The era of encrypted cities has arrived

Author: Vitalik Buterin

Original Title: 《Crypto Cities》

Published on: October 31, 2021

Special thanks to Silly and Tinazhen for their early feedback on this post, as well as many others who participated in the discussion of ideas.

Last year, there was an interesting trend of increased interest in local governments and those with greater diversity and experimentation. Over the past year, Miami's Mayor Francis Suarez has adopted a high-tech startup strategy similar to Twitter to attract the crypto community's interest in the city, frequently interacting with the mainstream tech industry and crypto community on Twitter. Wyoming now has a DAO-friendly legal framework, Colorado is experimenting with quadratic voting, and we see more and more experiments creating environments in the offline world that are more suitable for the public. We have even seen projects with varying degrees of radicalism—Cul de sac, Telosa, CityDAO, Nkwashi, Prospera, etc.—attempting to create entire communities and cities from scratch.

Another interesting trend last year was the rapid mainstreaming of cryptocurrency ideas, such as tokens (Coin), 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 tokens, NFTs, DAOs, and some on-chain records for anti-corruption, or even all four? It turns out that some people have already tried to do this:

• CityCoins.co, a project that creates tokens to serve as a medium for local exchanges, with part of the token issuance owned by the city government. Additionally, MiamiCoin already exists, and San Francisco Coin seems to be launching soon.
• Other experiments in token issuance (for example, this project‌ seen in Seoul)
• NFT-related experiments, often as a way to fund local artists. Busan is hosting a government-supported conference to explore what they can do with NFTs.
• Reno's Mayor Hillary Schieve has a broad vision for blockchain in the city, including NFT sales to support local art, issuing RenoCoins to local residents that can generate income from government-owned properties, blockchain lotteries, blockchain voting, and more.
• Other ambitious projects aiming to create crypto-focused cities from scratch: 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 form? Are there any changes that could make them better ideas? Let's take a look…

Why Should We Care About Cities?

Many national governments around the world have shown inefficiency and slow action in responding to long-standing issues and rapidly changing potential needs of the people. In short, many national governments lack on-the-ground players. Worse still, many out-of-the-box political ideas that today's national governance is considering or implementing are frankly quite scary. Would you want the U.S. to be taken over by a clone of Portugal's WWII-era dictator Antonio Salazar, or by an "American Caesar" to combat the evil scourge of the American left? For every idea that can reasonably be described as liberal or democratic, there are ten that are merely different forms of centralized control, isolation walls, and pervasive surveillance.

Now let's talk about local governments. As we see from the examples at the beginning of this article, cities and states have real vitality at least in theory. 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 such as local public goods, urban planning, transportation, and urban governance that can be addressed. Cities have tightly integrated internal economies where the widespread adoption of things like cryptocurrencies can actually happen independently. Moreover, experiments within cities are less likely to lead to terrible outcomes because 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 all in all, local-level government seems to be a severely underestimated form of governance. Given that criticisms of existing smart city plans often focus on concerns about centralized governance, lack of transparency, and data privacy, blockchain and crypto seem to be promising key factors for achieving a more open and participatory path forward.

What City Token Projects Currently Exist?

Actually, there are quite a few! But these experiments are still small-scale and largely trying to find a solution, yet they are at least seeds that can grow into interesting things. Many of the most advanced city token projects are in the U.S., but there is interest elsewhere in the world; in South Korea, the Busan government is hosting an NFT conference. Here are some examples.

1) Blockchain Experiments in Reno

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

• Selling NFTs to fund local art, starting with the NFT of the "Space Whale" sculpture in the city center
• Creating a Reno DAO managed by Reno tokens, with Reno residents eligible for airdrops. The Reno DAO could start generating income; one proposed idea is for the city to rent out its properties and use the income for the DAO
• Using blockchain to secure various processes: blockchain-based random number generators for casinos, blockchain voting, etc.

Reno Space Whale

2) CityCoins.co

CityCoins.co is a project built on Stacks, a blockchain that operates on an unusual "proof of transfer" (abbreviated as PoX for some reason instead of PoT) block production algorithm that is built around the Bitcoin blockchain and ecosystem. 70% of the token supply is generated through a continuous sale mechanism: anyone who holds STX (the native token of Stacks) can send their STX to the city coin contract to generate city coins; the 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; community groups can issue coins themselves. Answers to the common question "What can I do with CityCoins?" include examples such as "CityCoins community will create applications that use the tokens as rewards" and "local businesses can offer discounts or benefits to those… who stack their CityCoins." However, in practice, the Miami Coin community is not doing this alone. The Miami government has actually publicly supported it.

MiamiCoin Hackathon Winner: A website that allows co-working spaces to offer discounts to MiamiCoin holders.

3) CityDAO

CityDAO is the most radical of the experiments: unlike Miami and Reno, which are existing cities that need upgrades to their infrastructure, CityDAO is a DAO (see documentation here) that is attempting to create an entirely new city from scratch with legal status under Wyoming's DAO law.

So far, the project is still in its early stages. The team is currently completing the purchase of their first piece of land in a remote corner of Nevada. The plan is to start with this land and then add more plots in the future, building a city governed by the DAO and using radical economic ideas like the haberg tax to allocate land, make collective decisions, and manage resources. Their DAO is one of the few that avoids token voting governance; instead, governance is a voting scheme based on "citizen" NFTs, and there has been a proposal to further restrict voting to one person, one vote by using proof of humanity verification. NFTs are currently being sold to crowdfund the project; 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 CO2 meters 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 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 publicly verifiable, 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 in the entire global blockchain ecosystem. Blockchain-based systems are efficient in ways that paper cannot be and provide public verification in ways that centralized computing systems do not—this is a necessary combination, for example, if you want to create a new form of voting that allows citizens to provide real-time feedback on hundreds of different issues.

So let's get into the details.

What Existing Processes Can Blockchain Make More Trustworthy and Transparent?

A simple idea that many people, including government officials around the world, have repeatedly suggested to me is for the government to create a whitelisted internal-use 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, there are zero-knowledge methods to only publicly disclose the total number while still convincing everyone that the number is correctly calculated). Token transfers between departments could be done "explicitly," and these tokens could only be redeemed by individual contractors or employees for their payments and salaries.

This system could easily be 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)—VDFs, such as the one Ethereum is expected to include, 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 lottery as a form of government.
• Certificates, such as cryptographic proof that certain individuals are residents of the city, can be done on-chain to increase verifiability and security (e.g., if such certificates are issued on-chain, it would be 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 like development rights. While these registries may never become fully decentralized anonymous tools like cryptocurrencies due to the need for courts to be able to allocate in special cases, putting records on-chain can still make it easier to see what happened in a dispute.

Ultimately, even voting could be done on-chain. Here, many complexities are subtly visible, and it is important to be very careful; a complex solution combining blockchain, zero-knowledge proofs, and other cryptography is needed to achieve all the desired privacy and security attributes. However, if humanity is really going to turn to electronic voting, local governments seem to be a perfect entry point.

What Interesting Radical Economic and Governance Experiments Are There?

But beyond these covering what the government is 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 potential 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 this is far from the only vision. In fact, approaches like CityCoins carry 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 city tokens. The tokens issued in the next five years will exceed those issued in the following 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 is a sketch of different possibilities for how city tokens could work. This is far from the only possible alternative to the CityCoins.co vision; see Steve Waldman's excellent article advocating for a localized exchange medium for another possible direction. In any case, city tokens represent a vast design space with many different options worth considering.

The current concept of homeownership is a notable double-edged sword, with many believing that actively encouraging and legally constructing homeownership is one of the biggest economic policy mistakes we make today. There is an inevitable political tension between housing as a residence and housing as an investment asset, and the pressure to satisfy communities concerned with the latter often severely undermines the affordability of the former. Residents of a city either own homes, exposing them excessively to land prices and introducing perverse incentives against new home construction, or they rent, negatively impacting the real estate market and putting them in economic distress, which is inconsistent with making the city a livable target.

But even with all these issues, many still find homeownership 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 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 establish economic alliances without the flaws? What if we could create a divisible and interchangeable city token that residents could own 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. Of course, not all goals need to be achieved; a token that can accomplish three out of the five below is already a significant step forward. But we will aim to achieve as many as possible:

• Provide a sustainable source of revenue for the government. The economic model of city tokens should avoid redirecting to existing taxes; instead, it should seek new sources of revenue.
• 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 hedge funds.
• Promote saving and wealth accumulation. Homeownership does this: when homeowners pay their mortgages, they are effectively building their net worth. City tokens can do this too, making it attractive to accumulate tokens over time, even gamifying the experience.
• Encourage more socially beneficial activities, such as positive actions that help the city and utilize resources more sustainably.
• Maintain equality. Do not overly favor the rich over the poor (as poorly designed economic mechanisms often do). The divisibility of tokens does a lot to avoid the obvious binary divide between rich and poor, but we can go further, such as distributing most new issuances 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 too. 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 investors who are not aligned. Additionally, the utility of the incentives is limited by individual, encouraging widespread ownership.
• Create an economic alliance (the city becomes more attractive -> more people want to park -> tokens become more valuable). Unlike homeownership, this would align with the entire town rather than just a very specific location within the town.
• Encourage sustainable use of resources: this would reduce the use of parking spaces (of course, if those without tokens really need to park, they can still pay to park), supporting many local governments' desire to create more pedestrian-friendly spaces on the roads. Alternatively, restaurants could also lock in tokens through the same mechanism and require a token to park.

However, it is crucial to avoid improper incentives and not overly rely on a specific idea, but rather have multiple possible sources of revenue. A great goldmine that could give city tokens value while simultaneously trying novel governance ideas is zoning. 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 idea 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 haberg tax, quadratic voting, and quadratic financing come into play. I have already proposed some of these ideas in the sections above, but you do not need to have a dedicated city token to implement them. Some limited uses of quadratic voting and financing have already occurred in government: see the Colorado Democrats, as well as experiments like Gitcoin's Boulder Downtown Stimulus plan that have not yet received government support. But we can do more!

One obvious place where these ideas could have long-term value is in incentivizing developers to improve the aesthetics of the buildings they are constructing (see here, here, here, and here for recent examples of professionals debating modern architectural aesthetics). Haberg taxes and other mechanisms could be used to fundamentally reform zoning rules, and blockchain could be used to manage such mechanisms in a more trustworthy and efficient way. Another more feasible idea in the short term is to subsidize local businesses, similar to the downtown stimulus plan but on a larger and more lasting scale. Businesses have been generating various positive externalities in local communities that could be more effectively rewarded. 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 like each specific ad, encouraging more originality and creativity.

More democratic feedback (even possibly retrospective democratic feedback!) could create better incentives in all these areas. 21st-century digital democracy achieved through real-time online quadratic voting and financing could do better than 20th-century democracy, which seemed to be characterized in practice by strict building codes and the hindrances of planning and permitting hearings. Of course, if you intend to use blockchain to ensure the security of voting, starting with novel voting methods seems safer and politically more feasible than reinstalling existing voting systems.

The solar punk image above is intended to evoke a positive image of what our cities might look like if real-time quadratic voting could set subsidies and prices for everything.

Conclusion

Existing cities or new cities can try many ideas worth experimenting with. The advantage of new cities is, of course, that there are no existing residents with expectations about how things should be done; but in modern times, the concept of creating new cities is relatively untested. Perhaps the billions of dollars in funding pools in the hands of those eager to try new things and projects can help us get through. But even so, in the foreseeable future, existing cities will likely remain where most people live, and existing cities can also use these ideas.

Blockchain is very useful in both the more incremental and more radical ideas presented in this article, even if city governments have an inherent "trustworthy" nature. Running any new or existing mechanisms on-chain allows the public to easily verify that everything is following the rules. Public chains are better: the benefits of existing infrastructure for users to independently verify what is happening far outweigh the losses from transaction fees, which are expected to decrease rapidly in Rollups and sharding soon. If strong privacy is needed, blockchain can be combined with zero-knowledge cryptography to provide both privacy and security simultaneously.

The main trap that governments should avoid is sacrificing selectivity too quickly. An existing city could fall into this trap by launching a bad city token instead of slowing down and launching a good city token. A new city could fall into this trap by selling too much land, sacrificing the entire advantage to a small group of early adopters. Starting with independent experiments and then slowly proceeding with truly irreversible actions is the ideal way. But at the same time, it is important to seize opportunities. Cities have many areas where they can and should improve, and there are many opportunities; despite the challenges, the era of crypto cities has arrived.