Inventory of Major Cities' Crypto Experiments | Vitalik: Despite Challenges, the Era of Crypto Cities Has Arrived

More and more cities are planning to utilize blockchain and cryptocurrency to optimize their local governance mechanisms.

(This article is authorized to be reprinted from ChainNews, the original title is "Vitalik: The era of crypto cities has arrived, explaining three major experiments and trends", original article here)

An interesting trend last year was the increasing interest in local governments, with greater differences and more experiments in local government ideas. Over the past year, Miami Mayor Francis Suarez has been actively engaging with the mainstream tech industry and the crypto community on Twitter to attract interest in the city.

Wyoming now has a DAO-friendly legal structure, Colorado is experimenting with quadratic voting, and we see more experiments creating more convenient street environments for the offline world. We even see projects of varying degrees of radicalism—such as Cul de sac, Telosa, CityDAO, Nkwashi, Prospera, and more—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 when we combine these two trends? Having a city with coins, NFTs, DAOs, and some on-chain records for anti-corruption, or even all four, does it make sense? It turns out, some have already attempted to do so:

• CityCoins.co is a project building tokens intended to serve as local mediums of exchange, with some tokens being issued to the city government. MiamiCoin already exists, and "San Francisco Coin" seems to be on the horizon.
• 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 holding a government-supported meeting to explore what they can do with NFTs.
• Reno Mayor Hillary Schieve's ambitious vision for city blockchainization, including NFT sales to support local art, a RenoDAO issuing RenoCoins to local residents, revenue from government-owned properties, blockchain-secured tickets, blockchain voting, and more.
• Ambitious projects 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 in their current form, are these projects good ideas? Are there any changes that could make them better ideas? Let's find out...

Why Should We Care About Cities?

Many governments around the world have shown inefficiency and slow action in addressing long-standing problems and rapid changes in people's potential needs. In short, many national governments lack on-the-ground participants. Many of the off-the-shelf political ideas considered or implemented for national governance today are quite scary.

Do you want the United States to be taken over by a clone of Portuguese dictator Antonio Salazar from World War II or an "American Caesar" to combat the evil scourge of the American left? For every idea that can be reasonably described as an expansion of freedom or democracy, there are ten that are just different forms of central control, isolation walls, and universal surveillance.

Now, consider local governments. As we have seen from the examples at the beginning of this article, cities and states are theoretically capable of achieving real vitality. There are significant and very real cultural differences between cities, so finding a city where the public is interested in adopting any particular radical idea is easier than convincing an entire country to accept it.

There are very real challenges and opportunities in many other areas of local public goods, urban planning, transportation, and city governance that can be addressed. Cities have tightly integrated internal economies, where things like widespread adoption of cryptocurrencies can actually happen independently.

Furthermore, experiments within cities are less likely to lead to terrible outcomes, as cities are subject to higher levels of government oversight, and cities have an easier escape valve: dissatisfied people can more easily opt out of what is happening.

So, all in all, local-level governments seem to be a very underestimated form of government. Given that criticisms of existing smart city initiatives tend to focus mainly on issues such as centralized governance, lack of transparency, and data privacy, blockchain and cryptographic technologies seem to be hopeful key factors in achieving a more open and participatory path forward.

What are Some Current City Projects?

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

Reno's Blockchain Experiment

Reno, Nevada Mayor Hillary Schieve is a blockchain enthusiast, with a focus on the Tezos ecosystem, and she has been exploring city governance concepts related to blockchain (see her podcast):

• Selling NFTs to fund local arts, starting with the "Space Whale" NFT in the city center
• Creating a Reno DAO managed by Reno tokens, where Reno residents will be eligible for airdrops. The Reno DAO can begin to generate sources of income; one proposed idea is for the city to rent out its owned properties and use the income for the DAO
• Using blockchain to secure various processes: blockchain secure random number generators for casinos, blockchain secure voting, etc.

CityCoins.co

CityCoins.co is a project built on Stacks, which is a blockchain powered by an unusual "proof of transfer" algorithm that operates around the Bitcoin blockchain and ecosystem. 70% of the token supply is generated through a continuous sale mechanism: anyone holding STX (Stacks native token) can send their STX to the CityCoins contract to generate CityCoins; STX income is distributed to existing CityCoins holders who stake their tokens. The remaining 30% is provided to municipal governments.

CityCoins made an interesting decision, attempting to create an economic model not reliant on any government support. Local governments do not need to be involved in creating CityCoins.co tokens; a community group can issue its own token. Common answers to the question "What can I do with CityCoins?" include "CityCoins communities will create applications that reward using tokens" and "Local businesses can offer discounts or benefits to those who stake their CityCoins," among other examples. However, in practice, the MiamiCoin community is not going it alone; the Miami government has actually openly supported the initiative.

CityDAO

CityDAO is the most radical experiment: unlike Miami and Reno, which are existing cities with existing infrastructure in need of upgrades, people need to believe that CityDAO, under the DAO law of Wyoming, is a legally recognized DAO attempting to create an entirely new city from scratch.

As of now, the project is still in its early stages. The team is currently finalizing the acquisition of the first plot of land in a remote corner of Nevada. The plan is to start from this land and then add more land in the future to build a city managed by the DAO, and heavily utilize Harberger taxes and other radical economic concepts to allocate land, make collective decisions, and manage resources.

Their DAO is one of the few ways to avoid coin-based governance; instead, governance is based on "citizen" NFTs for voting and has proposed some ideas to further restrict voting to one per person by using proof of humanity mechanisms. NFTs are currently being sold to crowdfund the project, which you can find on OpenSea.

What Can Cities Do?

Obviously, cities can do a lot of things in principle. They can add more bike lanes, they can use CO2 monitors and far-UV lights to more effectively reduce COVID spread without inconveniencing people, they can even fund research to extend life. But my main expertise is blockchain, this article is about blockchain, so... let's focus on blockchain.

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

1. Creating a more trustworthy, transparent, and verifiable version of existing processes with blockchain.
2. Experimenting with new forms of ownership for land and other scarce assets, as well as new forms of experimental democratic governance with blockchain.

There is a natural fit between blockchain and these two categories. Anything happening on blockchain can be easily publicly verified, and there are many free tools available to help people do that. Any application built on blockchain can immediately plug into the wider global blockchain ecosystem and interact with it. Blockchain-based systems are efficient in a way that paper cannot achieve and publicly verifiable in a way that centralized computing systems cannot—essential for creating a new form of voting that gives citizens a high level of voting, which is necessary for hundreds of different real-time feedback on different issues.

So let's get into the details.

Which Existing Processes Can Blockchain Make More Trustworthy and Transparent?

One simple idea that many people, including government officials from around the world, have repeatedly proposed to me is for governments to create an internal-use stablecoin listed on a whitelist for tracking internal government payments.

Every tax payment from an individual or organization could be tied to a public on-chain record, minting the amount of tokens (if we want individual tax amounts to be private, there are zero-knowledge methods to only publicly disclose totals but still convince everyone it was calculated correctly). Transfers between departments could be done "on-chain," and these tokens could only be redeemed by individual contractors or employees to claim their payments and salaries.

This system could easily be expanded. For example, the procurement process determining which bidder wins government contracts could mainly be done on-chain.

Using blockchain can make more processes trustworthy:

• Fair random number generators (e.g., used for lotteries), can be utilized as fair random number generators for government-operated lotteries to make them more trustworthy. Fair randomness can also be used for many other use cases, such as a form of lottery as a form of government.
• Certificates, such as cryptographic proofs that certain individuals are residents of the city, can be completed on-chain to enhance verifiability and security (e.g., if such certificates were issued on-chain, it would be clear 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, and even more complex forms of property ownership like development rights. These registries may never become fully decentralized anonymous tools like cryptocurrencies, as courts need to be able to allocate in special cases, but keeping records on-chain still makes it easier to see what happened and in what order in case of disputes.

Ultimately, even voting can be done on-chain. Here, many complexities are vaguely visible, caution is crucial. 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 truly transitions to electronic voting, local governments seem like the perfect starting point.

What Radical Economic and Governance Experiments Might Be Interesting?

Aside from what governments are already doing covered by blockchain, we can 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, real-world feedback often determines how to adjust the experiments in the future.

Experiment #1: A More Comprehensive City Token Vision

CityCoins.co is one vision of how city tokens can operate, but it is by no means the only one. In fact, the CityCoins.co approach has significant risks, especially in how the economic model heavily favors early adopters. The distribution of 70% of the STX income from minting new tokens to existing stakers of CityCoins is heavily skewed towards early adopters. Tokens issued in the next five years will be more than those issued in the next fifty years. 2021 is a good deal for governments, but what about 2051? Once a specific city token is endorsed by the government, it becomes challenging to change course in the future. Therefore, city governments must carefully consider these issues and choose a path that is meaningful in the long term.

Here are different possible sketches of how city tokens can operate. This is far from the only possible alternative to the vision of CityCoins.co; see Steve Waldman's excellent article, which advocates for another possible direction toward city-localized transaction media. In any case, city tokens are a vast design space with many different choices worth considering.

The current form of the concept of homeownership is a significant double-edged sword, with many believing that actively encouraging and legalizing certain specific forms of homeownership is one of the biggest economic policy mistakes we are making today. There is an inevitable political tension between housing as a place to live and housing as an investment asset, and the pressures to cater to the latter interests of the community often end up severely compromising the affordability of the former.

Residents of a city either own a home, making them overly exposed to fluctuations in housing prices and introducing perverse incentives to oppose the construction of new homes; or they rent a home, putting them at a disadvantage in the real estate market, ultimately conflicting with the goal of making the city a nice place to live economically.

However, despite all these issues, many still find homeownership not only a good personal choice but also worth actively subsidizing or socially encouraging. One significant 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 community they reside in.

But what if we could provide people with a way to save and establish an economic alliance without the flaws? What if we could create a divisible and interchangeable city token that residents can hold as many units of as they can afford or feel comfortable with, and its value rises with the prosperity of the city over time?

First, let's start with some possible goals. Not all are necessary; a token that achieves three out of the five has already taken a big step forward. But we will try to achieve as many as possible:

• Obtain sustainable sources of income for the government. The city token economic model should avoid redirecting existing tax revenues; instead, it should look for new sources of income.
• Establish an economic alliance between residents and the city. This means that as the city becomes more attractive, the token itself should obviously become more valuable. But it also means that economics should actively encourage residents to hold more tokens rather than distant hedge funds. Additionally, the utility of the incentive is individualized, encouraging widely distributed holding.
• Promote savings and wealth accumulation. Homeownership does this: when homeowners pay their mortgages, they inherently build their net worth. City tokens can do the same over time, making accumulating tokens attractive, even gamifying the experience.
• Encourage more socially beneficial activities, such as aiding positive initiatives in the city and utilizing resources more sustainably.
• Be equitable. Do not overly favor the rich over the poor (as poorly designed economic mechanisms often inadvertently do). The divisibility of tokens, avoiding sharp binary divisions between rich and poor, has done a lot, but we can go further, e.g., by distributing most newly issued tokens as UBI to residents.

It seems relatively easy to meet the first three goals with a model that provides benefits to holders: if you hold at least X tokens (where X can increase over time), you get some services for free. MiamiCoin is trying to encourage businesses to do this, but we can go further and have government services operate in this manner as well. A simple example is to allow existing public parking spaces to be free for those holding a certain number of tokens. This would achieve several goals simultaneously:

• Create incentives for holders to maintain the value of their tokens.
• Create incentives specifically for residents to hold tokens rather than distant investors. Furthermore, the utility of the incentive is tailored to each individual, encouraging widespread ownership.
• Establish an economic alliance (city becomes more attractive -> more people wanting to park -> token becomes more valuable). Unlike with homeownership, this alignment would be consistent across the entire town, not just very specific locations within the town.
• Encourage sustainable resource utilization: this would reduce the use of parking spaces (although those without tokens who truly need them can still pay), supporting many local governments' desires to free up more space on roads to be more pedestrian-friendly. Alternatively, it could also allow restaurants to lock up tokens through the same mechanism and request parking spaces for outdoor seating.

However, to avoid perverse incentives and over-reliance on a specific idea, having multiple possible sources of income is crucial. A good goldmine is zoning, which can bring value to symbolic items for the city and also try out new governance ideas.

If you hold at least Y tokens, you can have a second vote on the fee landowners nearby must pay to bypass zoning restrictions. This hybrid market + direct democracy approach would be more efficient than the currently overly cumbersome permitting process and the fee itself would become another source of government revenue.

More generally, any ideas in the next section can be combined with city tokens to offer more places for token holders to use them.

Experiment #2: More Radical and Participatory Governance Forms

These ideas include radical market concepts like Harberger taxes, second votes, and secondary funding. Some limited use of second voting and funding has already occurred in some governments, such as the Colorado Democratic Party, as well as experiments not yet government-supported, like Gitcoin's Boulder Downtown Stimulus project. But we can do more!

These ideas find an obvious place of long-term value in encouraging developers to improve the aesthetics of the buildings they are constructing (see