Today, development aid gets diluted by administration, advertisement and corruption before it reaches its target, the individuals. Encointer provides a direct and egalitarian distribution channel from donors to individuals. Moreover, it potentially multiplies the economic impact of donations for the same reasons why fractional reserve banking works.
Encointer aims to provide every human with a digital proof of personhood and a basic income in a local cryptocurrency. This means that every participant can maintain exactly one digital identity and that every participant gets a fixed amount of cryptocurrency per month. In contrast to other known cryptocurrencies, encointer issues local currencies, meaning that their issuance is locally bounded. The currency of Benin can have a different exchange rate than that of Norway.
Let’s imagine a rural village somewhere in a developing country where 100 inhabitants own a smartphone and regularly participate in encointer ceremonies. Only few of them have a bank account and a state-issued ID. Encointer provides this village with its own cryptocurrency which sees an inflation of ~100 units per month. Let’s simply call this new currency NCTR. After ten years of constant participation, this would result in an annual nominal inflation rate of 10%. The transparent scarcity of this currency alone could give it value because it might be a more convenient medium of exchange than cash (i.e. if no one has a lot of cash, it gets difficult to get change for your purchase).
Let’s further assume an NGO that commits to spending 100$ as development aid for that village every month. With encointer, this NGO could set up an online exchange for that villages cryptocurrency at a fixed rate of 1$ per NCTR, turning NCTR into a stablecoin. The villagers could now sell their newly issued NCTR to the NGO in return for 1$ per NCTR. In the first month, almost all villagers might immediately exchange their NCTR for $’s. The few people owning a bank account could receive the $’s on their account and do the brokerage. The NGO would transparently burn all NCTR it bought to make sure these coins never hit the market again. After a few months, people grow more confident that their NCTR is indeed worth 1$ and they may choose to use their NCTR as a medium of exchange and unit of account instead. Other villagers will be attracted to encointer. If we’d have 200 participants after a year, 200 NCTR will be issued per month while the NGO may still spend ~100$ per month. If only half of the participants chose to sell their NCTR to the NGO and the other half trusts it’s stable value, the 100$ from the NGO have magically turned into 200$ in market capitalization for the NCTR currency. That is in fact similar to how fractional reserve banking in developed nations works: For every 100$ a bank issues in credits, it only has ~10$ in deposits. That works fine under the assumption that not everyone withdraws their deposits at the same time. Because of this assumption there is a risk. Developing nations might not reach a stable multiplier of ten, but imagine what even a doubling of the world’s development aid could do. Distributed directly to individuals as a basic income.
