The Cryptoeconomics of Funding a Universal Basic Income

rubgoldberg-cryptoA Universal Basic Income (UBI) would give all people enough money to meet their fundamental needs. We could fund a UBI through taxes or inflation. If we finance it with taxes, we’d have to take the money from somebody else. We’d most likely do that through some type of transaction fee. This post is concerned with exploring ways to fund a UBI that we could distribute via a cryptocurrency. I compare inflation funding to transaction fees. I also provide basic projections for an inflation-funded crypto UBI in the US and Haiti. Even though inflation may also impose a “cost” on holders of the currency (through a loss in purchasing power), my analysis led me to conclude that it would be better to fund a crypto UBI through inflation.

Different Types of Inflation

Price inflation happens when the value of a currency goes down. Consequently, prices that you have to pay increase when purchasing things with that currency. Persistent price inflation penalizes you for holding money longer. Transaction fees punish you every time you spend money. To maximize the probability that a crypto economy will bootstrap itself, people must spend tokens. In that way, transaction fees would hinder a currency during its crucial bootstrap phase.

If we fund a UBI through creating more tokens (i.e., expanding the money supply), then that would cause monetary inflation, which isn’t the same thing as price inflation. Increasing the money supply could cause price inflation, but it doesn’t always have to, even with traditional fiat currencies like the US dollar. A UBI cryptocurrency would spike in value as speculators see that a crypto economy is bootstrapping itself. In other words, price deflation can occur concurrently with monetary inflation. The price of bitcoins, for example, has increased dramatically over the years, even though the Bitcoin network creates new coins every ten minutes.

“It shrinks?”

The built-in characteristics of a token will impact the market value of that token. Imagine three tokens that are identical in every way except:

  • FantasyToken has no fees and no monetary inflation.
  • ShrinkToken has a 4% monetary inflation and no fees.
  • FeeToken has a 4% transaction fee and no monetary inflation.
IMPORTANT: The fees referenced in the preceding points refer to funding a UBI. There would be small fees for all currencies as incentives for nodes to process transactions, maintain network integrity, and discourage denial of service attacks.

FantasyTokens would be worth more than ShrinkTokens, which would be worth more than FeeTokens, assuming you spend the tokens within one year and price inflation is equal to monetary inflation. Even if we increased ShrinkToken’s inflation to 10%, it would still be a better currency for commerce than FeeToken. And with a ShrinkToken UBI, monetary inflation would decrease over time as the incremental increases in the money supply are increasingly smaller in proportion to the total money supply. My main point is that the more costs and restrictions we add to a token, the less it will be worth. That means people will be able to buy less stuff with it, and, therefore, the token will be less useful for fighting poverty, which is what we want a UBI to do.

To emphasize the previous point about restrictions, suppose we created a fourth token called an EqualityToken. In addition to a fee or inflation, EqualityTokens limit how may tokens one person can accumulate and, therefore, require capital controls to keep you from immediately flipping it into something you could sell to the Koch brothers. In a free market, a self-maximizing person would give me far less for an EqualityToken than any of the other three tokens. I agree that inequality is a big problem, and I’d love to solve it; however, restrictions would reduce the value of my EqualityTokens. The EqualityToken’s restrictions would also violate the main rational underpinning UBI: people are the best experts regarding their needs. With EqualityTokens, we’d be telling people what they can do with their money. The implication is that they’re too stupid to decide for themselves. That’s not only inconsistent with the argument for a UBI; it’s the opposite. If we tried to distribute a UBI in EqualityTokens, the project would fail. The more stuff (i.e., complexity) we add, the higher the chance of failure. A UBI is ambitious enough. Moreover, a successful UBI would significantly mitigate the inequality problem.

Projections

Here is a worksheet containing projections for an inflation-funded UBI in the USA and Haiti. In the Haiti tab, the numbers are enormous, but not crazy. After the 2010 earthquake that devastated Haiti, the world pledged $13B in aid. Even if we had to fully fund a Haitian UBI with US dollars, we could increase every Haitian’s average income by 50% for three years for less than $13B. That’s enough time for a UBI to demonstrate its effectiveness.

You wouldn’t have to fund a Haitian UBI with dollars. You could create the money as new crypto tokens (i.e., currency inflation). All things being equal, that would tend to also cause price inflation. The increasing money supply would tend to reduce the value of the crypto UBI currency; however, if the currency appeared to be taking hold (i.e., used in commerce and even displacing fiat currency), then the value of the currency would go up. In other words, if we could successfully bootstrap a crypto UBI currency, the deflationary pressure resulting from that currency’s appreciation would offset the price inflation resulting from increases in the money supply. I don’t know if the currency appreciation would be greater or less than the inflationary pressure caused by the expanding money supply. Nobody knows. However, we’ve seen the market value of cryptocurrencies increase dramatically in response to positive mentions in mainstream media, and sometimes in response to drunken tweets by some famous (or infamous) person. It’s possible that increasing currency value that appears to be working could far outstrip the effect of even substantial increases in money supply.

Elasticity of Supply & Economies of Scale

Anyone who has taken Economics 101 is familiar with supply and demand curves. They might also tell you that putting more money into an economy must drive up prices by a proportional and linear amount. For example, if the market price of a loaf of bread is $1, then raising everyone’s income by 50% must increase the cost of bread to $1.50. In fact, they might argue that the price of everything would increase by 50%. The flaw in that argument is that it does not consider the elasticity of supply. If, for example, a Haitian baker only thinks he can sell one loaf of bread in a day, he’ll only bake one. If, however, he thinks that there are many more customers with the ability to buy his bread, he’ll bake more. In turn, farmers may plant wheat in fields that they previously left unattended. Greater demand resulting from more people having more money to spend would exert upward pressure prices; however, that pressure would be offset as providers of goods and services create more supply to meet the increased demand.

Economies of scale are also all about cost reduction. If I’m the only person who wants to buy the new “iPhone Zillion,” perhaps I’d have to pay $1B (likely more) for it. Since I’d be the only potential user, I might have to pay $50K or more for each app that I install. But since there are millions of people who would want to buy that phone, Apple can sell it for hundreds of dollars and yet make a lot of money. The same is true for app developers who can now give apps away for free or sell them for just a few dollars while still making a profit. By creating more paying customers, a crypto UBI would make it possible to deliver goods and services at a greater scale with lower unit costs, which would put downward pressure on prices.

Backstopping a Crypto UBI Currency

We could help bootstrap a UBI by underwriting the value of its tokens with a widely-accepted fiat currency like US dollars. If you created a standing purchase order for, say “UBI tokens” at $0.01 per token, then the market would value those tokens at a minimum of $0.01 each, which would make people more likely to accept the tokens for purchase transactions. Merely backstopping a Haitian ShrinkToken would likely cost far less than the $13B we would need to fully fund it for three years. I don’t know if the amount that we’d need to backstop the currency is $1B, $100M or some other number. But the tantalizing possibility is that we could create a Haitian crypto UBI—and potentially wipe out poverty in that country—for far less than what the world collectively pledged in emergency aid. That would radically change millions of people’s lives for the better. And if it did work, the proof of the UBI program’s effectiveness would likely fuel a global effort that could ultimately lift hundreds of millions of people out of poverty.

Even if you assume at 100% correlation of monetary and price inflation, my worksheet shows that a Haitian ShrinkToken’s monetary inflation rate would dip below the historical Haitian price inflation (12.3%) in less than a decade. A Haitian would consider a 10% price inflation to be good. A Venezuelan would say it’s fantastic.

Monetary Inflation Set in Code

Suppose we are able to create a global UBI currency. How would we control the money supply? If the goal is to create a currency that works well for commerce, then long-term value stability is desirable. And since uncertainty increases volatility, we should make sure that the currency inflation of a crypto UBI currency is predictable.

The Bitcoin network is set up to create a certain amount of new bitcoins (currently 12.5) roughly every ten minutes with an upper limit of 21 million total bitcoins that the network will ever create. The Bitcoin example illustrates a key advantage of cryptocurrencies: You can use code to define the size and growth rate of the money supply. With fiat currencies, corruptible officials and politicians control the money supply.

We would be better off if we define the size and growth rate of a crypto UBI money supply in advance since it would reduce inflation risk, promote stability and, therefore, increase the utility of the currency. We could make the growth rate arbitrary, tie it to population or some other metric. The more definitive the rules are, the more uncertainty we can remove from the equation.

Some Known Unknowns

The effects of a large-scale implementation of a UBI are more complicated than my spreadsheets represent. Please also consider the following somewhat random thoughts:

  • Adoption would not occur all at once. Most UBI-like programs so far (e.g., Dauphin Mincome) have been means-tested programs. Most future government-sponsored projects will also be means-tested.Turmoil in fiat currencies could prompt people to adopt crypto faster.
  • If other social programs are scaled back (e.g., Would we need SNAP if we had an excellent UBI?), we could use the savings to help fund the UBI.
  • In a future crypto economy, it will be harder to collect taxes. Privacy can and should be built into currencies. But governments will need and want money. That may make them hostile to crypto. In some countries, the prospect of governments losing control over money could prompt a severe reaction. Asset and consumption taxes are probably in the future.
  • Governments might look at a transaction fee structure and think it’s pretty cool. Then they’ll try to do the same thing to collect taxes.

Conclusion

People would do whatever they could to avoid fees, which would include not using the currency. Higher complexity = higher chance of failure. Fees diminish value and increase complexity. We should be careful not to conflate monetary inflation with price inflation. Comparing our experiences with fiat money supplies to a UBI cryptocurrency can be useful; however, we should not put too much stock in conclusions based on those comparisons, particularly for a crypto’s bootstrap phase. I favor monetary inflation over transaction fees.

Disclaimer: You wouldn’t let even a brilliant lawyer perform open heart surgery on you, and you probably shouldn’t take legal advice from physicians. The field of cryptoeconomics is new. Having good insights requires domain expertise in economics, crypto-technologies, and, I suspect, game theory. But since people who have won Nobel prizes in economics have uttered some ignorant things about crypto, I felt brave (or foolish) enough to step into the cryptoecon void. Please keep in mind when considering the prognostications that I set forth in this post. I am in uncharted waters.


5 thoughts on “The Cryptoeconomics of Funding a Universal Basic Income

  1. I haven’t won any Nobel prizes but I have a basic knowledge of economics as well as crypto currencies, and you lost me with the Bernie token, all I read afterwards in your proposal was clouded by my political bias. Sorry but that just killed it.

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  2. I’m not sure if you’re taking issue because you think I don’t like Bernie or because you think I do like him. But you have a point; it’s not good to turn people off for any reason. My goal is is to get people thinking about the topic, and I failed with you. If you can come up with a better name, I’ll change BernieToken to it.

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  3. I thought it was pretty good food for thought on UBI crypto. I’ve got a tech background and about nine months in crypto on steroids.

    I agree that inflation seems the best way to distribute, and the whole notion of “do one thing, and do it well” supports the goal of simplicity. I think it’s a very promising field. Different distribution methods need to be tested to find the sweet spot obviously, but it seems quite straightforward on how to proceed there.

    The major issue I see so far is preventing Sybil attacks, i.e. a single user creating multiple accounts to receive multiple incomes. I think it will be interesting to keep an eye on the innovation of blockchain identity projects for this purpose. Exciting stuff 🙂

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  4. Hi,
    I’d like to discuss my approach to this. Basically, just let the people, market, handle the inflation. Money is created by the (U)BI, and destroyed by people in a market competition for common resources. So there is a permanent reevaluation of resources, and clear ownership / responsibility for each resource. The market sets the inflation rate, much like a decentralised central bank.

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