Hey SCRF! I’ve had an interesting idea floating around my head for a while now, and thought this might be the right place to share it and collect feedback. This is an original design proposal for an unusual stablecoin and public goods funding hyperstructure. Let me know what you think!
PGTI: The Public Goods Token Index
Tokenized representations of public goods are a nascent but fundamental application of cryptoeconomic systems, but currently lack significant and reliable sources of funding or financing. While quadratic funding and retroactive public goods funding have created new financial incentives to be the bearer of public goods tokens, they are necessarily unpredictable, hence risky on secondary markets, and leave the tokens relatively illiquid. Furthermore, they are part of a fractured and patchwork landscape of different funding efforts from different ecosystems, each of which compounds the effort required to achieve effective public goods funding across all sources.
In addition to these funding sources, credit is an essential part of capital formation which can be used to facilitate the public goods economy. Collateralized debt positions (CDP) are commonly used for credit formation on-chain, such as in stablecoins like DAI, but are unlikely to accept collateral that lacks the depth of liquidity necessary to avoid bad debt, and will only do so if the potential for profit from growth outweighs the risks.
The Public Goods Token Index (PGTI) is a complement to the public goods token economy, a schelling point around the idea that we can and should encode our values into money through systems of global governance, and, in doing so, create a monolithic source of liquidity for capital formation to occur.
The proposed design centres around a CDP protocol which only accepts public goods tokens as collateral, and divides the necessary powers of governance between each independent group of stakeholders.
Cantillon Effects and the Directionality of the Money Supply
Richard Cantillon’s “Essai” (1730) was the first to note the effect of relative inflation when the money supply is increased and first enters the economy. An increase in the money supply results in price inflation, but only once that money circulates and reaches new equilibrium with the demand for goods. Since this effect occurs gradually, those who mint the currency experience the highest imbalance in the ensuing price effects, and as such extract the greatest benefit.
The context and directionality of money printing matters for the orientation of production and capital formation in an economy. Those closest to the money supply make decisions about the optimal distribution of capital based on their interests, which are aligned with that of the financial system.
In the current U.S financial system, primary lenders distribute to banks who make investment decisions about the distribution of capital in the economy in order to receive maximal returns on their capital and beat the risk-free rate. This drives them to invest their money to increase the quantity or quality of goods and services in the economy wherever profit is maximized, creating growth. This tends to orient profits around consumption and resource extraction, which act as primary drivers of the growth in recorded GDP.
However, money printing based upon observed GDP and unemployment, as is the case with the U.S Dollar, flattens the underlying conditions which contribute to those figures. GDP is isolated from whether the economic activities it consists of are beneficial or solely extractive. The two variables are related, but it is assumed that both GDP growth and minimal unemployment are universally good, and that all resources are being allocated effectively.
If an action can be proven and its relationship to public goods is meaningfully supported by the data, then we are able to, instead, direct inflation through the actions of this individual and reorient the basis of demand in the economy towards their productive needs.
The inputs demanded by those whose labour is certifiably resulting in the production of public goods are necessarily going to reflect the inputs needed for the production of that public good. This orients economic production and capital formation around what is necessary for the function of the public goods economy. For example, the direct cost of polluting today can be measured in fines and fees, and occasionally offsets, but if public goods were profitable then firms would also need to factor in the opportunity cost of instead reducing pollution from current levels. Both positive and negative externalities factor into the overall profitability of an individual in the public goods economy.
Additionally, when profits derive from public goods, bank managers and financial intermediaries are incentivized to lend to maximize the production of those public goods at minimal cost. Notably, demand for consumer and market based goods remains intact, but are allowed to come to equilibrium with public goods and common goods.
By using the public goods economy as the basis of the financial system instead of relying purely on a downstream redistribution of tax revenue, the economic effects are shifted upstream and multiplied due to relative inflation effects.
PGTI as a Store of Deep Value (SODV)
Money is fungible and has the ability to store value, which are valuable characteristics that result in demand for a currency which possesses them. The greater the demand for a given quantity of a currency, the greater the profit differential from inflation.
Credit derives from social consensus, if economic actors independently agree on a value then it can be borrowed against, regardless of what the underlying collateral represents. CDP protocols generalize this by using overcollateralization to neutralize counterparty risk, allowing collateral demand to be satisfied by any sufficient asset. Using this design, DAI creates demand for ETH as collateral because it acts as available credit and as a store of value.
If credit formation can only occur when public goods have verifiably been created and the tokenized representation has been deposited in a CDP protocol, then demand for the resulting SOV is passed into demand for the public good’s token. In doing so, the SOV effectively confers profit from seigniorage and relative inflation to the underlying collateral protocols. This, itself, becomes an immediate form of liquidity and funding which can be used to sustain operations and continue producing more public goods. A store of deep value ultimately goes one step further than an SOV, by storing and transferring value according to the alignment and externalities of its collateral.
Recently, there has been an increasing emergence of ideologically aligned on-chain credit, due to the perceived need to ameliorate the shortcomings of stablecoin scaling. DAI, due to its overdependence on USDC to maximize its scale, has been forked into many alternative protocols which limit collateral types to increase features such as decentralization and yield. The increase in L2 networks has similarly been marked by the use of ideological alignments in order to differentiate competitors, such as Optimism and Celo. By observing the positive externalities and second order effects of each currency, we can choose to look at these structures as tokenized social programs bootstrapped on financial infrastructure.
Currency is a medium of political representation, and the design space of its social, economic, and political interplay is highly intricate, forming an enormous opportunity to encode deeper values into our economy at its most fundamental level.
PGTI: Protocol Design
PGTI would consist of a CDP protocol and multiple independent systems of governance with mutual responsibility over its operation. The protocol would engage in overcollateralized lending based on certifications of public goods, such as tokens, hypercerts, attestations, verifiable credentials, and soulbound-tokens. By using a wide basket of assets, it seeks to reduce risk and exposure while maximally expressing human value preferences.
It is essential to the function of the protocol that it strictly allows for assets which represent measurable positive externalities, public goods and common pool resources. Public goods are non-rivalrous and non-excludable. They benefit society without exclusion, which hinders their ability to form natural economies. Similarly, if a common pool resource lacks the ability to exclude access, it may fail to express its natural value and become exploited. The purpose of the protocol is to allow for the formation of cryptoeconomies concurrent with the expression of demand for those goods and resources.
The observability of public goods, that they are of a measurable benefit to members of society equally, “it is good to do this action” is substantially different from that of a moral good, “it is right to do this action”. While some moral consideration is required to consider what defines societal benefit, public goods are unambiguously beneficial and should only be approved by this qualification.
This begs the question, how does the protocol decide what assets to approve, and how to distribute funding?
Governance over the CDP protocol and SOV asset are split into three groups of stakeholders, each with independent interests:
Tokenholders are given the power to decide how funding is distributed through the collateral basket. They express their preferences for different public goods through quadratic voting on the percentage of that asset newly accepted as collateral. While public goods are always beneficial, individuals may not have the same value preferences as to how much it benefits them. This can be true due to regional and geographic limitations, or simply due to preference. By relying on tokenholders to democratically express their preferences, it collectively aligns the protocol within each individual’s benefit, to the degree to which it is a consensus among others.
The second stakeholder group, bondholders, are responsible for voting on approving/revoking collateral based on whether it measurably meets the criteria of a public good. Many collateral types may be accepted, but in order to effectively function as an objective public goods economy there must be certain requirements to acceptable collateral.
Since bondholders are responsible for opening CDP vaults, we can assume that they are likely the most connected to the source of public goods tokens, whether through labour, finance, or trade. They have the most to lose through misinterpretations of the definition of a public good because it dilutes their potential share of tokenholder preferences. Additionally, it should result in a balanced set of public goods protocols which are not in direct competition with one another’s methodologies and have little incentive to exclude true public goods from being collateral.
The third group of stakeholders are the riskholders, in the example of DAI these would be the holders of MKR. The backstop token is used as a lender of last resort for CDP protocols, and requires that these governance holders maintain a satisfactory risk profile throughout the entire protocol to avoid facing financial downside. In PGTI, they are responsible for managing risk settings, collateral ratios, and rates of accumulation.
Each underlying public goods protocol is itself an independent stakeholder, which may overlay additional forms of management and governance in order to function. Common pool resources may rely on this to manage access, such as through regional governance and penalties.
Blockchains are a means for unaffiliated individuals to collectively govern a common pool resource over a distance, while minimizing the necessary trust assumptions. Any data, whether computation or labour, can be tracked globally in this way when provided with a sufficiently verifiable methodology.
Limiting the scope of an individual currency to a particular public good allows each protocol to function as a minimally governed social program. Since they are globally scoped and application specific, they are equipped to facilitate and broker cooperation with local governments’ social programs as well.
Quantifying and measuring the production of all public goods is an infinitely complex problem, composed of all existing global data. As the collection and sensitivity to global data increases with improved technology, we will need to develop methodologies which define the measurable characteristics of public goods production. Qualifying public goods and the goodness of that good must be left to tokenholder preferences.
Naturally, many methodologies will emerge which emphasize different data and characteristics. Some will compete, and some will overlap. However, as long as they accurately represent their chosen methodology, then the collateral mixture chosen by tokenholders can divide out their preferences for the underlying public goods and positive externalities. Additionally, the riskholders must consider the potential for rapidly shifting preferences if there is fraud or a misrepresentation of the outcome of public goods production.
The use of rebasing to account retroactively for real observed outcomes is recommended. Good intentions don’t always make good policy, and exposure to the risk of loss from negative externalities forces them to be accounted for prospectively. If the negative externalities and natural variability of public goods are not accounted for within the token framework to some extent, there is much greater risk that the methodology will not accurately represent public goods production over time. A regression towards measured output is necessary to penalize fraud and maintain data integrity.
Further research needed
This is the part where I say I haven’t built this, I don’t plan to in the immediate future, and I think there’s tons of work to be done to get the design to a functional state.
I haven’t begun to research the administrative costs associated with running even one public goods token protocol, whether local community-led statistical efforts are sufficiently reliable to base the global economy on, or the sociological and economic effects of community currencies. It’s been particularly hard to find examples or sources on local community currencies. They exist in very small scale form, and also very briefly during revolutionary periods in various parts of the world, but I haven’t found much in the way of specific data or research.
The public good measurement methodologies themselves would require expansive data collection, and so also requires sufficient protections of data rights and privacy. There’s lots of room for subjectivity and debate over their designs too, such as how to sufficiently formally define public goods in this context. Intentionality and additionality are often tough problems to solve, and some public goods are difficult to attribute to the actions of individuals. Regen Network has lots of interesting discussion on this.
Mitigating fraud is another necessary challenge. As is sybil resistant governance.
But, I think it’s an idea worth exploring. If you think so too, let me know your thoughts. If you know of any sources that would be useful in expanding on this idea, please send them my way as well. Thanks for reading!