A Proposal for Web3-Based Universal Basic Income

Income and wealth distribution have become more unequal in both the advanced and developing worlds over the past two decades. With automation poised to exacerbate this gap by replacing large numbers of certain jobs in the coming years, how to distribute social wealth to ensure the fruits of economic growth are more fairly shared will become an even tougher policy challenge.

Universal basic income (UBI) – a type of social-economic programme where all citizens of a jurisdiction regularly receive a monetary transfer, usually from the government, without discrimination – may provide an elegant solution to help address the issue. Large-scale implementation of UBI on a national level, however, may require further innovations on both technological and economic fronts. This paper lays out a proposal for leveraging web3 technologies – digital transaction networks such as blockchain or other programmable ledgers – as the infrastructure for scalable and efficient UBI implementation.

Income and wealth distribution is one of the world’s greatest challenges today. Data from the Global Inequality Report show that the global top 10 per cent earns 52 per cent of the total global income while the bottom 50 per cent earns only 8.5 per cent. Wealth distribution is even more unequal than income and the trend has become worse since the early 2000s.

The same report shows that the increase in income inequality over the past decades is mostly driven by within-country inequality. This is in part due to increasing globalisation. The expansion of global trade propelled strong economic growth of developing and emerging market economies. But the economic gains of globalisation have primarily accrued to multinational corporations in rich countries and the entrepreneurial class in poorer countries, resulting in the lower- and middle-income classes getting a smaller share of the pie.

This fact is important because it means that inequality is primarily a challenge within a jurisdiction, and not just across different countries. And this means that a mechanism for distributing wealth and income within a national economic ecosystem can be impactful in addressing inequality.

Increasing within-country inequality not only hurts the aggregate demand and, therefore, the growth potential of an economy, it also reduces the prosperity of the average citizen and becomes a significant driver of social instability. Data from the 2020 Global Peace Index show that civil unrest has increased over the past decade around the world. Between 2011 and 2018, the number of protests and riots roughly doubled, while the number of general strikes quadrupled. There may be a direct link between growing economic inequality and the decline of social cohesion within a country.

Technological progress may further worsen economic inequality even more, with automation poised to replace 30 per cent of jobs in all sectors by the mid-2030s, according to estimates by PwC. Income and wealth distribution will likely become an increasingly important policy challenge in all countries in the coming years.

Progressive taxation and social-transfer programmes are two of the most common policy tools to address economic inequality today. Some forms of these policies exist in most countries and they do help to a certain extent. For example, in North America, the top 10 per cent earns 17 times more than the bottom 50 per cent of the population before income taxes and social transfers while, after taxes and transfers, the ratio drops to 10 times.

However, the impact of these policies on the income- or wealth-inequality level within an economy are generally modest. Sub-Saharan Africa and Latin America have among the highest income-inequality numbers in the world and this gap persists even after taxes and transfers are applied, illustrating that such redistribution policies do not go as far as needed.

A further problem with existing redistribution policies is that they are costly to implement. It takes significant financial and human resources for a government to enforce tax compliance, administer social-welfare programmes such as pension and unemployment insurance schemes, and to make sure those programmes are implemented in a well-targeted manner. These policies are less likely to be successful in lower-income countries where the execution capacity of the public sector is typically lower, corruption is higher and the poorest are typically less empowered to challenge the status quo.

Moreover, the amount of resources at the government’s disposal for redistribution purposes may be declining. Public wealth as a share of total global wealth has been dropping since the 2000s. This is largely driven by increases in public debt around the world, which in part reflects the increases in public-sector obligations including social outlays related to population-aging in advanced and select emerging market economies. The mismatch between growing needs for economic redistribution and stagnating public resources available will likely increase. Addressing economic inequality in the coming decades will require additional policy innovations.

The most distinctive feature of a UBI programme compared with traditional social-welfare programmes is that it is universal and unconditional; in other words, it does not have any targeting criteria such as income or employment status that are required for most other transfer programmes.

There are several unique advantages of UBI as an income-redistribution mechanism. First, it reduces the screening and application costs on the part of the central authority and programme recipients respectively. Targeted redistribution programmes typically involve non-trivial costs for beneficiaries to prove their eligibility. On the government’s side, targeted redistribution programmes incur significant administration costs that go into screening potential recipients, reviewing applications, maintaining databases of recipients and so on, which can be a large burden especially on the governments of less-developed countries with limited resources. In countries with weak institutions and governance problems, targeted redistribution programmes, where discretion on the part of relevant officials is required, are also potential sources of misappropriation and corruption.

There can also be stigma attached to receiving certain social benefits. Having any kind of targeting criteria – for example, based on gender, race, income and employment status – also encourages lobbying and rent-seeking activities from socioeconomic groups, which adds to the total societal cost of these programmes.

UBI helps to solve these issues by keeping the eligibility criteria simple: every citizen is eligible and everyone receives the same amount. Consequently, it has the potential to significantly improve the efficiency and scalability of redistribution programmes to meet the rising challenge of income inequality on a large scale.

Despite having a long history in economic thought, the idea of UBI has never been widely implemented. But numerous UBI programmes have been executed or trialled in a localised manner around the world. Here are some notable examples:^[_]

• Alaska: Since 1982, the US state of Alaska has given each citizen an annual cheque, effectively eliminating extreme poverty. The cheque is financed by the state’s oil revenues.

• Brazil: Since 2020, the Brazilian city of Maricá has been implementing a basic-income programme. The programme is funded by the city budget, mostly from oil royalties.

• Namibia: Between 2008 and 2009, residents in the Otjivero-Omitara region received a basic income of 100 Namibian dollars ($6.75) per person per month with no strings attached.

• Kenya: Since 2016, a UBI experiment run by the charity GiveDirectly has been making payments to more than 20,000 people across 245 rural villages.

Most existing experiments found no effect of UBI on people’s incentive to seek employment, while an improvement in fertility rate, school attendance and mental health is found in some cases, as well as decline in petty crime and addiction.

Despite promising results from UBI trials, many existing UBI programmes are either funded by natural-resource revenues of the government (for example, Alaska) or supported by foreign donations (such as Kenya) on a one-off basis. To implement UBI on a larger scale would require substantial and consistent funding sources.

Many UBI proposals today suggest financing the UBI programme with additional government taxation. This can be problematic. First, additional taxation is likely to be socially unpopular among the population and encounter political resistance. Secondly, tax compliance is already a challenge in many lower-income countries. Imposing additional UBI-related taxation can make the problem worse. In addition, collecting UBI-related taxes and distributing UBI payments could still be a substantial, resource-intensive undertaking for any government, if such programmes were to be executed nationwide.

Web3, also known as the decentralised web, is a new generation of the internet that emphasises economic and technological decentralisation, as well as using tokenisation to give expression to economic values and asset ownerships.

Historically, web3 is intimately connected with blockchain technologies. Unlike with web2, where applications are siloed, on a public blockchain platform applications can interact and build on top of one another and users can take their data anywhere they go. The openness of public blockchains can lead to faster innovations and efficiency gains, while giving users more economic ownership and ensuring sovereignty of their data.

Blockchain technologies led to the emergence of a series of web3 economic models that use tokenisation as digital representations of economic ownership. This has already opened the door to innovations in income distribution in multiple ways:

• Democratising asset ownership. The borderless and permissionless nature of token-based digital assets makes them easier to access than traditional forms of capital ownership such as equities and bonds. Owning capital can be a big hurdle for the lower-income population to accumulate wealth, since a larger share of income needs go towards necessity-spending rather than being saved and invested. Lowering the entry barrier to capital ownership can support more equal wealth distribution over time.

• Allowing users and contributors of a product to benefit from its growth. With tokenisation, web3 projects and companies can incentivise users and contributors to drive growth without impacting present-day cashflow, while users can financially benefit from the growth of the projects that they contribute to. This allows the value added from high-growth segments of an economy to be more widely distributed among the population.

• Giving participants a direct stake in the entire economy. The second-generation public blockchain platforms such as Ethereum and Solana adopted the proof-of-stake consensus mechanism for transaction validation. Participants in the blockchain’s economy can pledge the chain’s native token they own and receive a portion of the transaction fees the platform collects. Since the transaction fees are levied on all economic activities happening on the platform and grow with the volume of activities, this mechanism allows participants to directly benefit from the economic growth of the entire platform.

Furthermore, digital transaction networks as exemplified by public blockchains reduce the need for financial intermediaries and the cost of transactions, improve the transparency, speed and efficiency of economic transactions, leading to increased economic activities and productivity gains.

The web3 economic models created strong incentive alignment among participants of a blockchain economy, which has been extremely powerful in driving digital-asset adoptions around the world, as evidenced by the rapid growth of digital-asset ownership over the past decade.

The same core ideas of web3 – decentralised, efficient transaction activities, giving people direct ownership in the economy without intermediaries – can be applied to any digital transaction network on a large scale and even facilitate the implementation of a UBI scheme.

Although web3 economic models originated from public blockchain platforms, the concepts can be applied to any digital transaction networks to improve efficiency and facilitate more equitable economic distribution.

In particular, central-bank digital currencies (CBDC) – digital versions of a country’s currency issued and regulated by the central bank – have been gaining interest from policymakers and the public alike as a more secure and regulated alternative to public blockchains that can provide the key transactional infrastructure for a modern digital economy. Some proponents of CBDC networks argue that the same innovative features that enabled public blockchains to grow exponentially – programmability, composability, interoperability, tokenisation – can also be adopted by CBDC networks to support the growth of a country’s digital economy. And the centralised and permissioned nature of CBDC networks may mitigate the security and fraud risks that are more of an issue of permissionless public blockchains.

An additional advantage of CBDC networks may be that they can be more quickly adopted within a jurisdiction since they are backed by the lender-of-last-resort capacity of a country’s central bank. But regardless of who manages the network – whether it is a permissioned network administered by central authorities or a distributed ledger maintained by the private sector – this type of network can provide the infrastructure for a web3-style UBI as long as it is the network on which the majority of economic activities of the jurisdiction runs.

If the digital transaction network is adopted nationwide and handles most or all of the economic transactions within the jurisdiction, a small transaction fee can be levied on all transactions processed by the network, which can then be distributed in equal amounts periodically to citizens’ wallets/accounts on the network as a UBI.

In other words, this digital UBI design will have the following basic requirements and features:

• Network coverage: a digital transaction network that handles most, if not all, domestic economic transactions in a country.

• Automated fee collection: a fixed percentage of transaction fees is automatically collected on each transaction occurring on the network.

• Account coverage: every citizen has a uniquely identifiable account or wallet on the network.

• Automated UBI delivery: in each disbursement period, the network automatically divides the transaction fees collected during the period by the number of individuals’ wallets on the network and disburses the fee to each wallet as a UBI.

This UBI design will allow each citizen to benefit from the value created in the country’s economy in a direct way. The amount of transaction fees collected will fluctuate depending on the volume of economic activities in the jurisdiction. Accordingly, the UBI will be higher when economic growth is strong, and lower in an economic recession. Its value also automatically fluctuates according to the inflation rate of the economy since transaction fees are collected on nominal volumes.

The programme also has several other advantages over traditional social-welfare schemes:

First, it does not require any human intervention in the collection and disbursement process, thus minimising the burden on government capacity, as well as administration and rent-seeking costs. Neither is there any need for economic agents to navigate complex regulations, which adds additional transaction costs to the economy.

Secondly, the design is automatically “progressive” – larger corporations and richer individuals typically have higher transaction values, thus paying more in fees, while the same amount of UBI is received by every citizen.

Overall, applying simple rules and leveraging the network’s automation capability ensures the UBI programme is executed in a scalable, efficient and transparent manner.

The amount of UBI the network can disburse will depend on 1) how widely adopted the network is in a country, 2) the transaction-fee percentage, and 3) the volume of economic activities. As a back-of-envelope calculation, if we assume that the network covers 100 per cent of economic transactions in a country and 2 per cent fees are levied on every transaction, the UBI programme can provide each citizen with, on average, 11.5 per cent of the country’s median income across 158 countries.

The coverage, however, varies widely from under 5 per cent of median income in some countries to over 25 per cent at the high end. Note that the variability is largely impacted by how unequal the income distribution currently is in a country. In countries with high degrees of income inequality, median income is typically low relative to the country’s GDP. In those cases the estimated UBI-coverage ratio would tend to be higher, since the calculation assumes that the total transaction volume on the network (equivalent to the concept of gross output) is at a relatively fixed multiple of the country’s GDP (this calculation assumes that the total transaction volume for each country is 1.78 times the country’s GDP, which is the average gross output-to-GDP ratio for the US, according to data from the US Bureau of Economic Analysis).

Other design features can be added to the basic UBI programme proposed in the last section to achieve additional policy goals. For instance, adding a staking feature on the network can serve to encourage savings and wealth accumulation, as follows:

• Allow citizens to stake the UBI they receive automatically from their wallet, similar to a savings account.

• In each period (for example, monthly), the portion of transaction fees collected on the network up to the amount equal to the fees collected in the same period a year ago (inflation adjusted) is distributed to each wallet as baseline UBI.

• The portion of transaction fees that exceeds the amount collected a year ago is distributed as “interest” in proportion to the staked amount in each wallet.

This will allow citizens to benefit directly from the economic growth of the country, while enabling wealth accumulation through compounding.

The UBI programme can also be designed to give the younger generation a head start in life, in the following ways:

• Register a wallet on the network for newborns when the birth certificate is issued.

• Distribute UBI to the new wallets just as to normal wallets, but disable spending of the UBI from the wallet until the wallet-owner reaches the legal age of adulthood; in the meantime, the UBI disbursed is automatically staked to collect interest.

• Allow the wallet to function as normal once the wallet-owner comes of age.

If we assume the UBI amount is 10 per cent of a country’s median income, and the median income grows at 2 per cent a year, this design will allow each citizen to have a base wealth of 1.75 times the country’s median annual income by the time they reach 21 years old.

Implementing a UBI on a national scale is a large undertaking for any central authority. The programmability and transparency of digital transaction networks help reduce implementation difficulties in many ways, but they likely also bring their own challenges, aside from the challenge of reaching societal consensus about the need and the specific design of a UBI. For example:

• The cost of creating and maintaining a nationwide digital transaction network can be substantial. Although a digital transaction infrastructure reduces the ongoing cost for UBI implementation compared with traditional social-welfare programmes, it will likely require significant investment upfront.

• The implementation of a digital transaction infrastructure will likely also require a complementary infrastructure of national digital identity.

• Onboarding the entire economy onto a single digital transaction network can be challenging. This will require behavioural changes of both individuals and corporations. Even though the shift can bring systemic efficiency gains and boost activity levels in the long run, the willingness and capability to make such changes may vary. In this regard, using the network to deliver UBI can actually provide an additional incentive for the adoption of the network.

• Disruptions to existing payment infrastructures may lead to resistance from interest groups. Current payment-service providers, such as credit-card networks and banks, will be significantly affected if most of the economy’s transaction activities are to be switched to a single transaction network. It will require major shifts in the business models of the existing financial-services sector. How this shift can happen is largely an untackled challenge.

The potential benefits and execution challenges of a nationwide digital transaction network are substantial. If, how and when it can be implemented depends on country-specific conditions:

• A feasibility study of retail CBDC is likely the first step to help answer questions such as technology choices for the network, partners and stakeholders involved, features and costs of the network, how it will be financed, what impact it will have on the country’s existing financial infrastructure and how such impact can be dealt with.

• For countries that are already in the process of developing a retail CBDC, it may be useful to explore the options of how the CBDC network can be designed to support a UBI implementation, while leveraging the UBI feature to support the adoption of the network.

Income and wealth inequality is a growing challenge globally. UBI can provide a scalable approach to address income inequality compared with most traditional social-welfare regimes. Meanwhile, web3 technologies such as blockchain and distributed ledger have enabled new economic models that can potentially support more equitable distribution of economic value in society. As digital transaction networks such as public blockchains and CBDC networks grow to become part of the core financial infrastructure in the global economy, they can be the ideal tool for implementing UBI programmes efficiently on a national scale. Using a nationwide digital transaction network to distribute UBI will also help drive the adoption of such networks. However, the development of digital transaction networks and associated technologies is still at an early stage. And the disruptions they may bring to the business models of the existing financial-services sector are challenging to quantify but should not be underestimated. Nevertheless, UBI on web3 is a powerful tech-led re-imagining of how our societies can be fairer and is therefore worthy of more consideration.

Lead Image: TBI