Why I’m excited by Encointer - Part 1

What is Bitcoin? “Imagine if keeping your car idling 24/7 produced solved Sudokus you could trade for heroin” (1).

What is Encointer? Imagine if hanging out with members of your community once a month produced a local universal basic income you could spend on papayas and haircuts.

Many people are troubled by the rise of cryptocurrencies, and not always without good reason. For example, running a proof-of-work blockchain like Bitcoin or Ethereum requires a large amount of energy resulting in significant carbon emissions.

It could also be argued that for all the talk of decentralization, cryptocurrencies have done much to centralize wealth and accelerate the growing gap between the rich and the poor through speculative investment models that are not dissimilar to those found in traditional finance.

While WallStreetBets and related communities inside the cryptosphere promise a new form of revenge capitalism against hedge fund managers and their wealthy investors, there are now emerging other possible ways to fight against income inequality. One such example that I’m excited about is Encointer.

Encointer is a common good parachain on the Kusama blockchain network that was voted in by an on-chain referendum and started producing blocks on the 9th January 2022. Once Encointer is fully deployed, it will offer communities around the world a way to create their own local currency, which can then be distributed to all participants as a universal basic income (UBI). In communities where many people have limited access to earning fiat currency, this UBI can facilitate the exchange of local goods and services that would not normally be affordable to many community members. But what is backing the value of this new local currency? The answer to this question is a radical reimagining of money.

Money is typically described as a store of value that is widely accepted for the buying and selling of objects and activities. In order to operate as a store of value, money is commonly backed by something with scarcity, i.e. for which there is a limited supply. One example is a material commodity like gold, although this is less common since the end of the Bretton Woods system in 1973. Nowadays money is often back by power, be it the military or economic power of nation states or the electrical and computing power used by crypto miners. In the case of the former, governments can (and often do) increase the supply of their own fiat currencies as a form of permissionless taxation. However, there are limits to the endless production of fiat money imposed by other forces (see for example the Weimar Republic in 1923). While some economists continue to argue that cryptocurrencies are not money, claiming they are backed by nothing, it is clear that at least some are backed by significant resources that are not unlimited in nature. It is also worth noting that the distribution of cryptocurrencies is generally far from equal across network participants.

Encointer provides a different model, one where the value of money is backed by relationships between people in a given community, rather than by the symbolic use of other material or social resources that are external to that community. No arbitrary commodity is required to back this type of currency, no separate central bank is necessary to bring it into existence, and no outside governing force determines its quantity and distribution. While scarcity still matters, it is less fundamental. Value emerges primarily through the communal relationships that the currency supports, and all those who participate are given equal access to a regularly distributed basic income. While it is still early days for Encointer, this could be no less than a cure for poverty, as well as a driver of new forms of socioeconomic collaboration and creativity.

My excitement with Encointer does not stop with their redesign of money as relational. The project also has the potential to offer much needed alternatives to how online identities are verified and managed, with relevance to issues of privacy and security. I may do another Subsocial post on Encointer’s sybil-defense mechanism, as well as a more speculative post on how Encointer could develop in the future, so if this is of interest – watch this space.

For now, if you want to read an interesting (and at times inspiring) discussion of Encointer by members of the Kusama community, see this Polkassembly post. Perhaps one of the most exciting developments for the Encointer network is the fact that it is now secured by the vast wealth staked in the Kusama relay chain, and that this security was offered for free to a project with no revenue model through a democratic vote by crypto investors. Perhaps there is hope for humanity after all.