Worldcoin – Who Pays for Universal Basic Income (UBI)?

5/5 - (3 votes)

The universal basic income (UBI) in Worldcoin isn’t directly funded by the Worldcoin Protocol but will eventually require a separate funding source, such as a share of profits from an AI Lab. There’s no guarantee or explicit sustainable protocol rule.

However, the Worldcoin Whitepaper envisions the possibility to set a 1.5% annual inflation rate, essentially taxing existing Worldcoin token holders.

So the UBI is paid by an external funding source that’s either donors or WLD token holders who implicitly lose 1.5% of their asset value per year.

A Few Words on Worldcoin

Worldcoin is a centralized startup launched by the founder of OpenAI Sam Altman. It is centralized because its major assets — such as the app, the WLD tokens, and the Orb device — are controlled by a small team of early investors and developers.

The Worldcoin marketing strategy is to distribute free tokens to every user who went through Worldcoin’s “Proof of Personhood” identity mechanism by means of scanning their biometric details (e.g., eyes) using the Orb device.

To prevent privacy leaks, Worldcoin uses “zero-knowledge proofs” so that your personal identity data is never sent to a central server once verified. Instead, the ZK-Proof represents a digital fingerprint of the data that isn’t supposed to leak personal information.

So the idea is that you can verify your humanity without revealing any personal information such as your biometric data. πŸ‘οΈ

In case you’re interested, we’ve published an in-depth article on ZK technology on the Finxter blog that’s relevant to this topic as well:

πŸ’‘ Recommended: What is a zkEVM Rollup? A Simplified Guide to Ethereum’s Most Promising Scaling Solution

Worldcoin Token Distribution

The plan of the Worldcoin Foundation is to distribute 10B (billion) WLD tokens within the first 15 years. After that, they plan for an annual inflation rate of 1.5%.

The Worldcoin foundation controls all 10B tokens, however, to spur initial growth, they plan to distribute 7.5B tokens to the Worldcoin Community, keeping 25% of all the tokens for the team and investors.

You can see their planned supply schedule in this graph:

You should be aware that the Worldcoin Foundation can change this token distribution at any time.

The Worldcoin Foundation has complete (centralized) control of all tokens and future token releases: πŸ‘‡

Interestingly, the Worldcoin Foundation raised its own token allocation from 20% to 25% due to unforeseen difficulties. As reason they state that development “[…] proved to be more complex and costly than […] initially anticipated”! This means they could (and already have in the past) increase their token allocation at any point in the future.

See the following screenshot from their whitepaper: πŸ‘‡

So now for the WLD token distribution.

The initial (one-time) token distribution of up to 10 billion WLD during the first 15 years will be distributed to new and existing Orb-verified individuals and Orb operators.

Universal Basic Income (UBI) using Worldcoin Token WLD?

Many view this as “UBI – Universal Basic Income” but due to the lack of long-term sustainability, Worldcoin uses the term “user grant”:

Now here comes the interesting part that answers the question of where the money for UBI actually comes from:

πŸ§‘β€πŸ’» Whitepaper: Long-term sustainability of user grants. To achieve the goal of providing WLD tokens to every living human being (subject to the β€œAvailability” noted above), governance may also decide to phase out the recurring grants after a few years and only keep the Welcome grants, thereby reserving the remaining tokens for new users in the future. As explained above, 15 years after launch, governance may also decide on enacting an inflation rate of up to 1.5% per year, if this is deemed necessary to continue the user grants mechanism into the future.

While Worldcoin distributes initial user grants and may continue to do so using the annual inflation rate of 1.5% after 15 years, the Worldcoin Protocol itself does not have an explicit plan to generate profits and redistribute them via UBI.

Instead, it mentions that the UBI “requires a separate funding source,” such as “a share of the profits generated by an AI Lab”.

Neither the separate funding source nor the AI Lab is explicitly guaranteed in the whitepaper; Worldcoin strives only to provide “the globally-accessible digital financial rails” while solving the problem of a single human claiming multiple identities or an AI claiming one or multiple human identities.

However, if implemented, there is the possibility of setting an annual inflation rate of 1.5% and, thereby, essentially taxing existing WLD token holders to pay for the UBI. Ignoring all other protocol influences, such as internal growth or external fiat inflation rate, the existing token holders lose 1.5% of their value to fund the UBI.

TLDR: External funding mechanisms or donors, as well as existing token holders will pay the universal basic income (UBI) of Worldcoin.

Does This Work Long-Term?

Nobody knows. But let’s try to answer this question. I’m not very bullish on the long-term prospects of WLD compared to king crypto Bitcoin though.

A good way to analyze every crypto project is to examine the “steady-state” scenario where all tokens are distributed.

How does the project fund all operations without the initial token distribution rewards and overly-optimistic retail speculators pumping the price?

In this steady state scenario, either the UBI will be paid by (1) an external funding source (a possible “AI lab” is mentioned but could be any donor) or (2) by infinite inflation.

(1) Assuming the first case, i.e., there’s external capital available for the UBI. In that case there’s no need for the WLC token in the first place because we could also pay the token out using Bitcoin rails that are already proven and efficient using second-layer technologies without introducing an inflation rate.

From Silicon Valley founders, like Worldcoin’s Sam Altman, I have learned that to replace an existing technology with network effects, the new technology needs to be 10x better. But WLC as a stand-alone token is actually worse than BTC as a stand-alone token due to the inflation rate, so I don’t expect this to be the disruptive element of the Worldcoin Startup venture.

What may be innovative is the “proof of humanity” devices such as iris-scanning devices (The Orb). In order for the protocol to succeed and become a decentralized financial infrastructure (currently, it’s as centralized as it gets), the Orb technology needs to be open-sourced.

This is also the roadmap described in the whitepaper.

As soon as the proof of humanity technology is open-sourced, however, the moat around the protocol decreases, and existing decentralized payment protocols with massive network effects, i.e., Bitcoin, can also use the technology. We could easily imagine a layer two solution for UBI built on Bitcoin and paid for with explicit funding rather than inflation.

This leads us to case (2).

Of course, inflation is one option but it will cause the monetary unit of WLD to be inferior to BTC and capital naturally flowing from WLD grants (“UBI”) to Bitcoin as people sell WLD to buy Bitcoin.

But with billions of people dumping inflationary WLD to buy deflationary BTC, the protocol will quickly die out. The pump is over. The incentive to scan your iris and receive pennies is negligible.

This long-term risk scenario would likely kill the project.

I expect, however, that the hype for free money and the decade-long incentive scheme of Worldcoin will carry the protocol a couple of years into the future, paid for by stupid money, i.e., retail investors who purchase the WLD token for speculation.

πŸ§‘β€πŸ’» While I like the general idea of using crypto for UBI, it seems that WLD is a high-quality and well-funded but completely centralized crypto project appealing to good-meaning retail investors with a carefully-crafted mid-term pump and dump scheme built into the protocol that ensures that early VCs can sell their premined tokens to retail before the incentive mechanism stops working, latest at the ~15y boundary.

This is only my humble opinion and I may be wrong. I think you’ll fair better with this project (no investment advice in this article though):

πŸ’‘ Recommended: Bitcoin Whitepaper Cheat Sheet (PDF Download)