Web 3.0 is about creating communities from the ground up, outside the purview of the state and large corporations. But these tools can also inspire communities to engage with traditional institutions like city governments in new ways, as the CityCoins initiative demonstrates.
CityCoins are cryptocurrencies intended to help everyday people leverage the power of public blockchains to invest in cities; simultaneously, cities can accrue new funding. CityCoins are designed to encourage civic involvement, most notably by reserving a percentage of the gains from mining for a particular city. The tokens also offer an opportunity for cities to experiment with new ways of accepting, using, and distributing money.
This experiment is playing out in real time, as new CityCoins issued for Miami and New York gain traction in both the crypto community and real world. Both coins have gained the support of their respective mayors, and the MiamiCoin wallet reserved for the city has reached a valuation of $23 million.
What are CityCoins?
CityCoins are cryptographic tokens issued by the private CityCoins company and powered by Stacks—a blockchain technology that allows smart contracts and apps to be built on Bitcoin by virtue of a “proof-of-transfer” consensus algorithm. Miners generate CityCoins by forwarding Stacks Tokens (STX) to a CityCoin contract. Under the protocol, 70% of the STX is distributed among existing CityCoin users who stack their coins, i.e. time-lock their tokens until new ones are mined. The remaining 30% of the STX is sent directly to a digital wallet reserved for the city.
A Guide to CityCoins and Crypto Terminology
Cryptocurrencies are digital representations of value that use mathematically derived security mechanisms to verify transactions and account values. These mechanisms are intended to build credibility in a decentralised context without institutions to certify ledger values. They function through peer-to-peer transactions or on centralised exchanges, without having legal tender status. Their value is typically driven by market supply/demand.
Bitcoin is the first widely used cryptocurrency, developed in 2009 to demonstrate the consensus-based cryptographic “ledger” accounting mechanism on a decentralised network. It is powered by a proof-of-work consensus algorithm. It currently has a market cap of $865B
Stacks is a cryptocurrency built on top of Bitcoin. Stacks connects to Bitcoin via a proof-of-transfer consensus algorithm. Stacks powers a layer of smart contracts and decentralized apps on top of Bitcoin. However, all transactions are ultimately settled on Bitcoin.
Proof-of-work is a consensus algorithm whereby nodes dedicate computing power to validate transactions and mine new tokens. Proof-of-work is incredibly energy intensive.
Proof-of-transfer is a consensus algorithm that builds on proof-of-work. Proof-of-transfer powers Stacks. With Stacks, miners transfer Bitcoin (a proof-of-work currency) to STX holders who freeze their STX, i.e., forego liquidity to enable the consensus mechanism. This process is called Stacking. Leader election happens on Bitcoin and new blocks are written on the Stacks blockchain. Proof-of-transfer requires far less energy than PoW.
CityCoins are cryptocurrencies issued by the private CityCoins company and powered by Stacks. Miners generate CityCoins by forwarding STX to a CityCoins contract. 70% of the STX profits are distributed to existing CityCoins users who stack their tokens, i.e., time-lock their tokens for a prescribed period of time. The remaining 30% are sent to a digital wallet reserved to the city. A city is not involved in the creation or management of a CityCoins assigned to it. Early examples include MiamiCoin and NYCCoin.
This reserved 30% is essentially a voluntary contribution from the miners to the city. These STX will be automatically converted to US dollars once the city accesses the wallet—technically, cities can’t hold cryptocurrencies on their balance sheet because they are currently regulated as a commodity in the US.
No city is directly involved in the creation or management of a particular CityCoin, or even of the digital wallet assigned to it. It can merely access funds deposited there. In fact, anyone can vote to determine which city will host a CityCoin next, and anyone can mine CityCoins. MiamiCoin, for example, was launched by 20 independent miners.
The reason that CityCoins are built on Bitcoin—rather than, say, Ethereum—is that its developers are betting that Bitcoin will become the preeminent global currency. STX is the gas—an auxiliary currency facilitating transaction costs—but BTC is the foundation.
A local initiative with precedent?
Since CityCoins are based on Bitcoin rather than a fiat currency, volatility is a risk—in 2021, the value of Bitcoin dropped by 30% in a single day before recovering slightly. Without price stability, it is unlikely that CityCoins will be usable as a currency. If CityCoin holders expect the value of their CityCoins to increase exponentially, they are unlikely to spend the tokens on the sundry necessities of quotidian life. They are more likely to hold them, or perhaps sell them during a dramatic downturn.
Local currencies designed to increase a city’s wealth are not new. In the US, they date back to the 1800s, when commercial banks issued their own currencies to make loans to local businesses. Generally, these currencies are issued by a non-profit organization and act as complement to a national currency but are not legal tender. They can only be spent in a particular area—the idea is to keep money circulating through local people and businesses rather than hemorrhaging it to large multi-national corporations. Take the Bristol Pound, in Bristol, UK, BerkShares in the Berkshires, USA, the Solidaridad in Lusaka, Zambia, or the DLBC in Lisbon, Portugal. There are even consultancies that can help you establish a local currency in your region or city.
However, these differ from CityCoins in key respects. With respect to use, CityCoins are not meant to be used as a local currency. Rather, they are conceived of as a mechanism whereby everyday people can hold “stock” in a city, demonstrating and rewarding an individual’s civic involvement and commitment to the city more so than to trade for local goods and services like traditional local currencies. A city can incentivize further mining by, for example, offering perks to CityCoins holders. A MiamiCoins user might pay for everyday items in BTC, but receive free parking, access to a coworking space, or free wi-fi because she holds $MIA. Because CityCoins are assets tradeable on exchanges, users can also incentivise cities to act in users’ interests. If users disapprove of the direction a city is taking, they can sell their CityCoins tokens, driving down its price and reducing the incentive to mine new tokens. In this way, CityCoins aspires to a novel, bidirectional civic model.
With respect to value, most of today’s local currencies are pegged one-to-one to a fiat currency held at a community bank, while CityCoins are traded on exchanges and not pegged to any currency. As CityCoins gain traction in the real world, developers, researchers, and city officials will need to monitor their uses in practice to balance the token’s monetary and civic aspects
Questions for policymakers
There are some outstanding technical questions that the CityCoins community has yet to address directly. For instance, how will the STX in the wallet reserved for the city be automatically converted to US dollars? By a central exchange? If so, which one? STX and BTC have limits to the number of tokens that ultimately can be mined—do CityCoins? Does CityCoins intend to decentralise such that users will be able to change the protocol via a “hard fork,” or will the CityCoins corporation retain centralised control? If the latter, how will it decide on and communicate changes to the protocol?
Further, while the proof-of-transfer consensus mechanism is less energy-intensive than Bitcoin’s proof-of-work consensus mechanism, the environmental impacts of crypto-mining still warrant a mention.
While CityCoins warrant much closer attention, as interest grows, the potential to leverage technological innovations and community efforts to increase the quality of life in our cities is an exciting opportunity.