Community Currencies: A Case Study to Explore New Technical Possibilities
- A currency gains value from its use — call it Community Contributed Value
- National currencies aggregate this contributed value and centralize the benefit to the government and adjacent actors
- People see this, and Community Currencies have been attempted to capture this value locally, instead of sending it on to financial centers and capitals
- Community Currency experiments have generally failed for various reasons — difficulty of creation/use, lack of transparency or auditability, moral hazard, lack of immediate convertibility, instability of value, inability to see, measure and capture Community Contributed Value
- Blockchains have shown a pathway to overcome some, but not all, of these roadblocks; until now, no successful local currency projects on blockchain
- A new set of blockchain protocols has emerged in the Verus Project, which is developing rent-free public blockchain infrastructure — use of these open protocols allows for low risk, low cost experiments such as Community Currencies that overcome traditional roadblocks
- Without programming, a community can quickly create a made to suit local currency that is easy to use, is transparent and auditable, defeats moral hazard, allows for instant conversion into other currencies, has a stable and predictable value, and can measure and capture Community Contributed Value, to be used for the betterment of the community
- Adding intelligent namespaces to Community Currencies gives the potential to experiment with additional value enhancing opportunities, creating digital goods economies attached to the Community Currency
- At this time, Verus is a project where developers are focussed on the core protocols. Rolling out a Community Currency for broad use would still require some additional work on user-facing apps.
The Problem
Like any other good, money is ruled by the laws of supply and demand. A currency in high use requires a constant float of supply to be circulating through its system. In the case of a fiat currency, the demand for holders to hold the currency gives it its value. In other words, as users of a currency, we collectively give value to that currency by our use. For something like the United States Dollar, its value comes from use in its domestic economy, as the global reserve currency, as the petrodollar, as the primary numeraire in financial markets, as the base currency for most foreign and corporate debt, as a predominant store of value, etc. etc. If we live in the United States and we zoom in, looking at our own local community, we can see that we are providing some small fraction of value to the overall value of the USD through our community’s aggregate use and holdings. However small that might be in relation to the global forces of supply and demand, it might still be a relatively large amount of value when considered from the community’s point of view. Little work has been done in quantifying this actual value provided by a community through its demand for a prevailing currency, but new technical tools might allow us to see this more clearly through actual experience. That’s what this sample case study is about — let’s call this value created by a community, “Community Contributed Value”.
Observing this in the world today, the first thing we see is that, at the local level, we have zero control of our own Community Contributed Value, nor do we experience much, if any, local benefit from it. The aggregate of all Community Contributed Value, worldwide, is centralized in the hands of the US government. In the fiat period, as the master of the global reserve currency, the US government has proven that this aggregate value is enormous, allowing the government and country to run persistently high budget and trade deficits, and expand the money supply at will, while still maintaining a strong dollar.
In addition, although specific research is hard to find on this issue, it does seem as if powerful private forces that are adjacent to the United States Government, such as Wall Street and the Defense Industry, are conferred certain advantages through their proximity to the controller of the USD. Connected and powerful people and corporations may be, directly or indirectly, tapping into this Community Contributed Value.
Solutions — pre-Blockchain
All of this is obvious enough to have given rise to a long history of efforts to start local community currencies, to keep some of this contributed value in the community. Prior to the development of the blockchain, these efforts really seem to have been doomed from the start. Currency issuance in the paper money world is difficult to control and has huge security and moral hazard issues (counterfeit, over-issuance, etc). These currencies cannot easily be made transparent, or auditable. The funds can’t be reasonably saved or protected in banks. There is no plausible way to have readily available conversion at market rates between the community currency and the USD, nor is it plausible to keep a local currency at a stable and predictable value. For users, using community currency was hard, and for communities, making community currency was hard — and so, except for a handful (or less), every effort ran aground.
Solutions — in the Dawn of the Blockchain Era
Interest in community currencies perked up in the blockchain era, as it became clear that auditable, transparent tokens could be created at will (eg. ERC-20s), and the tokens could be securely stored and controlled through digital wallets. Bitcoin itself is an example of a type of community contributed value, where demand to use and hold gives it its value, to the benefit of a worldwide virtual community of early adopters. Ease of creation and use has been enhanced as against paper currencies, at least for the technically adept. Still, no longstanding successful cases of broad local community use have emerged. In fact some, such as CityCoins, have been notorious failures.
It seems that auditability, transparency and digital wallets are not enough. Other key issues are:
- community currencies still require some sophisticated engineering capability to implement
- there is no method for easy, reliable convertibility into the prevailing fiat currency, nor can conversion rates hope to be predictable or stable, even in the short term
- there is no easy way to safely and measurably capture the Community Contributed Value
- there are no additional enhancements to community or the currency through attached digital goods and a new digital goods economy
New Solutions — Bancor; Verus, public blockchains as a service
It is likely that, were these problems solved, and ease of digital wallet use addressed (along with personal privacy), motivated communities would find it far easier to bootstrap use of a community currency {“CommCurr”}. Imagine being able to spend your CommCurr anywhere in the community, from the babysitter to the gas station to the bank, and have it accepted with ease because the recipient knows that they can convert it easily and immediately, and without a counterparty, at the push of a button, to the USD, on a 1:1 basis (or very near thereabouts). And if community members could measurably observe the amount of Community Contributed Value that was emerging through widespread and persistent use, CommCurr would be easy to promote, and hard to resist.
One of the best efforts to deal with convertibility in community currencies is the project Bancor. They pioneered onchain reserves as part of a currency’s definition, dynamically expanding and retracting supply, tied to use, and the ability to convert directly to and from other currencies, using locked onchain reserves as a fractional backing. This proof of concept has existed since the first version of Bancor, as a smart contract capability on Ethereum. For any community, each particular implementation of a smart contract would need to be designed, engineered and audited by experts, in this case Bancor developers. But Bancor is a heavily funded venture business at root, having raised hundreds of millions of dollars in an ICO. Development of community currencies doesn’t pay, unlike commercially-driven defi, so Bancor soon abandoned any focus in this area.
At about the same time as Bancor emerged, former Microsoft fellow Michael Toutonghi, and some associates, released a vision paper focused on making public blockchain infrastructure that can be used by the world. Inspired by bitcoin’s approach to re-imagining money, they aimed for the development of usable blockchain primitives that could form the basis of distributed network applications that provide people a real chance of self-sovereignty and new ways to self-organize in many areas of life.
They began developing software and protocols, basing off Bitcoin and Zcash, and bootstrapped a worldwide network of self-interested miners and stakers who power a network that is capable of providing public blockchain infrastructure. Fast forward five years, and a good portion of the network has been running for years, providing the first parts of the system. Now, the rest of the full vision (and more) is about to transition from testnet to mainnet, and new capabilities for blockchain are about to become publicly available, including the ability to run advanced Community Currency experiments that are virtually risk-free for communities, can be carried out at low cost, and have several elements that will make them attractive and safe for broad community use.
Two key points to note about the Verus protocols, software and network are:
- no venture capitalists or investors have been involved in its financing or development, so there is no need to extract rent or payment from users to pay back investors — it is rent-free technology, the only payments necessary are network fees to provide sufficient incentive for outsiders to provide their compute resources to power the network; and
- Verus does not use smart contracts — it is based on more traditional and longstanding distributed computing paradigms, and users access the software for basic primitives, which they then put into use and combine however they see fit. No contract programming or special blockchain engineering skill is required to carry out sophisticated actions. Recently, on the Verus testnet, one community member (a non-programmer) implemented a powerful community currency example in less than ten minutes with a few simple commands.
Currency Reserves — Convertibility
Verus provides the ability to define new tokens/currencies at will, without programming. Various options are available, as tokens carry a multitude of possible uses, from voting to tickets to currencies. For community currency experiments, one of the key options is to lock in reserves that are attached to, and back the value of, the newly issued currency. And, since Verus is bridgeable to and from the Ethereum network, you could back a new currency with ethereum or USDC or any other valuable currency from that network.
If a CommCurr is defined with reserves backing it, then users can freely mint new currency by converting their USDC, for example, directly to CommCurr. This would build up the locked reserves of CommCurr. Or, they could go the other way around, converting CommCurr into USDC immediately by converting it into its reserves, without any need to find a counterparty. This would reduce the locked reserves. The conversion rate in these situations is driven by Automated Market Maker (AMM) technology, similar to Uniswap, although providing a MEV-resistant fair conversion experience for all users at the lowest possible fees.
Reserve backing in the Verus protocols is user-selected upon the creation of a currency, ranging from a 5% backing to a 100% backing, Multiple currencies, with arbitrarily selected weights can be used. There is a requirement to use the Verus coin as at least one of the currencies backing CommCurr, or any currency — it needs to represent at least 5% of the backing. This is due to interoperability goals, to ensure that networks built using the Verus protocols stay connected, as a worldwide network of value, where currencies connect to each other throughout.
These few simple options make for a host of use cases, which will not all be explored here. Instead, we’ll focus on CommCurr and note that a decent implementation might have backing consisting of two currencies — USD (represented by USDC bridged from the Ethereum network), and Verus, weighted 95:5 in favor of USD.
As a result of having valuable reserves, CommCurr is guaranteed to be valuable, and users can instantly convert in and out of it by simply sending it to themselves, or another person, choosing a conversion option. If a user sends USD and receives CommCurr then the reserves for USD will go up, and two things will happen to CommCurr — it will issue a little bit of new supply, and its value will go up. On the other hand, if a user goes the other way, sending CommCurr for USD, then some CommCurr supply will be automatically burned, and the value of CommCurr will decrease a little. In other words, CommCurr has a dynamically expanding and retracting supply, and a floating conversion rate, depending on the demand for the currency.
Capturing the Contributed Value
When creating CommCurr the best way to capture value for the community will be to create the currency so that it is only partially backed. For this sample case study, let’s say it’s backed at 80%. A community can easily engineer this precise amount of backing (which never changes, as a percentage, through the life of the currency) by choosing an initial supply of CommCurr, say 1 million, and then contributing 760,000 USD as reserves, and 40,000 dollars worth of Verus as reserves. We’ll avoid going into detailed mechanics here but the result would be that, upon the launch of the currency, the community currency issuer would own 1,000,000 CommCurr, which is 80% backed by real value, but is convertible, as its initial price to acquire or to sell, 1:1 with the USD.
Now, as we described above, if the issuer just starts converting their initial holdings of CommCurr (1 million units) into USD, they’ll start depleting the reserves and driving down the value of the currency. In fact, if they just dumped it all, they’d get all their initially contributed reserves back and the currency would be rendered virtually worthless. So, instead of doing that, they’ll encourage use by the community. Perhaps they’ll simply promote its use, or maybe they’ll offer small discounts on community services, and encourage others to do so, to bootstrap use. The overall idea would be to encourage use by the community at large. If use emerges, and people start to acquire the currency (by contributing USD into the reserves), and the issuing community does not sell any of its initial holdings, the value of CommCurr will begin to creep up (provided that not all of this currency is immediately converted back by the recipients). Under these circumstances, It should be easy enough for community members to become comfortable with the value of CommCurr, as they see that it can always be acquired and disposed for USD, immediately, and at a predictable and stable price. It’s important to note that if the issuing community doesn’t sell/convert any of its holdings it is *impossible* that the value of CommCurr would fall below its initial value of 1:1 vis-a-vis the USD.
If regular use persists, there will be constant demand for the currency and a certain float will begin to remain in circulation. In our example, let’s say the community reaches the point where 100,000 CommCurr is more or less always outstanding, in some form of transit circulating through, or being held by, the community. This would tend to increase the value of CommCurr some amount. But, instead of allowing the currency to appreciate, the Community could begin to draw down on some of the 1,000,000 of initial supply that it holds in its reserves. In fact, in this example, they’d need to convert 100,000 of that supply into USD just to keep the price pegged 1:1 with the USD.
So now we would have an exact measure of Community Contributed Value — in this case it’s 20% of $100,000 = $20,000. If the demand in the community created a persistent float of $1 million, the issuer could draw down their entire supply converting it into USD, and it would still be backed at its original amount, and still be convertible 1:1 with USD..
No Free Lunch (well, maybe a free appetizer)
Did the issuer just make $1 million? No. Remember they had to commit $800,000 of value in the first place to set this up. And, although that investment is never at risk (they can always just convert everything into the reserves at any time to recoup them), there is a certain upfront capital cost there. However, they did clearly make $200,000, which, in this case would be a measurable amount of Community Contributed Value that they captured. There are also some minimal network costs to set this up on the Verus network, which is paid to the miners and stakers, as block rewards, for mining the Verus blockchain, and powering all the community’s transactions. At current rates, it would amount to less than $200. Overall, the cost/risk/reward matrix is attractive.
It is important to remember that all of this is transparent and auditable, being on a public blockchain. Community members would be in instant possession of all relevant information about currency supplies, reserves, spending, conversion, etc. by the CommCurr creators.
Community members would have transparency on their spending too, which is unfortunate. However, as a fork of zcash, Verus does offer private transactions on its native currency, Verus, and so there would be methods for users (or preferably, their apps) to help protect the spending privacy of community members.
Governance
There are other blockchain primitives that Verus enables which enhance CommCurr as an attractive and low-risk method to create Community Contributed Value. First, the protocols allow for virtually unlimited flexibility with respect to the governance of who is in control of the initial holdings of CommCurr. Multiple signatures could be required, up to, for example, 13 of 25, to authorize any spending or conversion activity. This would allow for fairly sophisticated approval mechanisms and safeguards for communities that are implementing this type of experiment.
Moral Hazard — Escrow
Another blockchain primitive is the ability to provably and irrevocably lock digital wallets for an arbitrary period of time (up to 21 years). In this way, a community issuer could reduce concerns about the moral hazard of dumping their holdings and crushing the value of a growing CommCurr. They can choose to stagger escrows, making, say, 10% freely spendable now, and then unlocking 10% a year after that. One aspect to consider is that, if a lock is made irrevocable, it will build in capital cost risk for a community. Ie. if the experiment is a failure and there’s no adoption, they wouldn’t have access to their original capital until the unlock period passes.
Wait, There’s More — Enhancing the Community Currency through New Capabilities for a Digital Goods Economy that Directly and Tangibly Benefits the Currency
Possibly the most forward-thinking element of a Community Currency is the ability to build a real digital goods economy around it. The Verus protocols make this possible through the issuance of what are called SubIDs. SubIDs are multi-use friendly name “identities”. Community members can register these names by paying a set amount of CommCurr, for example, 10 CommCurr per registration. This increases the value of CommCurr because any amounts paid for the “identities” are burned, thus increasing the value of the currency for all holders thereof (including the original issuer).
Community members might seek to register identities for many reasons:
- to signal support for the community
- to have a recognizable or branded community-oriented name to receive funds, eg. “member.CommCurr@”
- to create a NFT or public profile attached to the name (“identities” are capable of being expressed as nfts, artwork, public profiles, etc.)
- to be a ticket for an event or a discount code for purchases, or a membership in a club
- To be attached to a physical item, like a community landmark, where it can represent a public profile or description, fundraiser, message board, etc.
These are just some of the virtually unlimited examples of digital goods that could be created, all of which would require CommCurr to acquire, this creating a real demand for the currency.
Conclusions
These are new blockchain capabilities. They do not currently exist on Ethereum or other smart contract blockchains because the interplay of such different elements would seem to create overwhelming complexity, requiring the use of multiple inter-operating contracts to implement. Certainly, such comprehensive and flexible solutions could not be carried out in minutes through the use of a few simple commands.
Currently, all of these capabilities exist in the Verus protocols and are in use on testnet. A mainnet activation is imminent, and communities can soon start to experiment, at the smallest initial scales they desire. It’s important to note, however, that additional software development would be required to make some of these elements easy and safe to use for the broader community. As a FOSS project, Verus encourages communities to work together, and with the Verus developer community to create open source apps that leverage the protocols, so that all communities worldwide can benefit from the resulting development.
