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Index Wallets Invalidation Brief

Index wallets are a novel payment method enabling users to pay with multiple currencies simultaneously, akin to scooping out a blend of different colored sands from a single bag, each color representing a different currency. This mechanism offers potential benefits such as funding public goods, voluntary taxation, and wealth equalization. For example, supporting Wikipedia with an index wallet would allow donors to “spend” the currency associated with Wikipedia, incentivizing vendors to value it and potentially driving more customers to those who support Wikipedia, thus addressing the free-rider problem. To ensure its viability, index wallets must overcome challenges such as avoiding market monopolization, ensuring stable valuations, preventing market failures, and protecting user privacy. The practicability of Index Wallets depends on assumptions that people donate to causes, consumers seek the cheapest prices, and vendors aim to maximize profits. This brief describes how index wallets appear to work on paper, and lays out the approaches to explore whether the properties are likely to hold up in a real world implementation.

Index wallets are a mechanism-based payment method that promise theoretical benefits like:
funding for public goods
voluntary taxation
wealth equalizing dynamics
Index wallets can be quite easily explained:
In a standard payment, the two parties to a transaction have to come to an agreement on the currency to transact in — e.g. if you’re in the EU you’ll use euros. In an index payment this is different, instead of paying with a single currency you pay with all of the currencies in your index wallet at once.
A good analogy for understanding how an index wallet behaves is to imagine various bags of sand of different colors that are used as currency. In a traditional payment, like we have today, you would just reach into the proper bag and scoop out the right amount of the right color. In an index payment, you would first mix all the sand together into a single bag, and then shake it up to make them homogenous, only then would you reach in and scoop out the payment to be transferred to the vendor — paying with all the various colors of sand at once. Once a currency has been bundled in an index wallet — mixed together in the same bag — it can never be unbundled.
When you want to buy something from a vendor with an index payment, the number of scoops you need to take out of your bag of mixed sand depends on how much the vendor values each of those different colors of sand. Let’s say you have some blue, a lot of red, and a small amount of green sand all mixed together. If the vendor values green a lot, and red only very little, you’ll have to take a lot of scoops in order to satisfy them. Conversely, if they highly value red then it will be very few scoops, leaving you with more sand in your bag.
What is this good for? Well, we can now imagine a public goods entrepreneur who gets funding to create a public good, and mints a new currency (a new color of sand) to fund the public good. Let’s say they’re creating Wikipedia. Under the current model, Wikipedia survives purely off of donations from very few of their readers. With index wallets, when a supporter sends a donation to Wikipedia, Wikipedia can now return a receipt of donation in the form of a bit of the currency associated with Wikipedia, which the user can choose to include in their mixed bag and use for payment.
By including it in the mixed bag, if a donor finds a vendor that highly values the Wikipedia currency, it will feel cheaper to buy from them, literally they’ll take fewer scoops from their bag in order to pay them. However, if a donor to Wikipedia finds that the vendor doesn’t support the public good, but that a competitor does, then it will be cheaper to buy from that competitor, and the vendor that doesn’t support Wikipedia may lose business. This means that in the index wallet system, vendors have a selfish reason to value the currency associated with a public good — it gets them more customers.
Once everyone in a community has reached a steady state valuation of the public good Wikipedia can finally divest of their holdings of the currency associated with that fiscal year’s funding. They can sell the currency into the community (perhaps by way of a bank or another intermediary) and use it to further fund operations.
So, what have we accomplished here? We have made it so that people who donate to Wikipedia can spread out the cost of maintenance of a good that benefits a community to other members of their community, thereby no longer having to carry that cost entirely themselves. Technically, we’re solving for the funding of public goods. The practicability of this only rests on the assumptions that:
some people are willing to donate to certain causes
consumers want to buy things for the cheapest price
vendors are trying to maximize profit
Concretely, the payment mechanism looks like this:
customer = np.array([10, 20, 30]) # the customer's wallet
valuation_a = np.array([1, 1, 1]) # the first vendor's valuation
valuation_b = np.array([1, 1, 2]) # the second vendor's valuation

price = 5 # the price charged by both the first and second vendor

# the cost when the customer pays each vendor
cost_a = customer * (price / customer.dot(valuation_a))
cost_b = customer * (price / customer.dot(valuation_b))

print(cost_a, cost_b)
# output:
# [0.83333333 1.66666667 2.5 ] [0.55555556 1.11111111 1.66666667]
# showing that it's cheaper to pay the second vendor

For a more technical presentation of the same ideas, as well as a discussion of the wealth equalizing properties of index wallets, read .

Invalidation

This is big if true, it could mean that the popup cities that are being experimented with like Vitalia, Zuzalu, or other Network States could use this as a more democratic, lower bureaucracy public goods funding mechanism.
However, before we deploy it to the real world, let’s try to find out we’re wrong! Our next steps are:
examine the mechanism theoretically, using classical game theoretic and economic assumptions
run agent based simulations of an in-silico economy that uses the mechanism, characterize its behavior
run digital experiments with players using the mechanism, like incorporating it into a game economy

The primary way to invalidate index wallets would be to demonstrate that any of these are true:
Priority
Name
Severity
1
Under index wallets, monopoly players are able to exploit their market advantage to artificially control the rest of the market's valuations.
Complete Invalidation
2
Index wallets do not address free-rider problems in public goods funding, as they purport to.
Complete Invalidation
3
Index wallets economies would suffer from balkanization, where only certain sub-communities transact in a particular currency.
Discourage Continuing
4
Index wallets do not create wealth equalizing dynamics, as they purport to.
Less Compelling
5
Index wallets cause runaway inflation
Complete Invalidation
6
Index wallets create highly unstable waves of valuation changes that do not settle to an equilibrium over time.
Discourage Continuing
7
An index wallets economy suffers from frequent market failures (people unable to transact) due to differing valuations.
Discourage Continuing
8
It's impractical for index wallet users to update their valuations, as there will be too many currencies and too frequent changes.
Discourage Continuing
9
Index wallets represent a privacy hazard for their users: they leak information about users' values and economic relationships and that can’t be fixed.
Less Compelling
There are no rows in this table

Frequently Asked Questions


What incentive do users actually have to adopt this?
For businesses and projects the argument is always the same.
Businesses: am I losing customers because I don’t accept this payment option?
Projects: if I return a donation currency I can get more funding.
The rationale for user adoption will of course depend on the stage of adopter. Perhaps the reasons for users will look like this:
Innovators: (e.g. Zuzalu ppl, The Commons) This is a cool experimental way to do public goods funding, let’s try it.
Early adopters: Ideological, e.g. in this city I don’t have to file taxes, I have voice in where my taxes go, political processes are broken this is better, wealth inequality is a problem and this would fix it, etc..
Early majority: I can get the businesses I buy from to pay [to protect the environment | to improve working conditions | to build a park]
Why would users bundle their currency rather than just maintain multiple wallets?
If a user has a token that they believe should be considered valuable, they can add it to their index wallet. Now there is an incentive for the vendors they buy from to increase their valuation of that currency or else potentially lose that customer. The loss of a single customer is likely not enough of an incentive, but if a group of potential customers bundles their currency at the same time, there’s more pressure on that vendor to increase their valuation of that currency.
In this way, a group can coordinate to get the rest of their community to fund a certain public good. A boycott is an analog analogy to this sort of behavior.
With so many currencies, what will prices be denominated in?
The prices can universally be denominated in some objective quantity like joules or watts, representing your partial ownership of the global economy’s energy production. Users can of course also view their wealth through the lens of a particular reference currency, like USD or BTC. Perhaps there is also a conserved quantity that can be used.
How to liquidate holdings if no unbundling?
This is a trapped paradigm question, like asking, “How do you liquidate your cash?” The value of the currency in an index wallet is what you can buy with it, just like cash.
What problem is this actually solving?
The technical problem this addresses is in public goods funding — essentially the fact that you can belong to a community that benefits from a public good without paying for it. It does this by allowing new currencies to gain purchasing power by dissolving the keynesian beauty contest at the heart of currency selection, .
That’s way too many currencies to possibly pay attention to. How will people keep up?
Most users won’t be interested in all the denominations of currencies, but just a handful of them — the goods that they and their community care about. This means that most of their valuations can be set automatically, and just a handful can be pushed above or below the automatic price.
Can people receive payments containing currencies they don’t want?
Yes, you can receive a payment with currencies you don’t want, if you don’t want them you can set your valuation low and they’ll pay you more to make up for that fact (or they’ll walk away because the price is too high). If you set a low valuation of a currency, the cost is carried by the person paying you. When you go to pay your community (who has the same valuation as you) you face no additional cost — so the unwanted currency doesn’t affect your purchasing power.
E.g. let’s say you’re part of the hiking community and there is a public shooting range being built near your favorite trail which you and your community don’t want. You can set the valuation of that project low (or even negative) and any hunters that pay you will have to pay extra to make up for the unwanted currency. When you pay other people who also don’t want that currency (they have the same valuation as you) you don’t face any additional costs, the cost was already paid by the hunters.
Couldn’t this result in ideological balkanization, where e.g. the hunters and hikers can’t transact?
Yes, if two groups want incompatible public goods, it could result in the two groups having trouble transacting with one another. This is considered a good thing: if they can find a mutually agreeable solution to the problem then both groups get richer. In general, the benefit from trade is expected to make it better to find agreement than to cut one another off.
Doesn’t this imply that the wealthiest group will always get their public good if there’s conflict?
If there’s conflict — two public goods that are mutually incompatible — the group that’s most willing to pay for their public good is most likely to get it. Since the wealthiest participants have more reserves, this can result in plutocratic outcomes — wealthier players being more likely to get their way.
This is a risk, but what’s unclear is how this compares to the power centralization and plutocracy of existing political systems. There are three arguments that index wallets might be better than existing political systems on this dimension:
Index wallets may have wealth equalizing dynamics, meaning that if there are plutocracy problems due to wealth differences they may be short lived. However, it’s not yet clear whether the wealth equalizing dynamics are real or merely artifacts of the mathematical models
A key reason why wealthy individuals enjoy additional political influence is because it’s easier to raise 100k from a few donors in large chunks rather than from many donors in small chunks. This is a coordination problem. So if index wallets succeed in reducing coordination costs it should erode the preferential influence that wealthy individuals enjoy.
Economic processes tend to be more pluralist than political systems. For example, to maximize market size, Apple is better off making phones affordable by many people instead of merely the richest few. Put simplistically, it’s easier to acquire 10x more customers with the same product than to create a product that a single rich customer is willing to pay 10x more for.
Couldn’t someone arbitrage a community that has a high valuation of some currency?
Yes, this is the point. By setting a high valuation that community is saying that they want more of that currency (or, more of the outcome associated with it). By acquiring and selling the currency to them, an arbitrager gets a better deal on the community’s goods, and the community gets more funding for the project it cares about.
E.g. imagine a community that lives downstream of a dam controlled by the upstream community. The downstream community wants more water, and so they increase their valuation of a project that would deliver more water to them. The upstream community can buy up that currency, thereby funding the project, and then can use it to get a deal (either today, or someday in the future) on the goods produced by the downstream community.
If you were to visit a community far away, how would you be able to pay them?
Due to the global velocity of money, it’s likely that you would already have many of their currencies in your wallet, so you could pay them. If they value some public good highly there it might even be productive to donate to that public good in order to get some of the associated currency in return. This is a way in which non-locals can fund local goods through selfish taxation.
Who else has considered this sort of payment mechanism before?
To my understanding, both Michael Neilson and Juan Benet independently considered a similar mechanism set in 2018. Though I’m told in addition to enabling multiple currencies their approaches also treated each payment as its own currency.
Each combination of currencies is effectively its own currency, how will markets clear?
Exchange trading of these currencies is highly unlikely — there won’t be liquid global markets for each user’s wallet composition. This is considered a good thing — it allows for local communities to have additional sovereignty. The value of the currency in your wallet is what you can buy with it (just like cash) and so it will be through competitive dynamics on the individual business level (not speculation) that valuations are discovered.
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