Towards Encointer Self-Sustainability

Ecosystem
1

Like most digital platforms, Encointer’s service started at zero cost for its users. No substantial fees beyond spam prevention were collected from any stakeholders so far. As Encointer is considered a common good, it has so far been 100% subsidized.

This document shall explore ways to reach a self-sustainable operation of the Encointer Network and its local communities. First, we will characterize Encointer’s stakeholders. Second, we will explain the operating cost positions of the encointer platform, then introduce monetization principles and possible revenue streams.
We’ll end this post with a tangible scenario at break-even sustainability and a conclusion.

We assume familiarity of the reader with the basics of Encointer

Stakeholders

  • Local Stakeholders of Encointer Communities
    • Community Leaders: A small group of individuals who initiate a local community and help it grow. They need to invest a lot of effort to bootstrap their community and should be paid reasonably and have means available to grow their community.
    • Cycle participants: beneficiaries of community-issued income (CII) obtaining a proof-of-personhood (PoP): Increasing their purchasing power for local products and services
    • Consumers individuals holding community currency (CC) for spending
    • Businesses/Acceptance Points (AP): accepting CC: Increasing their turnover thanks to CC through new customers. Take illiquidity risk of accumulating CC before they can spend it.
    • Local Society: (Beyond active participants) Benefits indirectly from boosted local economy and increased social capital and decreased inequality
    • Local Government: Benefits from increased tax revenue caused by increased local economy. Potentially benefits long-term from decreased welfare expenses thanks to CII
  • L0 Token Holders: Holders of KSM and DOT tokens, securing the Encointer Network and deciding on Encointers common good parachain slot as well as potential treasury funding for Encointer
  • Donators of tokens: Are interested in distributing foreign tokens or stablecoins to individuals, potentially with geo-targeting. Can be philantropic NGOs seeking more effecticve cash-transfer schemes, i.e. GiveDirectly) or promotional (increasing user base of new crypto tokens)
  • Encointer Association (EA) Currently in charge of operations. Planning and executing development of Encointer and its communities. Raising funds, paying salaries, infrastructure and community grants to community leaders. The EA currently forms the Encointer Council (EC) which sets protocol parameters and can spend treasury funds
  • Third-Party PoP Consumer Platforms: other web2 or web3 platforms which use personhood reputation for their own sybil-resilience (.i.e. social media, onchain governance)

Operational Expenses

Global Encointer Network

  • security: as long as Encointer is granted a system chain slot on Kusama, EN security is for free. This status is expected to continue as long as EN provides non-excludable value to the DotSama ecosystem (like sybil-defense, onboarding new token holders and strengthen brand reputation). After reaching sustainability, paying a dividend for security can be envisioned.
  • lifeness: collators perform state transitions for the network. These nodes are run by various entites
  • availability:
    • RPC nodes
    • Indexers and Explorers
    • Accounting Backend
  • growth: media presence (social media, blogs, articles) and global campaigns to grow the number of Encointer communities and their members
  • health: maintaining the software and infrastructure for ongoing operation of existing functionality
  • enhancement: development of new functionality and integrations with new third-party services
  • finance: mainly Encointer association: bank fees, accounting, taxes, fundraising

Local Communities

  • community activities: meetups and participating in popular events to raise awareness and educate. social media, blogs
  • marketing: branding, custom-tailored story for this community, translation of materials into local language
  • sales: approaching and onboarding businesses

Monetization

Guiding Principles

P1 Inclusivity

Encointer’s mission of lowering inequality locally and globally demands that any monetization is adjusted to purchasing power.

P2 Data-Minimalism

Encointer shall not promote any form of surveillance capitalism. Encointer’s products shall be data-minimal and tracker-free.

P3 Permissionlessness

The Encointer network shall evolve towards permissionless. No entity shall have elevated privileges without democratic legitimacy.

P4 Non-Discrimination

The network does not discriminate geographical regions, personal identities, business activities

P5 Democracy

The governance of the protocol shall be democratic in the sense of universal suffrage. Any kind of monetization will be subject to this.

P6 Social Enterprise

Encointer shall aim for financial self-sustainability to avoid dependency on any funding entities. This shall be a long-term goal and reliance on grants and donations is acceptable until sustainability is reached. Any revenue shall be reinvested according to the principles stated here.

P7 Trickle-Up

Revenue and benefits created at individual level should be fairly shared with the local community level. Revenue created at local community level should be fairly shared with the global level. Determining what fair is shall be subject to above principles

Technical Boundary Conditions

  1. Read Access can only be free (for now): With the current technology, community membership and personhood reputation of individual accounts are publicly transparent. Therefore, they are non-excludable and can’t be monetized. With Encointer’s planned privacy features, this restriction may change partially in the future (The entire community currency platform may become a privacy-enhancing sidechain)

Monetization Prerequisites

Global Treasury

There should be a global treasury on the Encointer network, able to collect any kind of fungible token (CC, but also external tokens, i.e. KSM, DOT)

Spending from this treasury should be delegated to the Encointer Council (a collective) which shall be a democratically elected body

Community Treasuries

There should be a per-community treasury able to collect any kind of fungible token. (CC, but also external tokens, i.e. KSM, DOT)

Spending from this treasury should be delegated to a democratically elected (multisig) body by the respective community

One-Way DEX for KSM/CC

A DEX between Encointer treasuries and the KSM token could be established. For individuals, such a DEX should be one-way and only allow to buy CC form treasuries for KSM.

Selling CC by individuals should not be facilitated by the protocol. In order to achieve Encointer’s goals to boost local economic cycles, CC should be spent for local goods and services - not for KSM or fiat. We need CC-onboarding without demurrage-exit from CC for individuals.

Revenue Streams

The following options extract revenue from services provided by Encointer and direct them to the onchain treasuries according to a distribution scheme.

  1. Tithe: A fraction of CII (i.e. 10%) could be issued on behalf of the treasuries on top of the amount rewarded to the individual cycle participants. This would increase nominal inflation and would therefore be collateralized by the entire community
  2. Fees:
    1. Transaction Fees: Each state transition on the encointer network is subject to a fee. These fees are purchasing-power adjusted by charging them in CC, which people can get as an income. This represents a fair and inclusive way to charge fees.
    2. Faucet Dripping Fees: Faucets receive donations in foreign tokens which shall be distributed to humans with valid PoP. This can be understood as a valuable service to both donators and recipients. A fraction of the dripping amount could be directed to the treasuries.
    3. Bazaar Offering Fee: placing an offer or promoting a business on the Encointer community bazaar could be subject to an extra fee on top of the pure transaction fee. Even better would be a fee which only applies upon closing a deal on the bazaar. Details of the implementation are out of scope here.

Fiat Currency Revenue

While we expect that an increasing degree of expenses can be covered in CC, this ratio will probably not reach 100%, even in very optimistic scenarios. Therefore, it would make sense to plan for revenue in fiat currency. In practice, fiat payments most often require a bank account and therefore a legal entity. The EA is one possible legal entity to receive and send such payments, but not necessarily the only one.

  1. selling CC for fiat: CC could be converted to fiat or stablecoin on a DEX or maybe centralized exchange. This is not really a revenue stream, but it converts CC revenue into fiat revenue. It has to be expected that such conversion comes at a loss. Also, this stream would be in partial competition with the treasury one-way DEX
  2. Consulting and engineering services: Employees of the Encointer Association could sell their services to customers (i.e. for technical integrations into 3rd party services to make them sybil-resilient). Salaries would be partially paid in CC but customers must pay in fiat.

Encointer Kusama Treasury Dividend (EKD)

With the one-way DEX we have a tool to turn CC revenue into KSM. A fraction of that KSM income could be paid back to the Kusama Treasury as a dividend. This would have the following advantages for the overall Kusama Ecosystem:

  • Anti-cyclic income for KSM treasury: The KSM Treasury is designed to get an influx based on KSM token inflation mainly. Such an influx is defined nominally and it fluctuates in proportion the the exchange rate of KSM. The Encointer KSM Dividend (EKD) behaves reciprocally: The lower the KSM exchange rate to real world assets, the more KSM will flow into the treasury through Encointer. Therefore, Encointer may act as a stabilizing force, eventually.
  • Treasury “ROI”: Assuming a thriving Encointer ecosystem, the KSM Treasury may get back its initial subsidies eventually - and even have an additional sustainable influx of KSM.

Social Enterprise Business Plan

806×432 426 KB

Legend:

  • (red) expenses: will grow with increasing population, but scale effects will allow to reduce cost per particpant. After break even, expenses can be increased through reinvestment into the social enterprise
  • (green dashed) nominal revenue: All the CC collected in Encointer community- and global treasuries, weighted at their spending power in USD
  • (green solid) liquid revenue: The fraction of nominal revenue which can actually cover expenses
  • (blue) real revenue including EKD.

Areas:

  • (red) subsidies: all the subsidies needed before break-even
  • (green top) soft reserves in CC
  • (green bottom) reserves in stable assets (fiat, others)
  • (blue) expected dividend for Kusama treasury (EKD)

Degrees of break-even:

  1. nominal break-even: the theoretical buying power of all revenues matches the expenses
  2. treasury/subsidy break-even: the subsidies which are still paid are matched with the dividend paid back to the treasury
  3. real break-even: expenses can effectively be settled with matching revenues

A Scenario at real break even

How might the Encointer ecosystem look like when we hit break-even? How much adoption do we need to get there?

Let’s draw a scenario with the following protocol parameters:

  • 10% Tithe on community currency issuance at every cycle (7% for the commmunity treasury, 3% for the global treasury)
  • 3% dripping fee for faucets (2% for the commmunity treasury, 1% for the global treasury)
  • tx fees such that one community income buys 2000 transactions (fee goes to global treasury)
  • KSM DEX: Split each KSM sold for CC like:
    • 90% for the global treasury
    • 10% for the Kusama treasury dividend
  • cycles would happen every 20 days

Adoption:

  • a global population of 21’000 humans actively participating in every second Encointer cycle on average.
    • developing regions: 4 communities with a population of 3000 humans
      • CII per cycle: 20 USD equivalent (just about enough to lift a person out of extreme poverty according to GiveDirectly)
    • developed regions: 3 communities with a population of 3000 humans
      • CII per cycle: 100 USD equivalent
  • faucets:
    • GiveDirectly distributes 10% of their 2021 basic income donations using Encointer (250k$/mt).
    • GloDollar distributes a fraction of their yield on stablecoin reserves through Encointer (20k$/mt)
    • Dotsama teams airdrop tokens valued 45k USD equivalent

These 7 communities would jointly yield a revenue of 133k USD/mt for Encointer and its community leaders.

  • Each community would have a budget of 10k USD equivalent for local expenses
  • the global treasury would receive 63k USD equivalent for global expenses

Local acceptance points would have established strong economic cycles such that 90% of income in CC can be passed on for expenses. Jointly, these businesses increase their turnover to 2M USD equivalent, resulting in estimated gains of 404k USD equivalent.

Faucet donators would jointly distribute 270k USD to communities in developing regions. The impact of their donation would be multiplied by a facotor of 1.8 considering the added value through increasing local acceptance point turnovers.

The Kusama treasury would in this scenario already receive a modest 1000 USD equivalent per month as KSM dividend.

Calculations and more detailed assumptions can be found in this spreadsheet This should be considered work in progress and assumptions made in good faith.

Conclusion

We have shown a way how Encointer can reach self-sustainability given reasonable adoption. In our scenario, Encointer would reach break-even by growing to 7 communities and onboarding 21k people and 1800 businesses.
All relevant stakeholders would benefit from their participation.

With this post, we’re seeking constructive feedback on the design of revenue streams and scenario calculations.

5 Likes
2

Excellent write-up Alain! Thank you for putting so much thought into this.

I will start by saying that I think your revenue model is reasonable and the calculations make a lot of sense. I agree with the fees, faucets, tithe, and treasury structures and I believe they are all necessary for a sustainable Encointer. I don’t have much to add regarding the feedback you’re asking for - you’ve done a great job conceptualizing everything.

With that said, I just think the adoption scenario is a highly optimistic vision for Encointer. It’s really hard for me to imagine 1,000 community participants in developed areas when LEU only has a few dozen and GBD has maybe half a dozen. I imagine it would require an enormous amount of work, money, and luck to get that sort of adoption and that’s what is necessary for community currencies to have any ascertainable value; having hundreds of users in a given location minting regularly and spending their currency at a diverse array of acceptance points.

The hard problem here is onboarding. People just don’t understand why a local form of non-governmental UBI would be beneficial to their community. From our experience in Green Bay, without a networking effect, onboarding a new user to the point of becoming a regular participant costs well over $100 per person. As communities grow word of mouth will help with adoption and onboarding costs will decrease, but even a community as large as Zurich’s required a significant amount of funding to prop it up to the size it currently is. It isn’t clear to me how we can convince people to participate without actually waving real fiat money in their faces - the average person just doesn’t see the value, especially when “crypto” comes with so much baggage.

I see a similar problem with the dividend program. The only way for these dividends to exist is if there is enough external demand for local currencies since locals could simply mint more community income for free or offer their goods and services for more currency. You would need a bustling local economy to achieve enough purchasing opportunities for a non-local to purchase a community currency with KSM. That requires onboarding KSM holders to the Encointer paradigm which only makes sense if they are travelling to a location with an Encointer community.

I’m not saying these challenges are insurmountable, it’s just that I personally cannot imagine the kind of numbers you’re mentioning - I have become quite pessimistic over the last 2 years. The only path forward that I see is leveraging the networking effect. If there are enough communities across the globe with enough users, Encointer’s legitimacy and utility will be easier for people to accept. Having more communities will also help us figure out what marketing/ implementation techniques work and which ones don’t. I feel like we’ve tried so many different ideas in Green Bay to get new people to mint/ accept GBD with very little success, so having others across the globe trying their novel ideas would help develop a general onboarding model that works well.

TL;DR I don’t think any revenue model would be sustainable with fewer users/ communities, therefore we need more Kusama/ Polakdot leaders thinking about and acting on onboarding users to Encointer to solve the hard problem of adoption.

3

The OP is more about the plausibility of a state of self-sufficiency, not about the way how we get there.

I see this very differently. Actually, 21k participants to me is a surprisingly small population to reach self-sustainability of a global platform.

Even if the first 21k participants would come at a cost of 100$ each, this would mean a very modest investment of 2M$ to reach the state of sustainability. Even if it were more, like a small multiple of that, it would still be very much affordable for the Polkadot treasury - even now. I believe the network effects would kick in earlier and even reduce the necessary investment.