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The cryptocurrency market went through a monumental bull market in 2017 and 2018, primarily as a result of massive growth on the part of the two largest cryptocurrencies, Bitcoin and Ethereum. For Ethereum, it was a time where the utility of the blockchain was finally hitting its stride. As an example, many of the most well-known NFT projects, like CryptoPunks and CryptoKitties, were released during this time. But the biggest development of that bull market was the ICO craze.
ICOs, or initial coin offerings, often draw comparisons to initial public offerings (IPOs), and for good reason. After all, both offerings are primarily used by new and often small companies to draw in money from investors to fund product development, corporate growth, and ongoing operations. ICOs took in billions of dollars worth of investment before being more or less shut down by regulators in many countries (but that’s a story for another day).
ICOs were enabled by the easy creation of fungible tokens on the Ethereum blockchain, usually under the ERC-20 standard. Creating new cryptocurrencies had been relatively easy beforehand since many of the largest protocols, like Bitcoin, were open-source. But the introduction of the ERC-20 standard was gasoline on the proverbial fire. Anyone could quickly, easily, and cheaply create their own cryptocurrency. And hundreds of people and companies did just that. Many of those cryptocurrencies have thus far stood the test of time, such as the Nexo token and its namesake company. But many of them have come to rest in the trash heap of history. And if there’s one truth about crypto, it’s that history has a tendency to repeat itself.
CityCoin: Future Funding for Cities and Governments?
Case in point: the cryptocurrency market is currently in the midst of what is surely its largest bull market to date. Bitcoin, Ethereum, and many other cryptocurrencies are regularly hitting all-time high prices. Popular blockchain technologies like NFTs, DeFi, and DAOs are back in vogue. And new cryptocurrencies, some valuable and others not, are being created left and right. It’s into this atmosphere that a brand new type of cryptocurrency, one that promises that it will revolutionize government funding, makes its entrance: CityCoins.
The name is spot on of course since only cities, like Miami and New York City, are eligible to have a namesake coin created. But what exactly is a CityCoin and how does it work?
CityCoins are deployed on top of the Stacks blockchain, a layer-1 solution that piggybacks on top of the Bitcoin blockchain to improve both security and miner compensation. There are only two functioning CityCoins at this point, MiamiCoin and NYCCoin, but the non-profit organization behind the project has ambitions to create a CityCoin for many more major cities over the next few years.
CityCoins appear to have a rather limited value proposition currently. The project’s own website puts it best:
CityCoins offer people a way to support their city and grow its crypto treasury.
In other words, CityCoins are essentially a blockchain-based way to make donations to your own city or another city that you want to support. The project’s backers have shared long-term ambitions to enable other use cases such as lending, smart contracts, and more though.
How does it work?
In all honesty, the process of making donations to a city through CityCoins is rather convoluted:
A smart contract in a particular city’s name is created on the Stacks blockchain.
Once activated, anyone is able to mine the CityCoin by sending the Stacks blockchain’s native token, STX, to the smart contract.
30% of the STX donations are sent directly to a wallet reserved for the city itself. The city is able to cash out the donation for another cash or crypto at any time.
The remaining 70% of the STX tokens are sent to prior miners of the CityCoin who have chosen to “stack” their CityCoin, a similar process to staking on a Proof of Stake (PoS) chain, except without any benefit of protocol governance attached.
Why do I say it’s convoluted?
For starters, the stated goal of CityCoins is to provide direct funding for cities through cryptocurrency. And yet, the protocol only sends 30% of the donations to the city, while sending the rest back into the system, presumably to be used once again in the donation process. As a result, the whole process is rather circular and seems to primarily exist in order to convince users and observers that there is utility for CityCoins outside of making donations to the government (which there currently is not).
The project’s description of its own tokenomics seems to shed light on the value actually being created:
CityCoins will continue to grow over time as cities and their citizens see fit, bestowing reputational, identity, ownership, access control, and programmable utility on top of their fundamental economic functionality.
In case you didn’t catch it, several of the “benefits” derived by participation in a CityCoin’s ecosystem serve to further solidify the status of people who are wealthy enough to make significant donations to the city (aka, the city’s elite). In layman’s terms:
Reputational: Those who mine CityCoins will wield a reputation of directly supporting the city and city initiatives.
Identity: City supporters can be easily identified, both by the city government itself and by outsiders.
Access Control: The project states elsewhere that this means access to “digital or physical spaces”. In other words, CityCoin owners will essentially have a VIP pass to events and locations of the city’s choosing.
There are perhaps people who will argue that providing direct funding to cities is worthwhile. Whether or not you believe that, my point is simply that a convoluted, self-serving pseudo-blockchain process is far from the best way to support your city financially. But if it has to be on CityCoins, then I’d argue that the “mining” should be removed altogether. Instead, 100% of the donations should be sent straight to the city in exchange for minted, not mined, CityCoins. After all, gamification is not needed when the only point of the protocol is to send money to the government.
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