Encointer: A Blockchain Experiment in Local Currencies and Universal Basic Income

:::info Author:

(1) Alain Brenzikofer ([email protected]).

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Table of Links

Abstract and I. Motivation

II. Local Currencies

III. Unique Pop Ceremonies

IV. Monetary Policy

V. Purchasing-Power Adjusted Transaction Fees

VI. Architecture

VII. Trusted Execution Environment Security

VIII. Encointer Association

IX. Known Limitations

X. Conclusion and References

\ Abstract—Encointer proposes a blockchain platform for local community cryptocurrencies. Individuals can claim a universal basic income through issuance of fresh money. Money supply is kept in proportion to population size through the use of demurrage. Sybil attacks are prevented by regular, concurrent and randomized pseudonym key signing parties to obtain a proof-of-personhood. Encointer features privacy by design and purchasing-power adjusted transaction fees.

I. MOTIVATION

A. Economics

\ With the appearance of Bitcoin [1] in 2008, a big socioeconomic experiment took off. The nature of money itself was widely debated. Bitcoin adopts a hard-coded nominally inflatonary monetary policy saturating at a fixed supply. Rapid adoption made Bitcoin a real deflationary currency, which it will remain if successful. Early adopters made a fortune. Because of its deflationary nature, bitcoin favors accumulation of capital for the few. Wealth increases without merit.

\ The monetary policy followed by central banks issuing national fiat money on the other hand often follows the goal of price stability, aiming at a moderate inflation goal in the order of 1-2%. Issuance of money is appointed to banks who give credit to companies who employ workers who consume goods and thereby make companies profitable and raise the GDP. A process that allegedly benefits everyone. However, the observation that an increase in money supply doesn’t benefit everyone equally is referred to as the Cantillon-Effect [2]. Thomas Piketty shows [3] that gains on capital historically exceed economic growth, another factor that questions the trickle-down theory.

\ Encointer aims at turning this logic upside-down and lets all individuals issue money subject to common rules. In order to mint Encointer , people need to attend pseudonym key signing parties (meetups) that happen at regular intervals at high sun all over the world within small randomized groups of people. The Encointer issuance therefore represents a form of universal basic income (UBI) for every person attending such meetups.

\ These Encointer meetups are at the same time the basis of a digital personhood claim, or proof-of-personhood (PoP) [4] [5], proving a one-to-one relationship between a person and her digital identity. One person can only maintain one personhood claim because ceremonies are designed to make it impossible to attend two meetups physically as they happen in different places concurrently.

\ While all other cryptocurrencies to date are global units of value, Encointer enables local community currencies. Because its money issuance is bound to the physical presence of people at specified locations at a specified time, this issuance can be geographically bound to enable regional currencies with their independent valuation. Regional currencies have been proposed as more sustainable alternatives to national money [6] [7].

\ B. Decentralization

\ Encointer aims to be resilient against censorship, attacks and failures. Resilience shall be achieved through decentralization:

\ architectural decentralization avoid a single point of failure through redundancy (different machines in different geographic locations)

\ political decentralization distribute control among many individuals and organizations

\ In order to achieve decentralization, Bitcoin and many other cryptocurrencies use an energy-hungry consensus mechanism called proof of work (PoW). While PoW has been the key idea that made Bitcoin possible in the first place, it is not ecologically sustainable. Moreover, it failed its goal of decentralization as mining has become centralized by a single company in a single country.

\ Peercoin [8] introduced the first proof-of-stake (PoS) cryptocurrency in 2012. While PoW makes a compromise on energy efficiency, PoS makes the compromise of benefitting and empowering the rent-seeking wealthy.

\ PoPcoin [5] introduced a more democratic consensus algorithm where all persons with a proof-of-personhood hold an equal right to produce new blocks. PoP consensus, however, faces a chicken-egg situation: The consensus algorithm which should ensure the security of PoP relies on PoP itself. Once established, this consensus algorithm is the closest fit to our stated goals but it needs a stepping stone to be bootstrapped.

\ Polkadot [9] can serve as this stepping stone. It introduced a heterogeneous multi-chain framework with shared security, based on Nominated PoS (NPoS) consensus. Encointer aims to benefit from Polkadot’s shared security by becoming a parachain until eventually migrating to PoP consensus.

\ C. Transaction Privacy

\ Bitcoin transactions are pseudonymous but not anonymous. It has been shown that identities of transacting parties can be revealed [10]. Aiming at transaction privacy, Monero was introduced in 2014, employing the CryptoNote protocol [11]. Receiving funds in Monero means scanning every block for transactions to oneself. This task can only be taken out by full nodes as delegating it would leak private information.

\ Zcash was introduced in 2016 employing the Zerocash protocol [12] using zk-SNARKS to hide sender, receiver and value from third parties. Generating SNARKS to send funds is a computationally heavy process, limiting its usability for mobile and IoT devices.

\ For both Monero and ZCash, privacy comes at the price of large transaction size, letting the blockchain grow quickly.

\ Hyperledger Sawtooth has demonstrated Private Data Objects (PDO) [13]. PDOs allow to take state and execution of state transitions off chain. PDOs rely on trusted execution environments (TEE) and require trust in vendor attestation services. Currently, there are few TEE vendors on the market (i.e. Intel SGX [14], ARM trust zone [16] used by AMD, Qualcomm and others) but there are also open-source hardware initiatives that might one day diversify the attestation trust.

\ SubstraTEE [17] is a TEE-based framework for trusted off-chain computation and TEE-validated sidechains on a second layer offering confidentiality and scalability at the same time. Encointer builds on this framework to ensure private transactions.

\ D. Scalability

\ Because of its block size limit, Bitcoin can only reach about 4-7 transactions per second onchain. In order to tackle Bitcoin’s scalability issues, Lightning Network payment channels [18] were introduced in 2015 and demonstrated in 2017. Scalability is achieved by bilaterally treating transactions offchain with the option to settle the last balance at any time on-chain. Teechan [19] was introduced in 2017, implementing payment channels in TEEs.

\ As mentioned in the previous section, Encointer takes the execution of state transitions off-chain altogether leveraging the SubstraTEE framework [17]. With individual shards for each local community, Encointer can effectively scale horizontally while still maintaining interchangeability among local currencies.

\ E. Governance

\ Decentralized blockchain governance is the process of deciding on the future of the chain’s rules, and any interventions necessary to avoid undesired effects. In the case of Bitcoin, a balance of power between miners and coin holders decides about the future of the protocol by putting their bet (mining power, bids on exchanges) on the desired option. This off-chain decision process lead to multiple chain forks in the past, hurting the ecosystem and dividing development teams.

\ PoS blockchains delegate governance to their coin holders entirely. Polkadot [9] employs a very elaborate representative on-chain governance scheme with referenda. This process can avoid forks because all interventions are decided onchain. While this design promotes a distribution of power, the underlying rule is still: Who has more coin has more say, a paradigm which is incompatible with our egalitarian ambition.

\ As Encointer has an anti-sybil attack measure in place (uPoP), a democratic one-person-one-vote (1p1v) scheme can be implemented within the boundaries of one local currency community. Deciding on the parameters of a local currency should be left to the community maintaining and using it.

\ Global protocol decisions can’t simply be delegated to all persons from all local currency communities because the trust model doesn’t reach beyond the currency that you yourself participate in (attackers can undetectably build bot communities as long as they never interact with honest humans).

\ One way to extend the trust model are decentralized exchanges among Encointer currencies. Communities that buy each other’s coins quantifiably trust the integrity of the other community. Even more trust comes from people traveling and are participating in different communities. If there is one community that acts as a root of trust, a global 1p1v scheme becomes possible.

\ Encointer appoints a root of limited trust to a Swiss association holding the Encointer trademark. The association defines and audits the root-of-trust community and suggests protocol updates in advance, including changes of rewards and fees or block size limits. Suggestions by the association can be blocked by a referendum vote requiring a majority of 2/3 of voters. Balloting happens on-chain anonymously. The 2/3 majority threshold for referendums allows the association to react quickly to changing circumstances but still provide decentralization, given large opposition.

\ If the Encointer association should fail to suggest necessary changes, the community may suggest changes as well. They also require a majority of 2/3 of stake and 2/3 majority of 1p1v voters.

\ Once a dense web-of-trust has been established, the association becomes obsolete in its function to act as a root of trust and it can be replaced by an on-chain elected council similar to Polkadot’s - but in contrast to the latter it will be democratically legitimized.

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:::info This paper is available on arxiv under CC BY-NC-SA 4.0 DEED license.

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