Vitalik: The era of crypto cities has arrived, detailing three major experiments and trends

Author: Vitalik, Founder of Ethereum

Original Title: 《Crypto Cities》

Compiled by: Hu Tao, Chain Catcher

An interesting trend last year was the increased interest in local governments, with greater diversity of thought and more experimentation around the concept of local governance. Over the past year, Miami's Mayor Francis Suarez has frequently interacted on Twitter with the mainstream tech industry and the crypto community to attract interest in the city.

Wyoming now has a DAO-friendly legal structure, Colorado is experimenting with quadratic voting, and we are seeing more and more experiments creating a more convenient street environment for the public in the offline world. We have even seen projects with varying degrees of radicalism—Cul de sac, Telosa, CityDAO, Nkwashi, Prospera and others—attempting to create entire communities and cities from scratch.

Another interesting trend last year was the rapid mainstreaming of cryptocurrency concepts, such as tokens, non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs). So what happens if we combine these two trends? Does it make sense to have a city that has coins, NFTs, DAOs, some on-chain records for anti-corruption, or even all four? It turns out that someone has already tried to do this:

• CityCoins.co is a project that builds tokens intended to serve as local mediums of exchange, with a portion of the token issuance going to the city government. MiamiCoin already exists, and the "San Francisco token" seems to be on the way.
• Other experiments in token issuance (e.g., see this project in Seoul)
• Experiments using NFTs, often as a way to fund local artists. Busan is hosting a government-supported conference to explore what they can do with NFTs.
• Reno Mayor Hillary Schieve's broad vision for city blockchainization, including NFT sales to support local art, issuing RenoCoins to local residents through RenoDAO, which can generate revenue from government-leased properties, blockchain-secured lotteries, blockchain voting, and more.
• Ambitious projects to create cities focused on cryptocurrency: see CityDAO, which describes itself as "building a city on the Ethereum blockchain"—DAO governance and more.

But are these projects good ideas in their current forms? Are there any changes that could make them better ideas? Let's explore…

Why should we care about cities?

Many national governments around the world have shown inefficiency and sluggishness in responding to long-standing issues and the rapid changes in people's potential needs. In short, many national governments lack on-the-ground participants. Many out-of-the-box political ideas currently considered or implemented for national governance are indeed quite frightening. Would you want the U.S. to be taken over by a clone of the Portuguese dictator Antonio Salazar from World War II or the "American Caesar" to combat the evil scourge of the American left? For every idea that can be reasonably described as liberal expansion or democracy, there are ten that are merely different forms of centralized control, walls of separation, and pervasive surveillance.

Now consider local governments. As we have seen from the examples at the beginning of this article, cities and states can theoretically achieve true vitality. There are significant and very real cultural differences between cities, making it easier to find a city where the public is interested in adopting any specific radical idea than to persuade an entire nation to accept it. There are very real challenges and opportunities in many areas of local public goods, urban planning, transportation, and urban governance that can be addressed. Cities have tightly-knit internal economies where things like widespread adoption of cryptocurrencies can actually happen independently. Moreover, experiments within cities are less likely to lead to terrible outcomes, as cities are subject to oversight from higher levels of government, and cities have an easier escape valve: those dissatisfied with what is happening can exit more easily.

So overall, local-level government seems to be a highly underestimated form of governance. Given that criticisms of existing smart city initiatives often focus on issues of centralized governance, lack of transparency, and data privacy, blockchain and crypto technologies seem to be promising key factors for achieving a more open and participatory path forward.

What city projects are there today?

There are actually quite a few! Each of these experiments is still small-scale and largely trying to find solutions, but they are at least seeds that could grow into interesting things. Many of the most advanced projects are in the U.S., but there is interest worldwide; the government of Busan in South Korea is hosting an NFT conference. Here are some examples of what is being done today.

1) Blockchain experiments in Reno

Reno, Nevada's Mayor Hillary Schieve is a blockchain fan, primarily focused on the Tezos ecosystem, and she has recently been exploring blockchain-related city governance ideas (see her podcast):

• Selling NFTs to fund local art, starting with the "Space Whale" NFT from downtown.
• Creating a Reno DAO, managed by Reno tokens, which Reno residents will be eligible to receive through airdrops. The Reno DAO can start generating revenue; one proposed idea is for the city to lease its owned properties and use the income for the DAO.
• Using blockchain to secure various processes: blockchain-secured random number generators for casinos, blockchain-secured voting, etc.

Reno's "Space Whale"
2) CityCoins.co

CityCoins.co is a project built on Stacks, a blockchain that operates on an unusual "proof of transfer" algorithm that builds around the Bitcoin blockchain and ecosystem. 70% of the token supply is generated by a continuous sales mechanism: anyone who holds STX (the native token of Stacks) can send their STX to the city token contract to generate city tokens; STX revenue is distributed to existing city token holders who hold their tokens. The remaining 30% is provided to the city government.

CityCoins made an interesting decision to try to establish an economic model that does not rely on any government support. Local governments do not need to participate in the creation of CityCoins.co tokens; a community group can issue a token on its own. Common FAQs about "What can I do with CityCoins?" include examples like "The CityCoins community will create applications that reward using the tokens" and "Local businesses can offer discounts or benefits to those who stake their CityCoins." However, in practice, the MiamiCoin community is not going it alone; the Miami government has in fact publicly supported the initiative.

MiamiCoin Hackathon winners: a website that allows co-working spaces to offer discounts to MiamiCoin holders.

3) CityDAO

CityDAO is the most radical experiment: unlike Miami and Reno, which are existing cities with existing infrastructure that needs upgrading, CityDAO is a DAO with legal status under Wyoming's DAO law, attempting to create an entirely new city from scratch.

So far, the project is still in its early stages. The team is currently completing the purchase of the first parcel of land in a remote corner of Nevada. The plan is to start with this land and then add more land in the future to build a city governed by the DAO, utilizing radical economic ideas like the haberdasher tax to allocate land, make collective decisions, and manage resources.

Their DAO is one of the few paths forward that avoids coin-based governance; instead, governance is a voting scheme based on "citizen" NFTs, and some ideas have already been proposed to further restrict voting to one vote per person using proof of humanity mechanisms. NFTs are currently being sold to fund the crowdfunding project, and you can buy them on OpenSea.

What do I think cities can do?

Clearly, in principle, cities can do a lot. They can add more bike lanes, they can use carbon dioxide monitors and far-UVC lights to reduce COVID transmission more effectively without inconveniencing people, and they can even fund longevity research. But my main expertise is in blockchain, and this article is about blockchain, so… let’s focus on blockchain.

I think there are two distinctly different blockchain ideas that make sense:

1. Using blockchain to create more trustworthy, transparent, and verifiable versions of existing processes.
2. Using blockchain to implement new experimental forms of ownership for land and other scarce assets, as well as new experimental forms of democratic governance.

There is a natural fit between blockchain and these two categories. Anything that happens on the blockchain is easily verifiable in public, and there are many ready-made free tools to help people do this. Any application built on the blockchain can immediately plug into and interact with other applications across the entire global blockchain ecosystem. Blockchain-based systems operate efficiently in a way that paper does not, and they provide public verification in a way that centralized computing systems do not—if you want to create a new form of voting that allows citizens to give high levels of input, this is the necessary combination—massive real-time feedback on hundreds of different questions.

So let’s get into the details.

What existing processes can blockchain make more trustworthy and transparent?

One simple idea that many people, including government officials around the world, have repeatedly suggested to me is for the government to create a whitelisted, internally-used stablecoin to track internal government payments. Every tax payment from individuals or organizations could be tied to a publicly visible on-chain record, minting that amount of tokens (if we want the amount of individual tax payments to be private, zero-knowledge methods could only reveal the total while still convincing everyone that it was correctly calculated). Transfers between departments could be done "explicitly," and these tokens could only be redeemed by individual contractors or employees to receive their payments and salaries.

This system could be easily expanded. For example, the procurement process for selecting which bidder wins a government contract could primarily be done on-chain.

Using blockchain can make more processes more trustworthy:

• Fair random number generators (e.g., for lotteries) that can serve as fair random number generators to make government-operated lotteries more trustworthy. Fair randomness can also be used for many other use cases, such as a form of government sortition.
• Certificates, such as cryptographic proof that a certain individual is a resident of the city, can be done on-chain to increase verifiability and security (e.g., if such certificates are issued on-chain, it would become very obvious if a large number of false certificates were issued). This can be used for various certificates issued by local governments.
• Asset registries for land and other assets, as well as more complex forms of property ownership, such as development rights. While courts may need to be able to allocate in special cases, these registries may never become fully decentralized anonymous tools like cryptocurrencies, but putting records on-chain can still make it easier to see what happened and in what order disputes arose.

Ultimately, even voting could be done on-chain. Here, many complexities are faintly visible, and caution is very important. We need a complex solution that combines blockchain, zero-knowledge proofs, and other cryptography to achieve all the necessary privacy and security attributes. However, if humanity is really going to turn to electronic voting, local governments seem to be a perfect starting point.

What radical economic and governance experiments might be interesting?

However, beyond these blockchain-covered things that governments are already doing, we can also view blockchain as an opportunity for governments to conduct entirely new and radical experiments in economics and governance. These are not necessarily final ideas of what I think should be done; they are more preliminary explorations and suggestions of possible directions. Once experiments begin, feedback from the real world is often the most useful variable for determining how to adjust the experiments in the future.

Experiment #1: A more comprehensive vision for city tokens

CityCoins.co is one vision of how city tokens could work, but it is far from the only vision. In fact, the CityCoins.co approach has significant risks, particularly in how the economic model heavily favors early adopters. 70% of the STX revenue from minting new tokens is allocated to existing stakers of the city tokens. The number of tokens issued in the next five years will be greater than in the next fifty years. 2021 is a good deal for the government, but what about 2051? Once a government endorses a specific city token, it becomes difficult to change direction in the future. Therefore, city governments must carefully consider these issues and choose a path that makes sense for the long term.

Here are different possible sketches of how city tokens could work. It is far from the only possible alternative to the CityCoins.co vision; see Steve Waldman's excellent article advocating for another possible direction of localized trading mediums for cities. In any case, city tokens represent a vast design space with many different options worth considering.

The current concept of home ownership is a significant double-edged sword, and many believe that the specific ways we actively encourage and legitimize home ownership are among the biggest economic policy mistakes we are making today one of the biggest economic policy mistakes. There is an inevitable political tension between residential homes as places to live and as investment assets, and the pressure to satisfy communities concerned with the latter often severely undermines the affordability of the former.

A resident of a city either owns a home, which exposes them excessively to housing prices and introduces perverse incentives against the construction of new housing; or they rent a home, which puts them at a disadvantage in the real estate market, thus contradicting their economic goals of making the city a pleasant place to live.

But even with all these issues, many still find home ownership not only a good personal choice but also worth actively subsidizing or socially encouraging. One important reason is that it encourages people to save and build their own net worth. Another important reason is that, despite its flaws, it establishes an economic alliance between residents and the communities they live in.

But what if we could provide people with a way to save and build economic alliances without the flaws? What if we could create a divisible and interchangeable city token that residents could hold as many units as they can afford or feel comfortable with, and that would increase in value as the city thrives?

First, let’s start with some possible goals. Not all are necessary; a token that accomplishes three out of five is already a significant step forward. But we will try to hit as many as we can:

• To obtain a sustainable source of revenue for the government. The economic model of city tokens should avoid redirecting existing taxes; instead, it should seek new sources of revenue.
• To establish an economic alliance between residents and the city. This first means that as the city becomes more attractive, the tokens themselves should obviously become more valuable. But it also means that the economics should actively encourage residents to hold more tokens rather than distant hedge funds.
• To promote saving and wealth accumulation. Home ownership does this: when homeowners pay their mortgages, they are effectively building their own net worth. City tokens can also do this, making it attractive to accumulate tokens over time, and even gamifying the experience.
• To encourage more socially beneficial activities, such as helping the city’s positive actions and utilizing resources more sustainably.
• To be equitable. Do not overly favor the rich over the poor (as poorly designed economic mechanisms often do by accident). The divisibility of the tokens, which avoids sharp binary divisions between rich and poor, already does a lot, but we can go further, e.g., by distributing most of the newly issued bonds as UBI to residents.

One pattern that seems easy to satisfy the first three goals is to provide benefits to holders: if you hold at least X tokens (where X can increase over time), you will receive some services for free. MiamiCoin is trying to encourage businesses to do this, but we can go further and have government services operate this way as well. A simple example is to make existing public parking spaces free only for those who hold at least a certain number of tokens. This would achieve several goals simultaneously:

• Create an incentive to hold tokens, maintaining their value.
• Create incentives specifically for residents to hold tokens, rather than distant, unaligned investors. Moreover, the utility of this incentive is targeted at everyone, encouraging widespread ownership.
• Create an economic alliance (the city becomes more attractive -> more people want to park -> tokens become more valuable). Unlike home ownership, this would align with the entire town, not just very specific locations within the town.
• Encourage sustainable resource utilization: this would reduce the use of parking spaces (though those without tokens who truly need them can still pay), supporting many local governments' desires to open up more space on roads to be more pedestrian-friendly. Alternatively, it could allow restaurants to lock in tokens and request parking spaces for outdoor seating through the same mechanism.

However, to avoid perverse incentives, it is extremely important to avoid over-relying on a specific idea and instead have multiple possible sources of revenue. A good gold mine is zoning, which can bring value to city symbols while also trying new governance ideas. If you hold at least Y tokens, you could vote on the fees that nearby landowners must pay to bypass zoning restrictions. This mixed-market + direct democracy approach would be more efficient than the currently overly cumbersome permitting processes, and the fees themselves would become another source of government revenue. More generally, any ideas in the next section could be combined with city tokens to provide more places for city token holders to use them.

Experiment #2: More radical and participatory forms of governance

This is where radical market ideas like the haberdasher tax, quadratic voting, and quadratic funding come in. I have already proposed some ideas in the sections above, but you don’t need a dedicated city token to implement them. Some governments have already had limited uses of quadratic voting and funding, such as the Colorado Democrats, as well as experiments like Gitcoin's Boulder Downtown Stimulus that have not yet received government support. But we can do more!

One obvious place where these ideas have long-term value is in encouraging developers to improve the aesthetics of the buildings they are constructing (see here, here, here, and here for examples of recent debates among professionals about modern architectural aesthetics). Haberdasher taxes and other mechanisms can be used to radically reform zoning rules, and blockchain can be used to manage such mechanisms in a more reliable and efficient way.

Another more feasible idea in the short term is to subsidize local businesses, similar to the Boulder Downtown Stimulus plan, but on a larger and more sustainable scale. Businesses generate a wide variety of positive externalities in local communities that could be more effectively compensated. Local news could receive quadratic funding, revitalizing long-struggling industries. The pricing of advertisements could be set based on real-time voting on how much people appreciate each specific ad, encouraging more originality and creativity.

More democratic feedback (even possibly retrospective democratic feedback!) could produce better incentives in all these areas. And the 21st-century digital democracy achieved through real-time online quadratic voting and funding could do better than 20th-century democracy.

Conclusion

There are many ideas worth trying for cities, both existing and new cities. Of course, new cities have the advantage of not having existing residents with preconceptions about how things should be done; however, in modern times, the concept of creating a new city itself is relatively untested. Perhaps the billions of dollars in funding pools in the hands of those eager to try new things can help us through. But even so, in the foreseeable future, existing cities are likely to remain where most people live, and existing cities can also leverage these ideas.

Blockchain is useful in both the more incremental and more radical ideas presented here, even though city governments have an inherent "trust" nature. Running any new or existing mechanism on-chain allows the public to easily verify whether everything is following the rules. Public chains are better: existing infrastructure enables users to independently verify what is happening, and the benefits far outweigh the losses from transaction fees, which are expected to drop rapidly soon due to rollups and sharding. If strong privacy is needed, blockchain can be combined with zero-knowledge encryption to provide both privacy and security.

The main trap that governments should avoid is sacrificing choice too quickly. An existing city could fall into this trap by launching a bad city token instead of taking slower action to launch a good token. A new city might fall into this trap by selling too much land, sacrificing all the benefits to a small group of early adopters.

Starting with self-sufficient experiments and proceeding slowly with truly irreversible actions is ideal. But at the same time, it is important to seize opportunities first. Cities have many areas they can and should improve, and there are many opportunities. Despite the challenges, the era of crypto cities has arrived.