Encointer: Decentralized UBI & Privacy Protocol

• Encointer is a blockchain-based protocol that deploys privacy-preserving local community currencies through universal basic income and periodic in-person proof-of-personhood ceremonies.
• It features a layered architecture leveraging Polkadot’s relay chain, specialized parachain logic, and confidential TEE-protected sidechain shards for efficient and secure transactions.
• Demurrage dynamics and adaptive fee models ensure monetary equilibrium and incentivize currency circulation, while robust Sybil-resistance is maintained through randomized, in-person validation.

Encointer is a blockchain-based protocol for the deployment of privacy-preserving, local community cryptocurrencies with universal basic income (UBI) and robust Sybil-resistance. It leverages trusted execution environments (TEEs), periodic randomized in-person proof-of-personhood (PoP) ceremonies, and a hierarchical, layered blockchain architecture to enable local UBI issuance, demurrage-based monetary equilibrium, and scalable, privacy-by-design transaction processing. Encointer operates as a parachain within the Polkadot ecosystem, inheriting its security and consensus, while providing each community with an independent, confidential sidechain ledger.

1. Layered System Architecture

Encointer’s architecture is structured into four logical layers:

• Layer 0: Relay Chain The protocol employs Polkadot’s Nominated-Proof-of-Stake (NPoS) relay chain as its global root of trust, achieving block time of approximately 6 seconds and finality via GRANDPA. This layer confers shared security across Encointer parachain and its shards.
• Layer 1: Parachain The Encointer parachain contains protocol-specific logic, including the registry of attested TEEs (SubstraTEE validators), governance parameters for all local currencies (UBI amount $R_C$, demurrage rate $(\delta)$, fee coefficient $(\alpha_C)$, ceremony schedule), and commitments to ceremony assignments. Transaction fees are paid in DOT; no native Encointer token exists at this layer.
• Layer 2: Sidechain Shards Each local community currency $C$ maintains a confidential TEE-protected sidechain shard, which executes fast local transaction logic, money supply maintenance, demurrage, and PoP ceremonies.
• Off-chain/Client Layer Mobile and desktop wallets facilitate user interactions: ceremony registrations, transaction submissions, and attestation verification.

Principal actors include: participants (users), sidechain TEE validators, parachain collators, relay-chain validators, and the Encointer Association—a Swiss legal entity functioning as a root-of-limited-trust (parameter proposals, TEE attestation keys, subject to community referenda with a 2/3 blocking threshold) (Brenzikofer, 2019).

2. Universal Basic Income Minting and Scaling

UbI in Encointer is realized through periodic, concurrent PoP ceremonies conducted every 41 days across all community currencies. Each validated participant in community $C$ receives $R_C$ new tokens per ceremony. The system enforces a schedule $T_C$ such that all communities run their ceremonies at local “high sun,” rendering simultaneous attendance at multiple geographically dispersed locations physically impossible.

Let $N_i$ be the number of validated participants for ceremony $i$; then total issuance at $i$ is:

$(\delta)$0

Money supply across ceremonies follows the recurrence:

$(\delta)$1

where $(\delta)$2 is the demurrage factor applied per period. In stationary regime $(\delta)$3, equilibrium supply is:

$(\delta)$4

For example, with $(\delta)$5, $(\delta)$6 token, and $(\delta)$7 (7% demurrage/month), equilibrium supply converges to approximately $(\delta)$8 tokens, adjusted for continuous compounding in simulation (Brenzikofer, 2019).

3. Demurrage Dynamics and Purpose

Demurrage, defined as a negative interest rate applied periodically to all balances, serves to counteract nominal inflation from ongoing UBI issuance, ensuring near-constancy of $(\delta)$9 purchasing power and incentivizing currency circulation (velocity). For discrete demurrage per period, after ceremony:

$(\alpha_C)$0

For continuous time with annual rate $(\alpha_C)$1 over $(\alpha_C)$2 days:

$(\alpha_C)$3

Demurrage systematically “burns” a fraction $(\alpha_C)$4 of the outstanding money supply $(\alpha_C)$5 before new UBI minting. At stationary equilibrium, a share exactly $(\alpha_C)$6 of supply is redistributed each cycle, closing the monetary loop and decoupling aggregate money supply from indefinite growth (Brenzikofer, 2019).

4. Proof-of-Personhood Ceremonies and Sybil-Resistance

Sybil attack prevention utilizes in-person, pseudonymous PoP ceremonies conducted in five distinct phases:

1. Registration: Users submit confidential registration transactions, optionally including prior ceremony reputation proofs, to the sidechain.
2. Randomized Assignment: TEEs algorithmically generate non-overlapping, random meetup groupings with the following constraints: groups of size 3–12; ≤25% of members without “reputation”; minimized group repetition; and random physical locations drawn from a large community-specific set.
3. Physical Meetup and Claim Broadcast: All participants mark presence and broadcast ephemeral key-token claims within an attestation timeout window, enforced by travel speed bounds ($(\alpha_C)$7 km/h).
4. Mutual Attestation Exchange: Pairwise digital signing of claims among group members.
5. Witness Submission and Validation: Attestation bundles are submitted to sidechain; only majority-consistent, adequately-attested participants receive PoP certificates and UBI minting.

Security assumptions hinge on the physical constraints and unpredictable group assignment. The critical condition is that in each meetup, the majority of “reputation” participants are honest and timely. Attacks such as videoconferencing, surrogate substitution, or flooding are mitigated by the protocol’s assignment and witness rules or are explicitly out of scope (Brenzikofer, 2019).

5. Privacy, Confidentiality, and Auditability

All sidechain state—balances, ceremony assignments, and attestations—is maintained inside Intel SGX or ARM TrustZone enclaves (SubstraTEE), ensuring both confidentiality and integrity; only encrypted or attested state commitments are emitted on-chain. Each ceremony utilizes a fresh ephemeral pseudonym key-pair, precluding longitudinal balance linkage.

Confidentiality assumes TEE vendor attestation remains robust. If TEE integrity is compromised, privacy may fail. Auditors may independently run attested TEE instances to check code validity; on-chain, only hashes of enclave code are stored, not operational logs, reflecting a trade-off between privacy and external auditability (Brenzikofer, 2019).

6. Purchasing-Power Adjusted Transaction Fees

Transaction fees in Encointer are determined by each community’s fee coefficient $(\alpha_C)$8 set via on-chain governance, and are denominated as a fraction of periodic UBI:

$(\alpha_C)$9

For example:

• Low-income community: $C$0, $C$1 leads to Fee = $C$2 tokens.
• Higher-income community: $C$3, $C$4 yields Fee = $C$5 token.

Fees thus remain normalized to ~1% of periodic UBI, automatically adjusting for local purchasing power differences. This ensures equitable cost of transacting across heterogeneous economic communities (Brenzikofer, 2019).

7. Security Analysis and Threat Model

Major adversarial classes addressed include:

• Sybil attacks (multiple UBI claims)
• Double-spending within local currencies
• Ceremony collusion or sabotage
• Spam registrations
• TEE side-channel or enclave compromise

Sybil resistance derives from concurrent, randomized, in-person ceremonies. Double-spend protection uses either UTXO-style or account-based spending rules enforced by TEEs. New registrations by attackers are throttled by limiting no-reputation participants per meetup. Demurrage disincentivizes speculative hoarding and spam. The Encointer Association may revoke compromised attestation keys. Security guarantees depend on the honesty of recruited reputation bearers and probabilistic bounds from group size and ceremony frequency. The paper does not provide a formal proof, relying instead on analysis and parameter studies (Brenzikofer, 2019).

Encointer implements locally governed, privacy-preserving UBI currencies whose monetary and security properties, including Sybil-resistance, adaptive money supply, purchasing power normalization, and confidentiality, are supported by an intersection of blockchain, TEE, and in-person ceremony design, all underpinned by the Polkadot platform’s verifiable consensus and scalability features.