De-Risking Acceptance Points

With newly emerging local community currencies like Encointer’s, acceptance points take a risk, especially early movers while the community isn’t fully established: They give the community credit in the form of giving out their product today in exchange for the promise to getting another product or labor back in the future. Fortunately, this risk comes with immediate upsides: new customers. However, as we have experienced in Zurich, our first community, the risk actually grows with the popularity of the system before the promises of getting something in return actually pay out.

Our first approach was to offer acceptance points a limited buyback guarantee: Up to a certain amount, the community initiators would buy the local community currency back from acceptance points to give them relief from their exposure. To a certain extent, this makes sense for all parties because the community leadership needs currency for promotional activities like handing our vouchers to try out the system with low barrier of entry. Still, this obviously doesn’t scale because a buyback guarantee ends up being a subsidy for consumption to the community which needs to be funded externally.

After one year of Leu, the most pressing issue are high balances on the accounts of the most popular acceptance points. This is painful due to two reasons:

  1. Demurrage is like a constant expense
  2. Illiquidity: As long as Leu can’t be used to pay for supplies or labor, they are illiquid
  3. Risk of total loss because the currency experiment might fail and stop to be used

This, understandably, has led the most popular accaptance points to narrow their offering (narrow the choice of products that can be paid in CC or just accept CC for a fraction of the payment).

Some acceptance points have gathered and have founded an association which shall support the CC and also protect the interests of acceptance points. Such an association could help reduce risk for businesses and also help closing economic circles. So, let’s explore what such an association could do if it had a pot of national currency as a security.

The particular association of acceptance points in Zurich is called “LEA”, so let’s use this as an example, along with “Leu”, the community currency of Zurich


  1. Only formal businesses who accept Leu as payment can join LEA
  2. There is only one association like LEA in the Leu community
  3. Someone is willing to provide an initial reserve pot to reduce the risks for all members of LEA in solidarity. It can be the businesses themselves or an external grant


  1. The reserve is used in sustainable fashion.
  2. The case of total loss is treated fairly among members: Who took more risk should be allocated a higher share of the reserve
  3. There may be no disincentive to accept new members to LEA
  4. There has to remain a strong incentive for members to help closing economic circles
  5. Making a high earnings in Leu should be a reason to celebrate, not to worry

A simple buyback guarantee without a refill mechanism would conflict with requirements 1,3,4 and possible 2 as well.

Proposal: Community Dissolution Reserve (CDR)

Such a reserve is distributed to all members of LEA in the event that all members unanimously decide to no longer accept Leu because Leu is considered a failed experiment. In consequence, this event will dissolve the association itself as well.

In the event of dissolution, the reserve is paid out to all members according to the risk and loss they took during the time they accepted Leu.

In concrete terms:

  1. The higher a businesses’ Leu balance B at the time of dissolution, the higher the share
  2. The higher the cumulated demurrage D a business has suffered, the higher the share

A simple intuition could be to divide the reserve R according to the formula: S_i = R * (B_i + D_i) / (sum over all members(B + D))

If a new business applies to join LEA which is expected to be very attractive to Leu holders, there could be a disincentive for existing members to accept the new member because their share in the reserve will go down. I would not expect that this is problematic because with new popular businesses accepting Leu, actually, the risk of failure of Leu as a whole also decreases.

Of course, LEA is free to come up with rules for entry and exit of members. Maybe members need to buy into the reserve guarantees and the above formula is applied upon exit of a member.

What amount of national currency should be in such a CDR, initially? One way of approaching this could be to sum up the exposure of all current members and state that the reserve should at most that much (because it is more, the members have an incentive to dissolve):

R < B + D

Another guideline could be to incorporate the circulating total supply T of Leu (along the reasoning that a dissolution of Leu could start by all individual Leu holders quickly cashing out all their Leu as long as they still can (the equivalent of a bank run, just that the acceptance points would be the target)

R < T

The problem with both formulas is that the inputs change over time and that the risk factor tends to grow with success of Leu. T is an indicator of community popularity. But this just means that R should be a level that the members feel comfortable with at the time of raising the initial R. Should Leu be a big success, there should be significant returns for LEA members that can be used to augment the reserve.

Considering requirement 4 (incentive to close economic circles: Pay your suppliers and workers in Leu), the reserve R should be significantly smaller than the upper limits in the above formulas

Very interesting idea!

Risk of total loss because the currency experiment might fail and stop to be used

I can see the CDR to be a very smart way to fully remove this issue.

You stated two more issues that acceptance points currently experience.

Demurrage is like a constant expense
Illiquidity: As long as Leu can’t be used to pay for supplies or labor, they are illiquid

The old idea limited buyback guarantee helps to remove some of this pressure for the acceptance points. (arguably not in a sustainable fashion).

Can you maybe elaborate if and how the proposed Community Dissolution Reserve (CDR) could also have a positive impact on removing immediate pressure from demurrage or illiquidity? or whether CDR is meant to complement the old guarantee…

I don’t think the CDR can provide relief for demurrage by itself. However: it can deliver fairness: the more you suffered from demurrage, the higher your share in the reserve

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On the matter of raising and growing the CDR:

Our experience with Leu shows that some people report a bad concious when they consume goods and services and pay with Leu, because they got the Leu “for free” and they feel like the acceptance points make them a gift by accepting Leu. While I disagree with this reasoning, it also provides an opportunity:

Why don’t we offer the individual community members a way to donate national currency to the CDR very easily? Could even be integrated in the app with a hint: “Until now, you have spent X Leu, congratulations! If you wish to donate to Leu’s reserve fund, you can do so with a click (learn more…)” (google pay, paypal, twint…)

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I like the Idea of a CDR and also your donation Idea @brenzi.

Another Idea, next to the CDR would be a demurrage relief fund (which could be funded by community members).

The Funds of this Fund could be used to buy back LEU in the national currency from PoA’s up to the point of the monthly Demurrage they “suffered”. But not in a matter of walthiest PoA gets priority in buyback but all are treated equally to the point, that no FIAT is left.
An example:

PoA Alpha has a demurrage of 42 LEU per month
PoA Beta has a demurrage of 12 LEU per month
PoA Centauri has a demurrage of 236 LEU per month

The demurrage relief fund has monthly donations of 74 national currency equivalent per month.

Alpha can sell back 31 LEU (73% demurrage reimbursed)
Beta can sell back 12 LEU (100% demurrage reimbursed)
Centauri can sell back 31 LEU (13% demurrage reimbursed)

In this case the PoA’s are incentivized to use as much Leu as possible but for the rest, the chances of getting the full demurrage reimbursed is high.

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It may cause confusion if we start raising donations from the community for different things separately: CDR, DRF. IMO there should be a single donation target and a transparent strategy, how funds are used.

I don’t understand why you want to treat all PoA “equally”. You may end up spending the money where there is no pain and failing to allocate it to where demurrage causes pain. Small Leu balance/demurrage (i.e. your Beta) doesn’t mean that it’s a small business. Can you elaborate why your distribution mechanism is better than pro-rata demurrage paid?

I agree!

I see the point of no pain. The Idea of treating it equally was that PoA’s who do “their best” to use, pay out, spend LEU are awarded as well. Otherwise you can just do nothing and get your demurrage/pain paid/reduced anyway.

one more advantage I didn’t see before: The CDR can also mitigate the iliquidity pain point:
If LEA has a CDR, it could grant CHF loans to its members against LEU collateral. So, if a PoA has a high Leu balance but needs CHF short-term to pay bills, it could deposit Leu with LEA and get a loan in CHF.
It would be up to LEA if such a loan would be interest-free, a bond with fixed markup or subject to a compound-interest (hopefully not the latter)

Such loans would not weaken the guarantees of the reserve, even if PoA’s default, because the Leu which need to be “insured” are with LEA. However, demurrage will have to be beared by LEA from that point onwards.

I think this is a unique idea that could serve as a catalyst for businesses to accept an Encointer currency. I have a few things I would like to add to the discussion.

R < D + B is a good start, but I believe there are some concerning consequences if this precedent is set. If the limit of the reserve is directly proportional to the losses incurred by demurrage it may cause a global trend for communities to boost the demurrage rate with the hopes of raising more capital from an angel investor, VC, or donations. I believe a world where such a reserve isn’t directly proportional to demurrage would see a lower average demurrage rate per community than a world where it is directly proportional.

I also think that the dissolution payout as stated has tunnel vision that is biased toward businesses accepting the Encointer currency (i.e. the community’s association). I can imagine a scenario where a strong community bootstraps a currency and starts a healthy reserve fund only for a few businesses to join the association and dissolve the reserve, effectively ‘rugging’ the community. I would suggest that the payout businesses receive should be weighed by the association’s proportion of the total supply. So we would have S_i = R * B / T * (B_i + D_i) / (B + D) where T is the total issuance. Any leftover funds can be carried over to a new association of businesses.

You mention that the reserve should be funded with national currency. While this makes sense on a local level, it requires a lot of trust in legal entities to divvy out the reserve fairly in the event of a dissolution. With Statemine’s USDT, we have an HRMP/ XCMP capable asset that can be used globally and payouts can be totally automated by Encointer pallets: the council or currency holders/ openGov vote on registering a business with the local association and the association votes on-chain if they want to dissolve the community. The downsides with this are that it’s far less user-friendly for donors, it puts ultimate trust on Tether, and would require some insane coding wizardry. Something to consider nonetheless!

Those are my thoughts on this idea for now. I really like the concept! It could really help businesses take the steps necessary to close those economic loops.