Blockchain, Digital Twins, and Global Brain Economics – Part I
Introduction
A growing contingent in the crypto world focuses on a concept of ‘regenerative’ finance termed refi, which relies on the premise that social engineering, through economic incentives, smart contracts, mass data collection, and Artificial Intelligence, can create a positive outcome on society, and thus avoid the abuse of incumbent power centers through ‘decentralized’ digital organizations which implement the engineering and govern its evolution.
In reality, much if not all of the regenerative finance web3 endeavors offer a quieter path for central banks/governments/corporates to fulfill goals such as banking the unbanked, increasing data capture, enabling digital management of resources, industry, education, nature managing and commodifying natural processes. A few centers of activity have caught my attention for their close relationship to social impact finance paradigms and global capital.
The first part of this series will focus on ‘Community Currencies’ (CC), and digital twining for use in social impact finance and insurance securities. Risk management plays a major role in designing these cybernetic-social-financial systems, which require a higher level of modeling and analysis before the bigger players commit any kind of serious capital into any sort of product.
As the social impact finance sector grows, data capture and analytics increasingly builds these digital twins. Technologies like blockchain provide secure, real time, 24/7 open data feeds, and built-in interoperable identity systems for people and machines. These are all facets of the developing global brain, or metaverse – a transhumanist project or perspective about the evolution of humans.
At its core, the metaverse is the sum of all communication protocols. In other words, information in globalized, semi standardized systems, facilitated through the language of computers, binary mathematics. The internet, telecommunication networks, blockchain, closed communication systems (corporate or national) all embody different approaches and aspects of the metaverse. As these systems have matured and permeated much of society, the possibilities of the metaverse vastly increase. As it is a system based on mathematics and electrical engineering, it needs to be highly organized, and thus, inherently restrictive.
Without blockchain or similar database technologies, it is difficult for the system to scale. Digital twins, essentially live simulations, are a requirement for managing cybernetic systems in almost any context whether it’s an industrial or social system, and the vast majority of humanity is forced to contribute to its development, as the modern continuation of domination principles increasingly coerce, force, or manipulate people to interface with our burgeoning cybernetic enclosures.
Part 1
Engineering of Society: Community Currencies and Catastrophe Insurance
NAIROBI, KENYA – In 2020 the Danish Red Cross and Grassroots Economics, and BlockScience teamed up to implement blockchain-based Community Inclusions Currencies. Grassroots Economics, a recent grantee of the UNICEF innovation fund, operates primarily in Kenya since 2010, and focuses on implementing community currencies. The Community Currencies program created digital profiles for the sake of impact investment.
Blockscience and a few related organizations sit at the forefront of complexity modeling in the web3 space. They create digital twins of their clients’ systems for purposes of risk management and elucidating complex dynamics. The idea of community currencies goes all the way back to the origin of money, but in the international aid perspective they evolved out of food-supply voucher programs, which were attempts to provide access to necessities in distressed areas by distributing vouchers that could only be used for certain things. In the last decade, unconditional direct cash assistance became much more popular with NGOs, but has other consequences. The money tended to leave the local area quickly, and not circulate. The paper also cites Oxfam reports that physical cash opens more risk to theft, violence and local corruption. Community Currencies are an attempt to find a middle ground between those two paradigms. An academic review co-written by Grassroots Economics cofounder Will Ruddick, describes the differences and argues why they think Community Currencies serve better:
Unlike an aid voucher, CCs [community currencies] can be spent and re-spent across all member businesses that accept them. An aid voucher connected to a local business is immediately cashed out after its use. While this injected national money might circulate, it might also be spent on goods or services from outside the community (we shall refer to these as external inputs or imports) and depart the local economy. A CC directly addresses the problem of leakage of national money from a local, less developed community. The purpose of CC aid is for recipients to spend them locally and raise the likelihood of earning CCs back when the community’s purchasing power folds back in on itself, creating circular chains of spending and income
In other words, they argue that Community Currencies can help insulate local communities by not allowing money to leave the local economy. However, actually implementing this requires financial and social engineering in the actual place. Local merchants and other hubs where people spend money end up as focal points that the NGOs use to manage the supply of the Community Currency. Experimenting with different systems since 2010, Grassroots Economics essentially ended up investing in various businesses with donor funds to guarantee their acceptance of the Community Currency and help manage the supply/demand balance:
In 2017, GE [Grassroots Economics] unified all the different paper CCs into one fungible paper CC called Sarafu-Credit (Sarafu meaning currency in Kiswahili), retaining the expiration date and thus the promise of reciprocity (see Figure 1). But rather than purely decentralized production, GE had started in 2016 to invest in community businesses that would guarantee acceptance of Sarafu, which we call producer credit in Table 1. The establishment of general stores, subsidized by KSh donor funds, located in the communities, provided goods that effectively backed the currency. Donor funds also partially financed cooperative businesses (public goods) like a maize mill and coconut oil factory, that would always accept CCs. With these ‘authorized entities’ GE could manage their excess balances through con-version into KSh, and thereby manage CC supply, system wide and reduce overall imbalances. [emphasis added]
I highlight this process to show how these are managed systems, designed and implemented by forgien organizations. Running these systems requires cultivating local hubs through donation and investment.
According to their research, Community Currencies multiply the impact of donor funds, because of their circular nature.
The expenditure multiplier, or the number of times in which cash circulates in a community, has a central role for long term development aid. Indirect measurements of aid over the long run hint that cash injections (CVAs) generate modest long-term impact or none at all (Clemens et al. 2004).Overall, these interventions were said to be cost effective, leveraging donor funds 10 or more times.
Grassroots Economics eventually moved to digital systems to implement Community Currencies and by 2019 was using the Proof of Authority Blockchain system.
In late 2018 GE began transferring the paper currencies to digital records accessible on mobile phones and by 2019 all of the Sarafu became digital currencies, operating on the POA blockchain public ledger. Payments could be done without the internet on simple mobile phones and donor funds paid all the telecom fees
In 2020 they began using the xDAI blockchain, which has been rebranded as Gnosis chain. The xDAI blockchain used the stablecoin DAI as its primary currency and was operated by a consortium of web3 players. As Gnosis Chain, they transitioned to a Proof of Stake system, but retained xDAI as the primary currency. DAI is a stablecoin created through the Maker protocol, one of the largest defi applications in crypto. After migrating to the blockchain, they began creating digital profiles for the sake of impact investments.
The blockchain allows for data collection that allows impact Shilling investment donors to give cash directly to recipients and social enterprises tied to sustainable development goals. Community members can be endorsed on the basis of their data, or they can curate their own blockchain data profile to attract impact investors. CC transfers can also be distributed to users as aid or income on the basis of surveys and metrics e.g., on transaction data that proves residence in vulnerable household areas, helping to target future aid and cash transfer programs. [emphasis added]
This helps frame the Community Currency concept in the paradigm on social impact finance. It is also worth pointing out that this system does not require a formal self-sovereign identity, only a blockchain address that has been proven to be created by a unique individual (think biometrics).
In areas of extreme distress and poverty, many people have no official forms of identification to begin with, but may have a phone or can be given a phone. To target these populations and get around the lack of formal identity systems, they instead provide them with blockchain based Universal Basic Income, for example, the only requirement for which is to prove they are a unique person. Once the person receives the UBI and starts spending it they are building a digital identity, which can be used for impact finance, and progressively interfaces with any future formal identity systems that may be implemented.
So what role does BlockScience play in all of this? Notably, they are not mentioned once in that 30 page paper describing Grassroots Economics’ work with the Red Cross. BlockScience is all about modeling systems, specific complex systems, in a mathematically rigorous way. One of their core tools is called cadCAD, which I’ll let them explain:
cadCAD (complex adaptive dynamics Computer-Aided Design) is a python based modeling framework for research, validation, and Computer Aided Design of complex systems. Given a model of a complex system, cadCAD can simulate the impact that a set of actions might have on it. This helps users make informed, rigorously tested decisions on how best to modify or interact with the system in order to achieve their goals.
With all the engineering, statistical, computer science and crypto economic knowhow, BlockScience creates schematics to both help their clients understand their own designs, test for unforeseen potentials, and relay acquired data to update the model. This means digital twinning. Here are the founder Dr. Michael Zargham’s words from an interview about the Red Cross project:
“By creating a digital twin of the CIC [Community Inclusion Currency] ecosystem, one can simulate and test policy choices, and protect against otherwise unforeseen system failures. System shocks like we’ve seen with COVID-19 are examples of those unforeseen circumstances which models can help us test resilience to in advance.” [emphasis added]
Michael Zargham
Blockscience’s role is to create the digital twins to model the CIC system. Here is the schematic used for the digital twinning of the Community Currency system, providing exact descriptions of all the different entities involved and the possible/permissioned interactions.
Shruti Appiah, a researcher at BlockScience, is a top engineer in the industry. She currently is Head of Product at IOHK, the organization building the core Cardano infrastructure. Shruti also cofounded Consensys Labs and helped lead Okta’s 50 million-dollar investment into decentralized identity start ups. Okta is a multibillion-dollar company building identity management products.
We will dive into Consensys in much more detail in another segment, but for now it is useful to know that it was started by Ethereum co-founder Joseph Lubin, and is one of, if not the most influential firm in web3. Besides building much of Ethereum, and investing widely in that space, they are involved in most major institutional blockchain initiatives including the IMF, Bank of International settlements, as well as private consortiums and international aid.
One of their advisors, Shermin Voshmgir, is the Director at the Cryptoeconomics Research Lab at Vienna University school of Economics. She took part in one of the World Bank’s Blockchain for Education Community of Practicemeetings and was on the advisory board to the Estonian eResidency Program.BlockScience also developed the alphabonds for IXO. Alphabonds are a smart contract-based financial instrument that adjusts based on continuous data gathered through impact projects. They also help design systems for the social impact project Impact Data Consortium Chain, which has a Blackrock employee as a director and uses the IXO blockchain as its primary platform.
The Supercomputer Military Contractor Creating Digital Twins For the Insurance Industry
As financial thinking and computers consume the world, historically exotic financial products gain viability. Parametric insurance, a class of insurance which pays out claims automatically based purely on observable metrics, such as wind speed in a hurricane, is a perfect match for the data and ‘green’ paradigm. Structuring and assessing risk in parametric insurance encourages mass digital twining of the world in the name of protecting the earth. The same companies undertaking the digital twinning, directly work for the military and industry. Unsurprisingly, blockchain emerges as a key infrastructure for scaling and managing these systems.
Parametric designs were first implemented in catastrophe insurance. According to a World Bank report, the first parametric catastrophe bond was issued in 2006 through the Mexican government. The Red Cross first dipped their toes into sponsoring their own catastrophe bond in March 2021.
Volcano ash plume height serves as the trigger metric for the catastrophe bond. A company called Replexus partnered with the Red Cross to bring the bond to market through their blockchain platform focused on trading securities.
In an interview, Nick Williams, Co-founder of Sempo, Adam Bornstein, who works on alternative financing at the Danish Red Cross, and Will Ruddick of Grassroots Economics, talk about Catastrophe bonds, community currencies and how they expect the two to merge in the future.
“A Cat Bond is a security that is used to transfer risk of financial loss arising from a catastrophic event from the sponsor to investor. The Danish Red Cross is sponsoring the world’s first pure-volcano catastrophe bond. This parametric cat bond is structured such that the principal is paid to the Red Cross if specified trigger conditions are met.”
Eventually they hope to merge the catastrophe bonds with Community Currencies:
“Furthermore, as the CIC platform expands, globally, there becomes a very interesting opportunity, potentially, to develop various social impact and insurance linked securities for regulated investors. Imagine creating suites of crypto enabled mini-cat bonds that help direct targeting funding to mitigate against risks associated with conflict, climate change, and other humanitarian crises without so much as relying on algorithms, bonding curves, datasets, and pre-arranging funding commitments – in the near future, this is how chunks of humanitarian assistance will be allocated.” [emphasis added]
As we see with their work on community currencies and social impact finance with Grassroots Economics, they clearly see blockchain as the cornerstone of the cybernetic aid system.
In insurance-based securities, especially in parametric approaches where the payouts are based on a measurable metric, there is always a third party company tasked with environmental and economic modeling of the specific event. Mitiga Solutions provided these services to the Red Cross.
Essentially, this is the same sort of thing Blockscience does. Creating a digital twin of a physical system which has financial incentives to model possible outcomes. However Mitiga operates in the traditional industry-military complex. Founded in 2018, as a spin-off of the Barcelona Supercomputing Center, the company
“is a leading start-up in the development of technological solutions for the prediction and management of the effects of climate change based hazards through the use of HPC (High Performance Computing) solutions and Artificial Intelligence.”
Beyond just modeling for the risks of events they also model the potential asset impact, both in terms of physical assets and purely financial assets such as securitized catastrophe bonds. Their customers include major multinational defense contractors, NASA, NATO, United Nations Development Programme (UNDP), and some of the largest insurance companies in the world, such as Axa and Willis Towers Watson. Atmospheric sciences appears to be their specialty, and they work with the major air traffic control systems in Europe.
The only investor I could find was the venture capital arm of Banc Sabadell, a major spanish bank. They joined Microsoft Startup track in 2020, migrated their computing platform into Microsoft’s Azure and relies on their cloud platform. The partnership expanded in 2022 for co-development of a “fully transactional” insuran-tech saas (software as a service) platform for risk management. Microsoft and Mitiga together are evaluating the use of Microsoft’s Planetary Computer Platform.
In a report Microsoft released to highlight their commitment to the UNs Sustainable Development Goals They describe the planetary Computer: “Over the past year, we have committed Microsoft to becoming a carbon negative (SDG 13) and zero waste (SDG 12) company that is building a new planetary computing platform to transform the way we monitor, model, and ultimately manage Earth’s natural systems (SDG 15)”
Mitiga’s founder, Alejandro Marti, currently leads the wind/hail working group att the UN’s Focus Group on AI for Natural Disaster Management and was a board member at the Partnership for Advanced Computing in Europe (PRACE). PRACE, is in part funded by The EU Horizon Innovation Fund and:
is established as an international not-for-profit association (aisbl) with its seat in Brussels. It has 25 member countrieswhose representative organisations create a pan-European supercomputing infrastructure, providing access to computing and data management resources and services for large-scale scientific and engineering applications at the highest performance level.
An article published by PRACE about Mitiga Solutions’ approach to epidemic modeling in sub-Saharan Africa, highlights three phases of development. The first is “participatory surveillance”, where data is sourced from surveys about how people feel, which then cross-references with government data. The data is then put into agent based models. The third phase comprises “business intelligence that helps to reduce the financial impact of any disease outbreak, providing information about how supply and demand, transport, financial markets and other institutions might be affected.”
Coming full circle, Mitiga Solutions was involved with a Red Cross Project involving Community Currencies in Africa, where people earned tokens for providing information about their health status. While we can’t say for sure that this is the same project as the Grassroots Economics project, there cannot be many other Community currencies projects run by the Red Cross in Africa.
“Looking beyond the project, Mitiga is working on promoting a programme in Africa with the Red Cross that aims to incentivise people to provide information about their health. “This concept, known as a community inclusion currency, is based on blockchain technology and provides people with tokens that can be exchanged for certain good such as food, transport or education when they give information about their health status” [emphasis added]
Dr. Marti
The Grassroots Economics/Red Cross project specifically mentioned the use of surveys to decide how aid is delivered. With Mitiga’s involvement, this is direct evidence of a military contractor incentivizing/coercing distressed populations for their data in exchange for aid, then using that data to create digital twin models and inform impact investors/insurance markets.
Moving back to the catastrophe bonds. These products are considered in line with the UNs SDGs. The Guernsey International Insurance Agency issued its first Environmental Social Governance accreditation to Dunant Re IC limited, a cell of Replexus. Replexus is the company responsible for the blockchain based securitization of the catastrophe bond sponsored by the Red Cross and modeled by Mitiga .
The framework was launched in Guernsey earlier this year and has awarded Dunant Re IC Limited – an Incorporated Cell of Replexus ICC (Guernsey) Limited, managed by Aon Insurance Managers (Guernsey) – the first accreditation of its kind.
They go on
It follows the United Nations’ recommended approach of incorporating ESG processes to align sustainable development goals with the outcomes of financial services products, services and investments made by the insurer.
Guernsey is a British Crown Dependency island in the English Channel off of the coast of Normandy. The fourthlargest captive insurance domicile in the world and largest in Europe. Captive insurance refers to essentially any insurance provided by a corporation, as opposed to self-insurance. Highly connected to London, Guernsey provides the sort of insurance famous offshore opaque financial debauchery.
Replexus describes its mission:
The ultimate goal of Replexus is to move Insurance Linked Securities (ILS) Funds away from the ‘traditional reinsurer’ model.
Later on in the page
Replexus sees this issue and the solution; to create a liquid market of securities on an electronic platform to replace the illiquid reinsurance model.
Their blockchain-based sister company Bloxsys, also founded by Cedric Edmonds, manges this electronic platform. They also claim to have run the first live system of “dematerialized tradable securities ever on a blockchain”. Bloxsys facilitated the issuance of 14 Million dollars-worth of securities in 2017, and as of 2020, 23 securities have been issued through Bloxsys. They describe their product as a:
system, which involves various trust structures and issuers, allowed for the creation of asset-backed securities on a private permissioned blockchain. The system allows investors to purchase and hold these securities on the blockchain and to enter and settle secondary trades directly themselves using their nodes on the blockchain.
Founder Cedric Edmonds bio from their website
He is a reinsurer by background, first at Catlin Syndicate and then Swiss Re in Zurich, moving to Allianz Risk Transfer in Zurich in 1999. He has a background in traditional reinsurance as well as structured reinsurance. He moved to Solidum Partners in 2008 and founded Replexus in 2020.
Solidium, the company Edmonds worked at before founding Replexus, was the partner in the Red Cross’s other blockchain based catastrophe bonds.
[Edmonds] has been a source for ideas and innovation in the ILS market. In 2009 he Set up a Guernsey ICC and then in January 2010 issued the first ‘private placement insurance linked securities’ later named ‘cat bond lite’ by Trading Risk. In November 2010 these securities, which were settled over Euroclear, traded in the secondary market, the first time collateralised reinsurance had ever traded. [emphasis added]
The private placement part of that is important. Private placement instruments are never publicly listed, and do not require disclosure to the SEC. According to Prudential private capital
“The three most important features that would classify a securities issue as a private placement are:
The securities are not publicly offered
The securities are not required to be registered with the SEC
The investors are limited in number and must be “accredited”
In many ways social impact bonds, where payouts to investors are based on specific measurable outcome metrics, follow the same structure as insurance linked securities. Insurance linked securities are all about transferring the risk of payout (life insurance, meaning death, etc.) to capital markets.
These examples of community currency and catastrophe bonds projects help illustrate the movement towards integrated cybernetic environments where simulated financial, social and environmental systems blend together. Blockchain and web3 are foundational tools in these sorts of systems, especially in the areas of financial settlement and identity. The next installment in the series dives deeper on the different blockchain platforms built for these purposes, and their connection to the established global powers.
Cover image: Budget shoe store and repair shop in Kenya participating in the Grassroots Economics/Red Cross community currency project Sarafu-Credit. Source: Red Social Innovation, Red Cross
