Does Universal Basic Income Require a State?

Recently, Vishal Wilde advocated for a universal basic income (UBI) on the grounds that it promotes economic freedom and social justice. Indeed, UBI has long been attractive to libertarians of various stripes. However, this idea suffers from the problem that, to date, UBI proposals have generally relied on the state for a taxation and distribution mechanism. From the libertarian point of view, a voluntary UBI would be highly preferable. As Wilde notes:

Although it’s worth noting that all contemporary, publicly-funded services have coercive origins, a voluntarily-funded UBI would obviously be ideal. Ensuring that a voluntary UBI utilized suitable mechanisms for delivering and enhancing trust is an unenviable but profoundly important challenge. Even if this can be accomplished, the difficult task of convincing people to adopt these mechanisms remains.

That is, while a wide variety of people have an interest in a social safety net — particularly in a freed market economy where there may be more social mobility — nobody particularly wants to pay for it. This is the reason why the state is typically thought of as the source of a UBI: they have the ability to compel people to pay whether they want to or not. There is currently one purely voluntary method of implementing UBI that solves this problem; it’s called Resilience, and it uses the Ethereum platform. The solution involves clever use of human incentives.

Ethereum and Cryptocurrency

Resilience makes use of protocols found in a cryptocurrency known as Ethereum, so it is necessary to first recap how Ethereum works. The history of any particular cryptocurrency is kept in a file called the blockchain. On a simple level, one can think of a blockchain as a chronological ledger, or list, of every transaction that has been sent through the system. Each of these transactions contains information about the sender and the recipient of the message as well as the amount of currency that has been transferred in the transaction. Precisely how this bookkeeping is done is not important here; it is only important that the blockchain be a universally-kept record of transactions, that these transactions can be “programmed” so that each transaction could implement complex functionality, and that the record is updated in a peer-to-peer (P2P) fashion.

Resilience

In order to create a protocol like Resilience, we must make three assumptions. The first assumption is that we have a list of every transaction that has ever been made. This, of course, can easily be provided using a blockchain. The second is that we have a method of assigning identities to participants. Every participant in the system must have an identity, and nobody should be able to game the system by creating fake identities. Finally, the third assumption is that the transactions can be programmed to implement the functionality described below. This is also the case for most cryptocurrencies.

If these assumptions hold, then it is possible to “skim” off a certain percentage off each transaction. The actual details of this protocol are fairly intricate, but the basic idea is that you can choose a number representing your “tax rate” that is skimmed off of all the money you send to other participants in the network. The money that is skimmed is then divvied up in a particular way to people who have sent money to you, and this essentially forms their share of the basic income (BI). An interesting consequence is that in order for you to receive a basic income, you have to send money to other people in the network. This means you have to pay the “taxes” you have told the system you are willing to pay. The system is also quite flexible in that you can program the system to take a different percentage depending on certain variables or program it to distribute your money to a variety of companies. Although these are called taxes, they are purely voluntary, unlike taxes levied by states.

This might seem like a pointless exercise since you’re both paying money and receiving money to the system. Won’t the transactions just cancel one another out? Actually, the amount of taxes you pay is determined by the amount of money flowing through your account, while the amount of BI you receive from the system is not. In other words, the average person will receive more money as BI than they pay as taxes. The only entities that are likely to incur a net loss in this system are businesses, which can deal with quite large amounts of money at a time.

The more difficult task, then, is convincing people to adopt these mechanisms. Obviously, individuals are incentivized to join the Resilience system because they will get a UBI in return. But what about the businesses, who actually lose money by joining the system? To solve this problem, one final rule is created: Anyone who sends money to an account that isn’t in the Resilience network is temporarily disconnected from the network. This has the effect of freezing their BI, as well as discouraging anyone from sending money to them. In other words, participants in the network are strongly disincentivized from transacting with anyone outside the network. The upshot is, in order for businesses to have network participants as customers, they must join the network themselves.

Therefore, businesses are incentivized to join the network because they gain access to a new base of consumers. However, since participants can set their own tax rate, why can’t businesses set their own rate to zero and avoid paying anything? While they could do this, it turns out that their customers’ BI would increase with a higher tax rate. A business which set its tax rate higher would have customers with higher BIs, so consumers will generally look for businesses with high tax rates. Presumably, this will reach an equilibrium where businesses are paying fairly high taxes but not so high that they don’t make a profit. In a sense, the tax rates themselves are set by the market.

Proof of Identity

In the previous section I assumed that we had a method of assigning an identity – and only one identity – to every person in the system. The reason why this assumption must be made is that anyone without an identity would not be able to participate, while anyone who could create multiple identities would be able to receive extra basic income. So, how could a system like this come about?

Unfortunately, this problem turns out to be the bottleneck in this entire scheme, and there may not be a good solution. Currently the most popular scheme is the proof of identity (POI), which extends the concept of pseudonym parties. In pseudonym parties people are required to show up at a physical event periodically (for example, once every year or month), after having been randomly assigned to groups. Each member of the group cryptographically certifies that the other participants appeared at the party, and these certifications form a kind of “token” which attests that the person is, in fact, a real person. After a year or month, the token expires and the person must attend a new party. Because it is physically impossible for a person to appear at multiple different locations at the same time, the system prevents any single person from creating multiple identities.

The POI scheme attempts to scale these parties to the entire internet by allowing these parties to be virtual, e.g. over a VoIP service such as Skype or Google Hangouts. This scheme is slightly more complicated than its offline counterpart in that you must convince the other participants in your group that you are not playing a recording or appearing in multiple virtual parties simultaneously. Aside from this caveat, the protocol is essentially the same.

As the others in your group are selected at random from everyone else in the world, it is infeasible to bribe others to falsely grant you a POI. For each sock account you wish to create, you must bribe up to four others. Even if you attempt to spam the system to create some groups consisting of nothing but sock accounts, this is statistically unlikely to gain money. Spam attacks can further be rendered infeasible by requiring participants to submit a deposit to participate in pseudonym parties, which are automatically confiscated if their account is flagged as spam.

Importantly, POIs are not IDs. They are certifications that a person only has one account with a service, but a POI does not contain information about who the person is. A POI also cannot be traced back to any previous or future POIs used by the same person, so participants can remain anonymous while still being certified as a unique individual.

The most obvious problem with POI is that requiring people to appear in annual or even monthly virtual hangouts is unsatisfying. If somebody misses a party due to illness, disability, lack of internet connection, or even mere forgetfulness, they are stuck without an identity. Since people experiencing illness or disability or who are unable to afford stable internet are more likely to need a system like this, this is an unsatisfactory solution. Nevertheless, this scheme’s advocates seem confident that it will allow a UBI system like Resilience to function in the absence of a centralized list of identities. Perhaps this problem will be solved in future implementations. In the meantime the question of whether POI is realistic remains unresolved.

The POI system also has uses other than in Resilience. Imagine, for example, a decentralized Twitter, which gave accounts a “verified” status if they could show a valid POI. Indeed, the fact that POIs are anonymous illustrates that there is no conflict between privacy and accountability. Although much of the conversation about privacy assumes this conflict to be insurmountable, the difficulty in holding people accountable online comes not from anonymity but from the ease in creating sock accounts. POI enables greater accountability without sacrificing any privacy. This is just one magical result of cryptography.

Conclusion

The Resilience protocol may end up forming one part of a decentralized, voluntary, and freed market social safety net. Another part will involve various types of P2P sharing services, such as a decentralized version of Uber or Airbnb, run as decentralized autonomous organizations (DAOs) on the blockchain. Since the sharing economy allows people to stay afloat during financial hardship, these two ideas may make a good safety net when combined. This combination of DAOs and the Resilience protocol also forms a decentralized version of the co-operative economy. Indeed, Resilience was inspired by both the Rochdale principles of the modern co-op movement and by mutual credit. This particular form, however, cannot be shut down. The only way the system can stop functioning is if people stop using it.


Further Reading

I’ve described the Resilience protocol, for creating a voluntary UBI system without a centralized state apparatus, in the most basic possible terms. This is to allow people who aren’t that far into the cryptocurrency space to understand it. There are plenty of details I’ve glossed over, and plenty of implementation problems that I haven’t described the solutions to. If the reader wishes to dive deeper into this subject, the following links provide a good starting point, in roughly the order I would read them.

Bitnation Announces a Decentralized Application for Basic Income Based on Bitcoin 2.0 Technology and Voluntary Fees:

BITNATION: Basic income application set for BitNation:

The Resilience protocol – Explanation for a newbie:

Crypto-states make taxation impossible  –  Darwinian Basic Income is the Future (second half contains code):

Using a genetic algorithm for self-organising emergent tax-rates in a crypto basic income system:

The Resilience whitepaper (contains code):

Swarm Redistribution – ELI5 (contains code):

Swarm Redistribution live experiment, could a “Decentralized Basic Income Swarm” grow their own taxes? (contains code):

Johan Nygren – Using “Anti Bot Token” as security tokens for the Virtual Pseudonym Parties dApp:

Free Markets & Capitalism?
Markets Not Capitalism
Organization Theory
Conscience of an Anarchist