Encointer

Our Organization

Encointer Association

What is the name of your solution?

Encointer

Provide a one-line summary of your solution.

A platform that enables communities to establish decentralized local digital currencies with basic income which are independent of donors and do not require banks or state-issued ID

Film your elevator pitch.

What specific problem are you solving?

Local economies are often held back by a very basic problem — a lack of stable and reliable money for transactions. This means that even when people have skills, services or produce to trade locally, economic activity is stifled by a lack of liquidity.

The problem has multiple causes. In 2021, the World Bank estimated that 850 million people globally cannot prove who they are because they have no official identification documents. About one in three of these people report difficulties in accessing basic financial services like opening a bank account. These barriers are most prevalent in low-income countries.

Marginal and seasonal employment can also lead to liquidity shortages. People who are self-employed or rely on informal jobs need to contend with low pay and fluctuations in their income. According to the International Labour Organization, this particularly affects the 1.4 billion individuals in low- and middle-income countries classified as “own-account and contributing family workers”. In addition, disadvantaged communities sometimes rely on industries such as agriculture or tourism that are highly seasonal, resulting in liquidity droughts during periods of low yields or low demand.

Mobile phone-based money transfer technologies like M-Pesa in Africa have proven to be popular and successful, but they still rely on the supply and stability of national currency to operate and require participants to present a valid ID to open an account.

Decentralized digital currencies have often been touted as an alternative way of promoting financial inclusion, but they tend to be unsuitable for basic income initiatives for three reasons. Firstly, there is nothing to stop a single individual opening multiple digital asset wallets anonymously, which makes it very hard to distribute a basic income while preventing double claiming without requiring a state-issued ID. Secondly, users typically need money to purchase digital currencies via an exchange (and this usually requires an ID), so it is not a true alternative. Thirdly, high transaction fees pose an insurmountable barrier to adoption adoption of decentralized finance (DeFi) in many cases. 80% of the global population earn less per day that a typical cost of a single pure ETH transaction on Ethereum, for example.    

Beyond purely monetary considerations, low-income communities often feature lower levels of trust, economic connectedness and social capital. This makes it more difficult for individuals to form the networks that are important in achieving upward income mobility. 

What is your solution?

Encointer is a decentralized platform and payment network that enables communities everywhere to create their own local digital currency and distribute it as a basic income, without requiring a state-issued ID to participate.

The App: Participants install the free Encointer Wallet App, currently available for Android and iOS. In regions with an active community currency, the app enables users to send and receive funds and participate in gatherings to receive their community income.

To make a payment at a participating business, users simply need to scan a QR Code in the Encointer Wallet app. Users can also send funds to other individuals in the community through the app.    

Distribution of Community Income: The Encointer protocol is based on a very simple principle — one person cannot be in more than one place at any given time. Each community currency is distributed on a periodic basis (currently every 10 days) to all active participants. To claim their community income, each member needs to attend a small in-person gathering at a randomly assigned place in their locality. The Encointer Wallet App displays the time and location of the next gathering. All events are held concurrently, making it impossible to claim an income more than once each cycle. At the gathering, each attendee scans the QR code of the other participants to confirm their attendance. Within 48 hours, all attendees will receive their community income in the wallet app. Watch a video of an Encointer gathering here.

The Platform: The underlying network that powers Encointer is built on the Kusama/Polkadot blockchain network. Encointer has been granted the status of a “common good” project by Kusama, meaning that it does not need to pay to lease a place on the network.

Currencies are subject to demurrage, which means that unspent account balances are reduced by a fixed percentage each week. This encourages spending and economic activity, discourages hoarding, and thereby stimulates a local multiplier effect in the area.

Governance & features: Encointer community currencies are governed democratically according to the principle of one person, one vote.

The demurrage rate, the size of the community income and other factors are set democratically by participants. Participants are also free to decide whether they want to notionally peg the value of their community currency to the national currency or — if that currency is unstable — to a basket of local goods and services. Ultimately, however, the only true value of the currency is that it is accepted as a means of payment for local goods and services by participants.  

In sum, Encointer offers a toolkit for communities to increase the level of disposable income among participants, enabling them to boost the local economy without relying on external donations or aid.

See our intro video here.

Who does your solution serve, and in what ways will the solution impact their lives?

Encointer is a flexible framework by design that could be used by any community seeking to encourage local spending, strengthen local supply chains, and increase social capital. 

However, it is reasonable to assume that Encointer will be most beneficial in communities underserved by traditional finance, populations with low social capital, and regions where the national currency is volatile or scarce. 

Communities underserved by traditional finance

One of the key advantages of Encointer is that it allows participants unconditional access to a secure and transferable local digital currency. When people have no access to financial services, it is harder for them to integrate into economic life. Using survey data, the World Bank cites the three most prevalent reasons that individuals remain unbanked:

1. they lack the money to open an account 

2. they live too far away from the nearest financial institution 

3. they lack the required documentation.  

The Encointer platform addresses each of these issues. Firstly, by taking part in a gathering, every participant will receive a community income, at no cost, regardless of their current income, gender, age, race or social status. Secondly, Encointer currencies are locally based and governed, and can be established in any area with internet coverage that is underserved by conventional financial institutions. Thirdly, Encointer currencies are open to all individuals who live in a particular region, regardless of whether they possess identification documents or even citizenship.

Communities underserved by decentralized finance In addition, to overcome the problem of digital currency and DeFi transaction fees outlined earlier, Encointer takes advantage of the pooled security on the Kusama network to enable digital transactions that are adjusted to purchasing power of the respective community.

Populations with low social capital

In both the developed and developing world, low-income communities often suffer from low levels of trust and social capital. First popularized by Robert D. Putnam, social capital refers to the networks of social connections that help a society function effectively. These social bonds tend to be useful for individuals seeking job referrals, and to hear about opportunities for work. By requiring regular in-person gatherings, combined with the sense of belonging to a grassroots network with participatory governance, Encointer fosters greater social interaction and economic connectedness.  

Regions where the national currency is volatile/scarce    

In certain cases where the national currency is particularly scarce or unstable due to a macroeconomic shock or hyperinflation, an Encointer community currency could help to serve as a means to facilitate transactions among participating businesses and individuals in the local economy.

To be clear, however, Encointer currencies are intended to be complementary and work in tandem with the national currency. Participation in an Encointer currency community could help individuals to build important social connections, cover some of their basic needs and interact in the local economy. It is intended to be a stepping stone toward greater financial inclusion, however, not a wholesale alternative to traditional finance.  

How are you and your team well-positioned to deliver this solution?

Alain is well-travelled in many countries of the global south. Besides travelling in Western Africa, South America, India and Asia he also participated in a voluntary schooling project in Togo where he learned a lot about the situation on the ground. A social climber himself, he also experienced inequality in his home country Switzerland which nurtured his interest in macroeconomics - besides his formations as an engineer. He entered the blockchain space in its early days (2011), but was increasingly disappointed by the devastating ecological and social consequences of the design of early cryptocurrencies. So he developed the alternative concept of Encointer in his whitepaper. Still, we want to emphasize that Encointer - as a grassroots protocol - should not depend too much on its founder. We have adopted two main approaches to ensuring proximity to target populations.

Firstly, the Encointer Association does not centrally determine where new communities will form. Instead, we run information campaigns about Encointer and encourage interested local leaders to contact us with their questions and queries. After a short screening process, we provide local founding members known as “bootstrappers” with technical, marketing and financial support in establishing their currency community. By allowing the formation of new currencies to be demand-driven, we seek to attract local populations willing to take ownership of their community currency and tailor it to their needs.

Secondly, we follow the principle of subsidiarity in decision-making, meaning that we devolve as many decisions as possible to local communities. As the Encointer protocol requires individuals to attend in-person meetings to participate and claim their community income, it provides a secure and robust basis for democratic decision-making processes based on the principle of one person, one vote. There are a number of in-built incentive levers available to communities to tailor their local currency to their needs. They can set the size of the community income, decide whether it is notionally pegged to fiat currency or not, determine the time gap between community gatherings, define the demurrage rate on unspent balances, and stipulate how long a participant can retain their reputation if they fail to attend one or more gatherings.

We will monitor, collect anonymized data, and write reports about existing Encointer currency communities in order to generate learnings and help inform the decisions of other communities. Ultimately, however, the decisions will rest with the communities themselves.  

Which dimension of the Challenge does your solution most closely address?

Create and/or reduce frictions to scale safe personal identification methods for individuals who have been kept out of the formal financial system due to a lack of formal identification

In what city, town, or region is your solution team headquartered?

Zurich

In what country is your solution team headquartered?

• Switzerland

What is your solution’s stage of development?

Pilot: An organization testing a product, service, or business model with a small number of users

How many people does your solution currently serve?

There are approximately 150-200 users regularly using Encointer community currencies. The majority of these users use LEU, the longest established pilot currency based on Encointer, located in Zurich. A second, new community GBD is located in Green Bay, Wisconsin, USA and is gaining its first regular users.

In addition, community leaders are in the process of establishing new Encointer community currencies in Kigali, Rwanda, Felipe Carillo Puerto, Mexico, Dar Es Salam, Tanzania, Zaria, Nigeria and Berlin, Germany.    

Why are you applying to Solve?

Encointer is best suited for areas with limited access to traditional financial services, unstable national currencies, or corruption issues. The team has begun outreach in these areas and has received positive feedback, but cultural, legal, and market barriers make the process challenging. We believe that partnering with on-site development organizations is a viable way to introduce the platform. We believe MIT Solve can help to facilitate these partnerships.

In which of the following areas do you most need partners or support?

• Legal or Regulatory Matters
• Monitoring & Evaluation (e.g. collecting/using data, measuring impact)
• Product / Service Distribution (e.g. delivery, logistics, expanding client base)

Who is the Team Lead for your solution?

Alain Brenzikofer