Disclaimer
This topic I’m about to share with you challenges some deeply-held beliefs shared in the crypto-currency community. Specifically, it’s about a concept that contradicts the general consensus that cryptocurrencies should always strive to be deflationary. While this notion might not sit well with many, I believe it’s worth sharing and debating.
A bit of history
Cryptocurrencies, led by Bitcoin, aren’t the first initiatives to challenge the monopoly of central banks over money creation. The Wörgl Experiment, a local currency initiative launched in the Austrian town of Wörgl in July 1932, aimed to do just that. The Wörgl currency was designed to depreciate by 1% every month, incentivizing spending over hoarding. Launched as a response to the Great Depression, it showed considerable success in driving economic activity, with other Austrian towns considering similar experiments. Based on Silvio Gesell’s economic theories advocating “depreciating money,” the experiment intended to accelerate currency circulation.
Some remarkable results
- The Wörgl currency circulated 12 times faster than the official Austrian currency, the Schilling, from its issuance in July 1932 to September 1933.
- The experiment significantly boosted economic activity, reducing unemployment by 25% in just two years.
- It facilitated public works projects such as building new houses, a bridge, and increasing the town’s revenue by a staggering 1,300%.
- The Wörgl Experiment has since been hailed as a seminal moment in the history of community currencies and demurrage.
A dire end
In September 1933, the Wörgl Experiment was deemed illegal and stopped by the Austrian courts despite its obvious benefits of increasing consumption and reducing unemployment. The National Bank claimed that the experiment was an infringement of the law. The circulation of the certificates stopped, and so did the generation of wealth, causing a lot of people to lose their jobs.
Why am I bringing this up today?
Bitcoin, Ethereum, and other cryptocurrencies are changing how we think about money. These digital currencies are an exciting step towards the future. But right now, most people see them as a safety net against inflation. An asset rather than a daily tool like cash would be. This makes them useful and easy to trade, but not practical like something we’d use to pay for our everyday needs, such as groceries or rent.
That said, I believe there’s room for something else. A digital currency that would live alongside the likes of Bitcoin and Ethereum but would be tailored for a different purpose.
This currency would encourage spending through incentives, helping businesses grow and communities thrive. Instead of just sitting in our digital wallets, it would flow through our local economies like blood in an organism, bringing oxygen and fuel for our society’s organs.
In other words, i’d like to consider a blockchain-based inflationary token with a “proof of use” mechanism, akin to the Wörgl Experiment of the 1930s but enhanced with the power of blockchain and modern technology.
But before you jump down my throat for promoting an heresy, please bear with me a little more.
Designed for local economies, this instrument would aim to increase the velocity of money, stimulating economic activity, fostering community development, and work in tandem with deflationary cryptocurrencies, which is very different from what fiat currencies are doing.
Proposal: A proof of use mechanism
The token discussed (Let’s arbitrarily call it PULSE for the sake of this article, an acronym that would stand for Proof of Use Local Scale Experiment) could be built on top of the Ethereum blockchain, employing smart contracts to implement a “proof of use” mechanism. It would articulate as follow:
- Just like the Wörgl stamp, the token should be actively used for a certain number of transactions within a stipulated time frame, or else diminish in value for a predetermined but adjustable % each month. (Imagine that a fraction of the token would be burnt if held for too long)
- To further encourage spending and circulation, users would receive an allocation of a locked/staked deflationary currency (like ETH for instance) for each purchase made with PULSE, barring currency swaps, to prevent direct swaps and further promote spending.
This dual incentive system would stimulate economic activity and increase money velocity.
Success prerequisites
- Decentralization and Trust: The token must be decentralized, free from the control of a central authority. A Decentralized Autonomous Organization (DAO) comprising economic agents from the region (merchants, local authorities, citizens, associations) could be in charge of managing the currency, democratizing financial control and fostering transparency.
- Precision and Control: Smart contracts would offer precise control over the “proof of use” mechanism and enable democratic fine tuning.
- Transparency and Data Availability: Ethereum would enable transparency in the local economy.
- Interoperability and Innovation: Built on a blockchain like Ethereum, PULSE could interact with an ecosystem of decentralized applications (DApps) and other cryptocurrencies, opening up innovative solutions and services.
- Localized Design & Pilot Program: PULSE should be designed for a local economy, catering to its unique needs and goals. I also believe it should be launched in a controlled environment to allow fine-tuning and fast iterations.
Decentralized implementation and the importance of regionalization
For PULSE to work optimally, I believe it should foster local democracy by grounding at a local level to accommodate a community’s specific characteristics and needs.
By local, I’m thinking of a city, or a greater city region. Something socio-economically homogeneous enough so that a common monetary policy would make sense without benefiting a region at the expense of another.
A pilot program involving a DAO composed of local businesses, citizens, and civic bodies would be instrumental in setting up, iterating, and fine-tuning the system.
Key tasks would include deciding on the initial token allocations and setting the variables for the “proof of use” mechanism: The transaction reward system, and the hoarding penalty.
This democratic approach would promote collective ownership and shared responsibility among community members, giving rise to a new social contract that would empower every stakeholder to shape their local economy.
Addendum: Money Velocity
The velocity of money is pivotal in this framework. It measures how quickly money changes hands in an economy within a given time frame. High velocity indicates that each unit of currency is being used repeatedly, suggesting an active economy with frequent transactions.
John Maynard Keynes highlighted the role of demand in driving economic activity. According to Keynesian economics, the velocity of money is closely related to consumer and business spending. Keynes explained that during economic downturns, consumer and business confidence decreases, leading to reduced spending, further slowing the economy (A vicious cycle).
By increasing the velocity of money, this cycle could be inverted, and the economy could be steered toward prosperity.
This is precisely what I believe the Wörgl experiment demonstrated.
Edit: Added sources
Sources
