My colleagues and I have begun to visualize these different realms as economic spaces on a continuum from Extractive to Cooperative. Although the math and science behind both forms are well established, our modern financial institutions, regulatory regimes and university economics departments are more familiar with — and overwhelmingly skewed towards — Extractive Finance.

At the same time, the vast majority of the real economy, especially in the developing world, relies primarily on Cooperative Finance. This, despite there not being well-developed tools and expertise for Cooperative Finance (as there is for Extractive Finance). All of which leads us to the following observations and conclusion:

  1. The real world economy is based on both scarcity and abundance; Extractive Finance and Cooperative Finance.
  2. Despite the growing gap between rich and poor, overall, abundance is outpacing scarcity at an exponential rate (see here)
  3. Thus, the need for systems which foster Cooperative Finance has never been greater, and that need is also growing exponentially.

Meanwhile, in 2008, a fundamental breakthrough in computer science was discovered: Bitcoin. While Bitcoin itself is a form of Extractive Finance, the underlying blockchain technology (see here for a primer) is powerful enough to enable both Extractive and Cooperative Finance.

It is from this confluence of growing abundance and blockchain technologies that a community I am part of (called the Economic Space Agency) believes a financial revolution is coming.

Keeping with the metaphor of physical space, we note how scientists once thought our Universe was the only possible universe. However they now know that ours is just one of perhaps infinitely many universes, together making up what’s called the Multiverse. By analogy, Extractive Finance is one of many possible “economic spaces,” and we are just now learning how to create new economic spaces with the principles of Cooperative Finance.

Keys to Success

The COMMON Cents approach is threefold:

  1. Replace the function of bureaucracy, regulatory systems and financial institutions, respectively, with Blockchain, smart contracts, and cryptoequity.
  2. Have an adaptive monetary policy which regulates inflation to keep up with the true growth rate (or contraction) of the economic space and its internal economy.
  3. Remain “interoperable” and compliant with the institutions and legal structures of the “real world” traditional economy.

COMMON Cents

Conceptually, CC can be thought of as a hybrid between membership rewards points, a financial currency (which can be spent) and equity (giving everyone a financial stake in the community’s success).

You earn CC by helping the fellow community members — and the community as a whole — with their projects and goals. You can also purchase CC via a monthly subscription, or by making a one time contribution of equity (in your startup for instance).

Equity and cash contributions become the economic “backing” of CC, so that in the future you may earn dividends on your CC holdings, and also exchange your CC for cash.

Monetary Policy

For an economy to thrive and be sustainable, the inflation rate of its currency should roughly match the actual growth rate of the economy. When governments print too much money too quickly they end up with hyperinflation (c.f. Greece, Turkey, Brazil). When money supply does not keep up with growth, the currency tends to be hoarded rather than circulated (this is why gold is a poor currency, and also Bitcoin due to its fixed money supply).

Unlike the broader economy which tends to grow slowly (roughly 4% per year), startups and small business return over 30% annualized cash on cash to investors. This doesn’t account for the job creation and other value created. It would therefore be reasonable to assume somewhere around a 60% true annual growth rate for an economy backed by startup equity combined with radical collaboration. This assumption is backed up by circumstantial data from IRR data of startup accelerators and incubators.

Therefore, the key to sustainability and resilience for CC is to regulate inflation to fall between 30% to 60% per year. This is accomplished by ratcheting up issuance rates on the low end (i.e. incentivizing greater collaboration), and imposing demurrage on the high end (thus stimulating internal spending and and redemption).

Whenever CC is redeemed for cash, it is taken out of circulation, however there is no “sovereign debt”; when the treasury runs dry, there is no more redemption until it is replenished through cash subscription. In essence we’ve replaced treasury bills with “treasury equity”.

The integrity of the internal CC economy is maintained by restricting transfers of CC to other members of the community, rather than allow for “foreign exchange” markets like most cryptocurrencies seek. Membership is controlled at the community level to make sure antisocial behavior and freeriders do not become commonplace. Although it is explicitly noted that a certain amount of “behavioral diversity” is important, as it serves as herd immunity and make the overall system more resilient.

Blockchain Technology

The smart contracts necessary for CC may be easily programmed on Agoric with their front end interface on Slack, email and other community/social platforms.

One of the advantages of blockchain technology is that it can be used to enforce policies which are costly for traditional bureaucracies and unstructured communities to enforce. For example, if the CC system detects evidence of collusion (or otherwise gaming the system) members can be automatically issued warnings, have certain privileges revoked for a time (i.e. be put “on probation”), and ultimately bad actors are flagged to the community who may decide to ostracize them from collaboration or kick them out entirely.