Changing the Rules
Unlike the laws of physics, the laws of economics are a social construction, and are therefore changeable. But by no means does this mean that they are less important; the big issues of our times such as ecological degradation and wealth inequality have more to do with economics than they do with physics.
Economics outline a set of rules by which people interact with each other and the world. Although some economic rules are set by institutions such as central banks, most represent the collective unconscious of society. This means that these rules generally change very slowly.
The beauty of the cryptocurrency space is that it has given us the chance to sandbox an alternative set of economic rules. Developers in their dorm rooms have taken on the hats of central bankers.
At Regen Network, we’re asking the question of “what does a ruleset that optimizes for ecological health look like?” For almost two years now, we’ve been researching the best thinking in the fields of both token economics and alternative economics and applying it to the token design of our system. During this period our thinking has evolved. The following material outlines some of the different threads of this evolution.
Before getting into specific mechanisms, I’ll share some of the design requirements that have informed our work.
- Compatible with a system that cultivates intrinsic agency; extrinsic rewards can easily be modified by governance
- Optimizing for a true economy (multidirectional flows prioritizing utility above accumulation); should be a non-distortionary medium to transfer value and allocate resources
- Supporting commons management
- Must not inhibit the usability of the system for end users
- Must be attractive to investors
- Must ensure that governance is consistent with our broader platform aims and vision
- Must be resistant to all known threat models
- Those affected by rules can govern rules
- Many reward schemes can and should be approached to encourage context-specific regeneration
- Able to pay for utility on the network (compute, storage, etc.)
- Fixed gas price: value of primary token used for fees must be stable with respect to some useful measure of value , such as a consistent measure of utility (eg. a single data transaction)
- Users with governance power must be incentivized to maintain the value of the token that investors are purchasing at least up to the point where investors have achieved a reasonable ROI
- Legally compliant in United States
- Understandable by investors and users (at least in crypto sphere)
- Shows true value of utility of the network (ecological knowledge proofs/verification and agreements)
- Exchange friendly; listable
Given these principles and requirements, we can move into some of the use cases we’ve been exploring.
Regen Network is composed of four primary stakeholder groups:
I) Land Stewards (farmers, foresters, fishers, etc.)
II) Standards Creators and Verifiers
III) Ecological Commons Influencers and Co-Creators (Brands, Governments, NGOs, Insurers)
IV) Developer Community and Researchers
Our token is one of the connective tissues of this community of stakeholders.
As a Proof-of-Stake network, our staking token is required to secure the network. In addition, we require a token for payments on the network, both to cover overhead, and to pay for ecological services.
Ecological Agreements (smart contracts tied to Ecological State Protocols) link parties in a financial agreement. A natural products company could pay their producers a regenerative premium, tied to verified outcomes related to management decisions. A municipality or insurance provider could increase the drought and flood resilience of their watershed by incentivizing carbon sequestration amongst farmers up stream. Producers of Carbon Removal Certificates could purchase data to back their certificates, or actively incentivize carbon sequestration in the land steward community through our platform. Leveraging a model like Wikipedia’s contribution-tracking, researchers could be compensated based on their contributions to an Ecological State Protocol. Third-party auditors could be paid when brought in for on-the-ground verification.
These contracts could be structured directly in our native token, or through an interface that allows users to transact in whatever currency is most convenient for them (powered by our token).
With this grounding, we can now move into some of the various mechanisms we’ve been exploring.
In our earliest designs, Regen Network was inspired by an idea called Reverse Mining. Whereas Bitcoin relies on miners (to understandably ecologically-detrimental ends), Regen Network would do the opposite. Whereas mining produces new Bitcoins through energy consumption, Reverse Mining would produce new Regen tokens via ecological regeneration (or Proof-of-Regeneration).
Although this concept is deeply aligned with our ethics, there are two reasons why it hasn’t been integrated yet. The first is that this could potentially create a conflict of interest for participants in the network; in a system where we’re aspiring for verified ecological data, there are some instances where having a minting system tied to Proof-of-Regeneration could incentivize fraudulent data. The second issue is that our investors were strongly attached to a limited currency supply (similar to Bitcoin or Ethereum), and were leery of a dynamic supply that would scale with the scope of ecological regeneration. That said, we may return to this concept if we can reconcile some of these issues.
Staking and bonding have a rich history in cryptocurrency lore. Casper — Ethereum’s Proof-of-Stake upgrade — has been part of their roadmap to move to move away from Proof-of-Work since 2014 (almost a year before the initial Ethereum blockchain went live). Our advisor Rick Dudley has been a strong proponent of these approaches.
The concept of collateral has been a foundational concept in finance for millennia (think of mortgages). It forms one of the pillars of securitization — backing a financial product with something of underlying value.
An analogy can be drawn to reputation, or credit. In the trustless environment of the blockchain, by what means can we establish reputation?
Regen Network is built on ecological data, and the verifiability and confidence for these data are of utmost importance. Bonding at all levels of the system will allow for a concrete mechanism that backs the trustworthiness of a data source.
Elements of our architecture that could be bonded:
- Data sources: satellite data, IoT sensors, etc.
- Ecological State Protocols
- Validator nodes (via staking)
- Outcome of an Ecological Agreement (such as in the instance of a carbon removal credit, as an insurance fund)
- Verifiers and auditing agents
Single Utility Token
In our 2018 whitepaper, we outline a single-token architecture focused on utility. It drew inspiration from Dash (Dash News), with a small token supply increase managed by Regen Consortium as community grants.
One of the tensions of a single-token model is that a currency’s “medium of exchange” and “store of value” functions are directly at odds with each other. With the US dollar, the Federal Reserve balances out these functions by targeting a small annual inflation rate. Currencies with limited supplies skew towards stores of value — such as gold. Currencies with dynamic supplies, especially those in demurrage (declining value), are optimal for mediums of exchange. Each model is appropriate for different situations. What if we didn’t need to compromise?
Dual Token Models
2017 was the year of utility token offerings — tokens that attempted to avoid securities law via offshore incorporation and claims that they were very different than equities. By 2018, this legal supposed loophole was debunked, and many shifted over to the opposite end of the spectrum — the security token. Security tokens have higher regulatory oversight, but allow for attributes such as ownership and dividends. With these two models representing opposite ends of a spectrum, each with various benefits, there are scenarios where it could make sense to get the best of both worlds by having both a utility token and a security token.
As we are building on Tendermint/Cosmos, a Proof-of-Stake-based architecture, we’ve been influenced by their two-token design—one token for staking (securing the network), and one for fees. Their reasoning (Sunny Aggarwal) for the split is that, in a single token architecture, security and utility are at odds. Either a high percentage of tokens are used for fees, in which case security is compromised (as someone staking a small percentage of the total token supply could launch an assault), or a high percentage are staked, potentially creating a shortage in the fee market.
Demurrage has ancient economic origins. To take one example—cacao has been used as a currency at various points through history. It’s value—nutritional, ceremonial, and as a viable seed—are all degraded with the passage of time. The timelessness of modern currencies is one of their characteristics that creates perverse incetives. I will note that “money” has a broader when used historically, and I’ll leave you with David Graeber Debt: The First 5,000 Years to sort out the nuances there.
Expanding upon the medium-of-exchange and annual-token-increase threads above—one method of increasing the velocity of a currency is to have it be of declining value. A crude method of doing this is through simply targeting some annual inflation rate that is achieved through an annual increase in supply, but this is a little different than demurrage (and depending on distribution method, could exacerbate wealth inequality in the system, just as Quantitative Easing does via the Fed). One challenge in actively managing for prices is that a price must first be discovered in some meaningful unit of account.
In the crypto context, there are at least two technical hurdles:
- Creating a wallet that imposes some sort of half-life on deposits
- Preventing transferability into other currencies
One significant advantage of demurrage is that it encourages activity on the network. It should be noted that a demurrage currency only makes sense when there are other stores of value accessible (as a demurrage currency is a terrible store of value).
Although we haven’t yet integrated any mutual credit mechanisms, we have some interest in exploring what this might look like for our fee token. We’ve taken inspiration in this domain from Holochain Design (Arthur Brock). For any currency to have a relatively stable value over time, it requires a dynamic supply. Mutual credit is one method of achieving this functionality via decentralized means.
Putting Theory to Work
During 2019 we will be running our first pilot projects. This will give us an opportunity to start experimenting with token design in the wild.
We’d also like to convene a summit on token economics—bringing together voices from crypto, alternative/ecological/feminist economics, and central banking. Although there may be good reason to reinvent the wheel, we should at least have robust channels of dialogue between these different spheres as we do so. If you’re interested in participating in such an endeavor, please be in touch!