Table of Contents:
Decentralized Democracy
It is technologically possible to construct a political system with direct/liquid democracy as a source of power. Individuals can form groups and establish common-pool resources and vote on who is going to manage those resources and on who has authority to produce laws and regulations; and enforce them; and resolve conflicts in accordance with them. Traditional financial systems can be replicated and improved by building on fiscal, monetary and risk management mechanisms such as fiat currency, taxation, budgeting and tenders, banking and central banking, securitization, insurance and portfolio investment.
Voter District
Fiscal System
A group of individuals who decided to join together creates a platform for public tenders where service providers can put up proposals for consideration by the group. A proposal must specify a personal income tax rate together with any and all additional information that may relate to services that the service provider promises to provide to the group. Members of the group then vote on proposals and pay personal income taxes directly to their service providers, or pay to cover the debt obligations [See: Public Obligations] of their service providers. Service providers compete with each other by proposing more favorable tax rates and providing higher quality services. If a proposal receives the majority vote of a group then the personal income tax rate specified in the proposal applies to all members of the group, otherwise it applies to only those who voted for it. It means that everybody pays taxes on proposals that have the majority vote. It also means that proposals that do not have majority approval are still getting funding, just not from everybody.
Delegation
Members can revoke their vote at any moment, and if a proposal loses majority support it doesn't apply to the whole group anymore but only to those who are still in support of it. Members can delegate their vote and also revoke the delegation at any moment. Entities who wish to become delegates can put up proposals for consideration by the group that must specify their commission that they receive as a fraction of tax payments that are being made by those who delegated to them. Any member can have an unlimited number of delegates and may also allow for chain delegation, where delegates can delegate their vote to other delegates in which case the initial commission gets split between delegates in the chain. If the vote is revoked by a voter personally it can't be then added again to the same proposal by their delegate, and this rule also applies in the case of chain delegation.
Management
Let's call a group of individuals who vote on their personal income taxes a voter district. Anybody can create a voter district and the creator of the district is in charge of admitting members. At the time of creation of a district the creator must specify the commission rate that the district receives as a fraction of tax payments that are being made by the district members. Districts are supposed to compete with each other for members and may specialize in different areas of interest.
Sovereign Voter District
Monetary System
Let's call a special type of a voter district that acts as a basis for a monetary system a sovereign district. It is the same in a sense that anybody can initiate one and that it provides a platform for public tenders, but it also has a currency that is tied to it. The term “sovereign” is used here not in its colloquial sense as signifying complete control over oneself, but rather to emphasize the monetary sovereignty of the underlying construct.
When a service provider introduces a proposal up for a vote in a sovereign district, it must specify an amount of currency units that the service provider seeks to receive for their services. If the proposal gets the majority vote then the amount of currency units specified in it gets created in the service provider's account, and at the same time currency units that are being paid in taxes by district members on the proposal get destroyed. Creation and destruction of currency units directly alters the overall currency supply. Basic voter districts can only redistribute the currency created by a sovereign district.
The process of currency creation and destruction can be characterized as district members taking a loan from themselves, and then incrementally paying it down with their taxes. The money loaned is managed by the service provider who created the proposal for the loan. Of course any loan always contains a possibility of default, and this is a risk that members need to evaluate for themselves and need to be able to insure against [See: Public Obligations Insurance]. Technically, it is possible to take a loan that has the tax rate of zero which means the loan does not have to be destroyed and in effect constitutes a positive constant in the currency supply (Requirement 7). Minority voters who pay taxes on a proposal that they didn't vote for also have a possibility to shield themselves from the proposal default [See: Credit Default Swap].
Let's call a currency unit of a sovereign district a token. Let's also call sovereign district members the people. Let's also call a proposal by a service provider that is being funded by district members a bill. A bill is called active if it has the majority vote. Let's call a bill in a sovereign district that changes the supply of tokens an emission bill. Let's call the amount of tokens specified in an emission bill that are supposed to be created by the bill an emission bill value.
Administrative Division
Sovereign districts act as the most top-level administrative construct and are supposed to operate at the level of entire cities and states. There can be municipal, regional and national sovereign districts.
Regional and national level districts provide an opportunity for income redistribution. Service providers from municipal districts that have a comparatively lower income rate can submit bills in the regional and national level districts to receive additional funding.
Sovereign districts can specify a list of other sovereign districts of the higher administrative level. A potential district member must be first registered in one of the districts on the list in order to obtain district membership. Let's call a sovereign district that is tied to another sovereign district membership a complementary district.
Organization
The term service provider is defined here in relation to a voting district and can mean both governmental and private. Let's call any governmental or private entity that operates in a voting district an organization. Any entity can create an organization account that allows it to pay employees and pay corporate taxes [See: Tax Enforcement], and also to compete for taxpayer funding. So let's call any entity that receives taxpayer funding a public organization, and those who do not are just an organization. A public organization is called active if it has an active bill.
Hosting License
Each sovereign district has a separate database that keeps all transactions and voting data. The database is replicated such that multiple copies of it exist in different places hosted by different organizations who can apply to become a database host by creating a proposal and putting it up for a vote by the people. If it gets the majority support then the organization gets to download a copy of the database from other hosts who have already gotten the majority vote before that. The first host is the sovereign voter district itself. Every new transaction that is added to the database has to be validated and co-signed by every host and every host has full access to the data, and everyone else has access only to their own accounts and also to public data [See: Public Data]. Hosts can access the database by performing a query which specifies exactly the criterion that was used to select the data. All queries made by a host are visible to every other host. Transactions can be rolled back if every host has co-signed on it. At the time of creation an account can be configured in different ways depending on its type, and these configurations can't be later altered by the account creator (Requirement 4).
Let's call a proposal to host the sovereign district's database a hosting license. A hosting license is called active if it has the majority vote of the people. When a bill is created in a sovereign district it may also include a request for a hosting license that activates if the bill becomes active. All token transfer transactions that are made from a public organization account are public data. It's also worth noting that in general this type of database has a high throughput, transactions are commission-free and it is not resource intensive however there are risks of individual hosts leaking or mishandling private data and of all hosts being compromised.
Hosting License Image
Optionally, a hosting license can specify that it allows voting on the procedure of private data aggregation and sale. The license holder has to put up for a vote the computer code that is supposed to connect to the district's database and perform data selection and computations, and is supposed to output the result. Let's call the computer code that operates on the private data of the people an image. Anybody can then download the image, inspect the code, and test it on their own account or on a test dataset, and see what results it produces. An image is called active if it has the majority vote of the people. At the time of creation of an image it must also specify the price to run the image on the district's database to obtain the results it produces; and the commission rate that the license holder receives as a fraction of revenue from data sales. The revenue from data sales gets uniformly distributed among district members. Minority voters who didn't vote for the image can choose to opt out.
At the time of creation an image can be restricted by a host such that it can only be used by specific organizations. This is necessary when the data that is being sold contains personally identifiable information and can't be freely traded on the open market, and when the proper chain of custody of the data has to be maintained.
Bill
Voting districts can define their own tagging options that all bills must be tagged with at the time of creation. When delegating their vote district members can choose which tags their delegate is allowed to vote on on their behalf. Tax rate of a bill can be specified as a range of tax brackets with an appropriate bracket being determined based on an amount of tokens that is being transferred. Also the maximum budget of a bill can be specified as an absolute number of tokens and when reached it automatically will reimburse those who paid before by those who paid after the limit was reached in a uniform fashion. A bill may also specify a minimum budget that has to be reached in a certain time period and until then taxed tokens stay in an escrow account and are automatically reimbursed if the target is not reached. A bill must also specify a renewal date after which the public organization that created the bill may change bill parameters and then voters and their delegates have to confirm or revoke their votes.
Public Organization
Public organizations are separated into several distinct types that their bills must be also tagged with. First order public organizations provide their services directly to the people. Second order public organizations guide the rules of how those services must be rendered. There are three types of second order organizations that mirror the principle of separation of powers. First, legislative public organizations produce laws and regulations. Second, executive public organizations check compliance with those laws and regulations. Third, judicial public organizations resolve conflicts that may arise in a service, legislative and executive process. Let's say for example that a voter district allows one tag option named “A”. Then all available tags in that district are going to be A, A-legislative, A-executive, A-judicial.
Public organizations derive their authority from the number of votes that they have. However, the majority is not required to participate in the political process. Second order public organizations act to limit the authority of the first order public organizations in meaningful ways.There may be an unlimited number of public organizations of all types. Public organizations must establish by themselves constitutional rules and procedures that determine seniority. The exact process may be different in every case and is subject to consensus and (re)negotiation among the involved parties.
Law Enforcement
All organizations that are created in a sovereign district are subject to laws and regulations produced by the legislative public organizations of the district. First order public organizations directly enforce compliance with those laws and regulations. Then executive public organizations check if enforcement action itself was in compliance with the laws and regulations and if necessary bring action to judicial public organizations.
Tax Enforcement
Tax enforcement is a crucial service that public organizations have to provide. First, they must make sure that all organizations use their accounts to pay their employees and do not conspire to arrange payments outside their account. When an organization is using its account to transfer an employee's salary, it automatically makes all necessary personal income tax payments of the employee on all of their bills. Second, legislative organizations may develop tax codes that tax commercial and other activity and it's up to public organizations to enforce them. When an entity knows the total number of tokens it has to pay in corporate taxes in accordance with the tax code, the entity can pay its taxes by performing a special type of transfer transaction. Corporate tax revenue gets uniformly distributed among active bills of the sovereign district.
Public Property
Public property and assets that are managed by public organizations remain in ownership of the public. A voter district has to keep an account of all public assets that are under its management. Public organizations together with their district should figure out an exact way to assign public assets to district tagging options that bills are tagged with and then the district can put this information as part of a tag description. Public organizations that receive taxpayer funding from the same tag have to cooperate in their management of public assets and must find a way to most effectively divide their responsibilities among each other.
Fiduciary License
Optionally, at the time of creation of a voter district it may put a restriction on a bill's ability to become active: the bill has to be introduced to the district by a special type of account that has the majority vote in the district. Let's call the ability to introduce a bill for a vote a fiduciary license. Fiduciary license is considered active if it has the majority vote of district members. Let's call an entity with active fiduciary license afiduciary. To become a fiduciary any entity can put up a proposal for a fiduciary license up to a vote in a district that must specify the commission rate that the fiduciary is going to receive as a fraction of tax revenue on the bills that the fiduciary will have introduced; and another commission rate as a fraction of voter's personal income.
Conflict of Interest
Conflict of interest is something that should be closely considered. First, there are simple rules in place that do not allow it to perform certain actions that would cause conflict such as an entity with a fiduciary license that is submitted for a vote in a district can't use its account to also submit a proposal to be a delegate; same organization can't use its account to put a bill up for a vote that is tagged as legislative and then put up another one that is tagged as judicial. Second, public organizations have to enforce compliance with these rules to ensure that all organizations do not operate multiple accounts that are in conflict.
Financial System
Banking System
Tokens can be created in the form of commercial and consumer loans by a set of elected entities that are regulated by another set of elected entities.
Banking License
Any entity can submit a proposal in a sovereign district that must specify the parameters that determine the number of tokens that the entity can create in the form of loans. The proposal must also specify the commission rate that the entity is going to receive as a fraction of loan payments. Let's call a proposal that allows it to make commercial and consumer loans a banking license. Let's call a banking license that must specify the total amount of tokens that can be loaned with it a fixed-value banking license.
A banking license becomes active if it receives the majority vote in the district. A banking license directly increases the potential token supply. Let's call an entity that holds an active banking license a bank. There can be an unlimited number of banks. Banks make decisions about who to loan to. Loans have to specify a maturity date, however generally there are no automatic rules that enforce a loan payment and a borrower has to initiate the payment.
Deposits
Fixed-value banking license can specify that it accepts deposits and specify the commission rate that depositors receive as a fraction of loan payments. Deposits are added onto the banking license value. Revenue from the commission gets distributed among depositors in proportion to the deposit amount compared to the sum of all deposits.
Loans are drawn proportionally from deposits and from the base value of a license. And then they are further drawn proportionally from every deposit. The amount that is drawn from a deposit is not available for withdrawal.
Banking License Image
Alternatively, the banking license value can be specified by a bank as computer code that contains a scoring model. When a potential borrower applies for a loan, the computer code is supposed to connect to the district's database, select relevant data of the borrower, evaluate the scoring model and decide whether to grant the loan application or not based on the resulting score of the borrower. Let's call computer code that is supposed to make loans automatically a banking license image. Let's call a banking license that must specify the procedure of automatic loan creation an algorithmic-value banking license. The limit on automatic loan creation has to be specified within the logic of an image.
A banking license doesn't allow a bank to directly access the district's database. Also banks do not have access to the data of borrowers that was used in the process of a loan application by an image. However, the bank needs some user data to be able to construct a scoring model. So in order to construct and calibrate their scoring models, banks have to buy user data from the database hosts [See: Hosting License Image].
Central Bank
Optionally, at the time of creation a sovereign district may specify that it allows monetary regulators to set monetary policy of the district. Any entity can submit a proposal in a sovereign district that allows it to become a monetary regulator. Let's call a proposal to regulate monetary policy a central banking license. A central banking license becomes active if it receives the majority vote in the district. Let's call an entity that holds an active central banking license a central bank. There can be an unlimited number of central banks. Let's call a central bank that has a license with the most votes a primary central bank. There can be only one primary central bank per sovereign district.
Sovereign districts must specify a commission rate that central banks receive as a fraction of tax payments that are being made by the people. Revenue from the commission gets distributed among central banks in proportion to the number of votes that they have compared to the overall number of votes of all central banking licenses.
Relative Units
When central banking configuration is enabled in a sovereign district, the value of emission bills and fixed-value banking licenses may be specified as the number of relative units instead of the absolute number of tokens. The number of tokens that these contracts can create is then determined by the rate of conversion of relative units into tokens. Initially the rate starts out as one to one. The primary central bank can change the relative units rate thus increasing/decreasing the amount of tokens that can be loaned on fixed-value banking licenses and emission bills in a district. Central banking licenses must specify the limiting range of how much the rate can be changed in either direction in a time period.
Reserve Units
A sovereign district may be configured in such a way that any contract or wallet that keeps tokens must be tied at the time of creation to a banking license. When a bank proposes a banking license, the banking license value may specify the number of units of a special currency that can only be transacted by banks and central banks. Let's call the special currency used by the banking system to balance the credit supply a reserve currency. Let's call a banking license that must specify the total amount of units of the reserve currency that the bank initially holds a reserve-value banking license.
When a borrower transfers a loan they took from a bank to an account that is tied to another bank, an obligation is formed between the two banks that must be covered with the reserve currency. At the end of the day the district's database runs a netting procedure that calculates reserve obligations between the banks and automatically transfers reserve currency from one bank to another to balance their obligation. A reserve license must specify how many reserve units the license must hold as a fraction of the sum of accounts that are tied to the license.
A central banking license may specify the number of units of reserve currency that the central bank can lend to the banks in the form of refinancing. A bank can also loan excess reserves to another bank. If a bank is unable to cover its reserve obligations then the underlying banking license can't be used to make loans anymore. Customers choose which bank to tie their account to based on which bank they'd prefer to do business with in the future, such that the bank would be able to make loans by being able to cover its reserve obligations to other banks. Netting can be overseen by a clearing agency that obtained a hosting license.
Price Index
Price index is a measure of relative price changes in a sovereign district. The primary central bank is responsible for calculating and setting the price index of the district each month.
Open Market Operations
A central banking license can specify the maximum amount of tokens that can be created/destroyed in open market operations by a central bank. Active central banks can issue and sell treasury bonds which is going to decrease the overall token supply, and they can buy them back or pay them out which is going to increase it. When the limit of a central banking license is reached, the central bank can't perform operations on the open market with the underlying license anymore.
Treasury bonds must specify maturity date and nominal value in tokens or relative units, or specify the nominal value as a number of tokens that is going to be adjusted to the price index when repaid. Treasury bonds pay out automatically by creating tokens in the bond holder's account and they cannot default. Banks can buy and sell Treasury bonds from and to central banks and each other using the reserve currency.
A central bank can also buy and sell securities as part of operations on the open market. Central banks can never hold tokens. Any tokens that a central bank receives when it sells assets are immediately destroyed and the bank's limit on operations is increased by the same amount.
Exchange Rate
Two different sovereign districts can establish a bridge between each other's tokens by having their respective active central banks co-sign on an exchange rate. When tokens of district “A” are converted into tokens of district “B”, tokens A get destroyed and tokens B get created. Creation and destruction of tokens directly alters the overall token supply on both sides of the exchange. A taxpayer who is a member of two sovereign districts that are bridged can configure their account to split their tax payments between the two districts and convert a fraction of their tax payments from one token to another. Both sides can decide to suspend the bridge at any moment.
Abstract Currency
Sovereign districts can initiate and join currency unions. Currency union provides a utility currency that exists only as an abstraction: no one can actually hold it in their balance. An active central bank of a potential member district must submit a proposal to the currency union that specifies an exchange rate between the token of the district and the currency of the currency union. The proposal must be then cosigned by at least one active central bank of each member district. When a token exchange transaction between two member districts takes place, tokens of district “A” are first converted into the currency of the union and then immediately converted into tokens of district “B”. Let's call the currency of a currency union an abstract currency. Abstract currency can act as a national currency of a county, and all price tags can be denominated in it instead of tokens for convenience.
Stock Market
All organizations can issue stocks and bonds using their account. Stocks should be viewed in their traditional form and public organizations have to establish what rights shareholders have and provide protections of those rights, and shareholders on their part have to take advantage of their rights and organize. An organization account technically allows to issue an unlimited number of categories of stocks, however it must be specified at the time of creation of a category if additional shares can be issued in that category. Bonds have to specify nominal value and maturity date, however generally there are no automatic rules that enforce a bond payment and an organization has to initiate the payment.
Public Obligations
In the case of a public organization its obligations are treated differently and automatic rules do apply. Instead of going into the organization account, tax revenue automatically goes to cover obligations that the organization has. An exact amount of monthly payments is calculated based on the maturity date of a loan or bond. A fiduciary that introduced the organization has to co-sign its securities issuance and loans. Let's call the sum of all emission bills, loans and bonds of active public organizations and the total amount of open market operations by the central banks a sovereign debt.
Board of Directors
Shareholders can submit proposals to initiate a board of directors of a company whose stock they hold. Proposal must specify the number of seats on the board and the number of additional shares to be issued that board members are going to receive as compensation. The proposal is approved by the majority shareholder vote.
Any entity can then submit a proposal to become a board member that can specify the commission rate on trades of the stock that the potential board member is going to receive. Proposals with the highest number of shareholder votes get the seats. Also board members can be financed indirectly by shareholders if shareholders chose to do so [See: Portfolio].
Financial Organizations
There are special types of organizations that provide basic financial services that allow it to manage investments and risks. These are by no means a complete replacement for traditional financial institutions that provide services and products that are infinitely more complex. However they do provide a set of automated rules that guarantee certain behavior and restrict a set of possible actions. Also additional rules apply when these organizations receive taxpayer funding.
Rating Agency
Rating agency is a special type of organization that at the time of creation must specify a set of available rating options and then can assign these options to securities. Other entities that hold and trade securities can then consume these ratings in order to restrict the scope of securities they are allowed to perform operations with. A rating agency must specify one commission rate on trades of securities that use the agency's rating; and another commission rate on revenue of entities that hold securities that use the agency's rating.
Stock Exchange
Exchange is a special type of organization that lists organizations whose shares and bonds are allowed to be traded on it; and is in charge of admitting members who are allowed to trade on it. When an organization is being listed on an exchange, it may agree to restrict a direct sale of the organization's securities and only allow the sale through the exchange. At the time of creation an exchange must specify the commission rate that it is going to receive as a fraction of trade operations. It may also specify a list of ratings that securities must have in order to be allowed to be traded on the exchange. Rating agencies receive commission from trade operations. An organization can be listed on multiple exchanges. An exchange has an ability to stop trading on certain securities for a limited period of time.
Portfolio
Portfolio is a special type of contract that can hold securities and tokens. Portfolio is restricted such that it only allows buying and selling securities, and can't be used to make a transfer transaction of its assets. At the time of creation of a portfolio it may be restricted such that it can only trade securities on specific exchanges and can only hold securities with specific ratings (Requirement 11). Rating agencies receive commission from portfolio revenue. A portfolio may specify the commission rate on premium when assets are sold and the commission rate on securities yield, that the portfolio manager receives. A portfolio can hold shares of other portfolios however portfolios can't buy each other shares and generally create cyclical dependencies of multiple portfolios.
When a portfolio holder has an obligation that is supposed to be financed by the portfolio, automatic asset sale may occur if the holder is unable to cover periodic payments on their obligations and if assets can be sold at a premium.
A portfolio may also specify another commission rate on its revenue that is received by the board members of companies whose stock is held by the portfolio (Requirement 12). Revenue from the commission is distributed among the boards in proportion to the share of the stock in the portfolio.
Portfolio Fund
Portfolio fund is a special type of organization that manages a portfolio on behalf of investors. It must specify a number of shares that represent partial ownership of the portfolio. It must also specify the commission rate that the fund manager receives as a fraction of revenue from selling shares.
Insurance Fund
Insurance fund is a special type of organization that manages a portfolio and provides financial insurance services. When a banking license is initially created by a bank, the bank can make an agreement with insurance funds to insure the license. Additional commission rate for the banking license must be specified that insurance funds are going to receive as a fraction of loan payments. Other instances that can be insured include individual loans, bonds and emission bills. In the case of obligations of a public organization, the insurer receives a fraction of tax payments. Insurance funds must also specify the commission rate that the fund manager receives as a fraction of insurance payments. Assets may be sold automatically to cover fund's obligations.
Pension Fund
At the time of creation of a portfolio fund, it may be specified that the fund is going to start paying back its contributors after a certain period of time and also specify a period that the fund is supposed to cover its obligations in. Let's call a portfolio fund that pays back its contributors a pension fund. Payback value is adjusted for inflation with the price index. A pension fund may also specify the commission rate that the fund manager receives as a fraction of investor contributions. Assets may be sold automatically to cover fund's obligations.
Public Financial Organizations
Exchanges, insurance, pension and portfolio funds, and rating agencies can also compete for taxpayer funding by putting up bills for the vote in a voter district. Let's call taxpayer funded financial entities third order public organizations. If a public exchange is active, meaning it has the majority vote in the district, it automatically lists all active public organizations in the district; and all district members are allowed to trade on it; and it no longer has commission on trades.
If a public insurance fund is active it automatically covers all active public organizations in the district. Tax revenue of a public insurance or pension fund is used to cover its obligations. A public portfolio fund has its shares calculated as a fraction of tokens contributed by a taxpayer as compared to the total amount of tokens contributed to the fund by all taxpayers. An active public rating agency doesn't have commission and it may restrict the scope of securities that other active third order public organizations in the district are allowed to hold.
Financial Instruments
Credit Insurance
A borrower can default on their loan. For a fixed-value license, it is going to decrease the overall amount of tokens that can be loaned with the banking license that was used to make the defaulted loan. Tokens from the defaulted loan remain locked and unavailable for being lent again until somebody repays the defaulted loan. If the banking license or the defaulted loan is insured then insurance payments that insurers receive are automatically going to go towards covering the defaulted loan. The same also applies to defaulted bonds that were insured. An exact amount of monthly payments is calculated based on the maturity date of a loan or a bond. Also bank and other commissions on the defaulted loan that is being repaid by insurance is suspended.
Public Obligations Insurance
A public organization can default on its emission bill if it's unable to provide the service that it promised. If the bill isn't insured then the people continue to pay taxes on it until it's been repaid. However, if the bill is insured then it becomes an obligation of an insurer. The same also applies to defaulted loans and bonds of public organizations however the difference is, because an emission bill has to get the majority vote, it applies to all the people which may not be the case for a loan or bond.
Revenue Share
There are several types of entities that are able to receive revenue in the form of commission payments such as banks, central banks, stock exchanges, insurance funds, rating agencies, board members, voter districts, delegates, fiduciaries and hosts (Requirement 5). These entities can issue a special type of obligation that automatically redirects a fraction of entity's revenue to the holder of the obligation. It must specify a number that determines the nominal value of the obligation as a multiple of the initial investment. It must also specify the percentage of revenue that is paid to investors and the maturity date of the obligation. Let's call a security that pays a fraction of revenue of some underlying contract a revenue share.
Credit Default Swap
When there is an emission bill, loan or bond created by a public organization that has the majority vote, the voters who didn't vote for the organization and who believe it is going to default on its obligations have a possibility to shield themselves from being stuck with its obligations after it defaults and recoup some of their tax losses (Requirement 3). A minority voter can create a special escrow account and make the initial investment by transferring the amount of tokens into it that they wish to recoup in the case of default, not exceeding the amount they have paid in taxes to the organization so far. The account must specify a maturity date before which they believe the underlying obligation is going to default. In the case of no default before the maturity date, the escrow account automatically transfers the initial investment to the organization. In the case of default, the account transfers the initial investment back to the swap holder and creates an obligation with the matching amount of tokens for the organization. Let's call the special type of an escrow account that transfers tokens in the case of default of the underlying obligation a credit default swap, and the initial investment that is necessary to initiate a swap a swap value, and the obligation of a public organization that is created in the case of default a swap premium.
The minority voter doesn't have to pay taxes to cover the defaulted obligation unlike the majority of taxpayers, and the swap holder is also going to receive a swap premium in tax payments from the majority. A voter district at the time of its creation must specify the minimum value that is required to initiate a swap as an absolute number of tokens, or a relative number of currency units if the central banking configuration is enabled.
Swap Delegation
Voters can delegate the ability to create a swap to a portfolio fund. To become a delegate the fund must submit a proposal to a voter district that specifies the commission rate that the holder of a swap receives as a fraction of swap premium. Potential swap values of individual voters are combined into a swap pool. The fund can create swaps by providing the initial investment. All pool participants have a proportional share in every swap created from a swap pool.
However, there are important limitations to the swap mechanics. There has to be a weight that adjusts individual voter's swap premium according to the amount of risk that they take. The weight has to account for the individual voting record: if the voter doesn't also support other public organizations in the same category then their weight is decreased compared to those who do. Let's call the weight that adjusts the swap premium of a voter a swap coefficient.
Asset-Backed Security
There is a special type of contract that represents a security that is supposed to hold a collection of obligations such as treasury and corporate bonds, revenue shares, loans, insurances and swaps. The security cannot hold equity. The contract must specify the number of shares. Investors who buy shares of the security receive a fraction of payments from the obligations in proportion to the total amount of shares. Let's call a security whose value is determined by the underlying pool of obligations an asset-backed security. The contract can also specify the commission rate that the manager of an asset-back security receives as a fraction of payments on the obligations.
A manager of an asset-back security and issuers or holders of obligations can arrange an agreement where issuers transfer an obligation to become a part of the security and in exchange they receive the revenue from payments that occur when investors buy shares of the security. All transfers must be finalized before the shares can be sold. Issuers receive revenue in proportion to the size of obligations that they contributed to the security.
Networking
Domain
Each sovereign district must have an IP address or a domain name that identifies the physical location of the district on the internet.
Open Source
Computer code that runs a sovereign district and its database has to be open to the public and free of charge. Anybody can download, analyze and execute the code to ensure its integrity. Software experts can also make contributions to the code. In order to apply a software update to the system, all hosts have to cosign on it and all users have to confirm the updated terms of service to be able to continue using the system.
Derivative Image
Computer code of banking and hosting license images is open source and can be used by other banks and hosts to propose their own images that somehow build on the original. An image can specify the commission rate that the image owner is going to receive as a fraction of revenue from other images that are derived from their image. For that to be possible other image owners have to explicitly tie parent images to their image. Let's call an image that is based on other images a derivative image.
If an owner of a derivative image believes that the commission rate is not appropriate in their case they can create another image that adjusts the rate of the parent image. Let's say that the rate of the image A is x, and the owner of the derivative image B believes it ought to be y, then they can create an auxiliary image C as a derivative of the image A with the rate set to y/x and set the image C as the parent of the image B. Let's call a derivative image that adjusts the parent commission rate a proxy image.
Public Data
Public data provides aggregate value of all transactions in a district and is meant as an indicator of financial health of the district. It provides the overall number of tokens that were created, destroyed, paid in taxes, exchanged and defaulted on. A banking license provides the total amount of loans, total amount of loan payments, payments that are past due and the number of tokens that were defaulted on, but not individual loan details unless the borrower is a public organization. A fiduciary license provides the number of tokens that were defaulted on that the fiduciary signed off on. A public organization provides the total number of tokens paid to it in taxes and the number of votes that it has but not individual tax payments and voting data. Individual voter data is also not accessible to the organization itself such that it can't know who exactly voted for it and how much taxes they paid to it.
Account Suspension
If a hosting, banking, fiduciary license or a bill is believed to be compromised it can be suspended for a certain period of time if all second order organizations in a district co-sign on it. During the suspension period voters of the district can vote to transfer account ownership to the district. Or they may simply decide to revoke their vote or both. In the case when a second order bill is believed to be compromised it can also be suspended if all other second order organizations co-sign on it. A district account can not be suspended but it can be transferred if all second order organizations cosign on a proposal that specifies a new district account owner and if then the proposal gets the majority vote of district members.
Software Client
Anybody can create an application that connects to the district's database and allows users to manage their accounts. Let's call an application that provides desktop and mobile user interfaces for network participants a client. Clients compete with each other by providing better user interfaces. Users can then choose to share on their social media links to bills, districts, delegates and licenses that they support.
Monitoring Image
Identity theft is an even bigger risk for the kind of system that is being proposed here than for the traditional system. To counter this threat hosts can deploy computer code that performs additional transaction validations. Let's call the computer code that is supposed to flag suspicious transactions a monitoring image. Active hosts can deploy an unlimited number of monitoring images that are executed for every transaction that occurs and that also can access the district's database, however the image can't communicate any of the data that it uses back to the host.
A monitoring image does not require a vote and it is not open source. As network monitoring doesn't under normal circumstances have any impact on the network itself, there is no need to vote on every image but only vote one time to grant authority to the host to perform network monitoring. The code that is used for monitoring must be secret for security purposes because if an attacker knows exactly how monitoring works they can find a way to circumvent the algorithm. The code may also be highly specialized to a particular domain and type of account, and may be licensed and sold as proprietary software. It doesn't mean however that open source alternatives can't exist.
Custom Contract
There is a programming language that allows writing programs that can be deployed to the network and that allow interaction with network users. It can be used to create new or extend existing contracts.
Composite Image
If there is a bank or host that holds an active image in multiple sovereign districts then it can deploy another image to any one of the districts that when executed can consolidate data from initial images. Let's call an image that is able to perform computations on the data from multiple sovereign districts a composite image. At the time of creation of a banking or hosting license image it can be restricted in such a way that it can only be executed only by specific composite images. This way a composite image can operate on consolidated raw data without exposing access to the raw data itself.
Traditional Government
Transition Process
A process of transition from the traditional form of government to decentralized democracy requires broad societal support. Political parties have to be formed and elected on the platform of transitioning to decentralized democracy. In parallel, voter districts have to be formed with the help of venture capital. Then the government has to develop the rules of cooperation with a decentralized government with regards to public property and other government assets; and move a portion of financing of governmental agencies to voter districts; and abolish the traditional government taxation in favor of the decentralized one. After the process is complete the traditional government and its three branches continue on with their duties as guarantors of the Constitution while decentralized democracy is in charge of public policy.
Government Account
At the time of creation of a sovereign voter district a special type of account can be designated that has an ability to create tokens; and set additional personal income tax rate for all district members; and set a commission on commercial and other taxes that are paid in the district. Tokens that are received in the form of taxes get destroyed. Let's call the special type of account that can create tokens and set additional taxes a government account.
Extensions
Futarchic Public Policy
Optionally, a voting district can provide a platform where any entity can submit public policy proposals. It can be seen as a separate branch of power that is co-equal to public organizations, and that guides their activities. A public policy proposal itself is just a textual document and it doesn't have any programmatic rules that can enforce it in the real world. It also does not require taxpayer funding.
An author of a public policy has to specify in a proposal the number of shares, price of a share and exchanges that agreed to list the proposal. The author receives the revenue from the initial sale of the shares. Public policies are then selected by public organizations based on their market capitalization. The author can also specify an additional commission on tax payments for bills that use their policy. Policies can have derivatives and be proxied in the same way as images [See: Derivative Image]. Also revenue shares can be tied to a policy.
Alternative Selection Policies
Simple majority vote is just one possible selection policy for proposals in a district. Other selection policies can be applied to bills, licenses and images that are being proposed, such as qualified and unanimous majority vote, flexible majority vote, ranked choice vote, quadratic vote and futarchy. The district has to specify all necessary parameters for every type of selection policy, and specify the policy for each tag.
As a result of selection every proposal gets a score. One way to convert the score into votes is to normalize the score to be between 0 and 1 by dividing it by the maximum score. Normalized score is then multiplied by the number of voters, and that's the number of votes that proposals are assigned. Proposals that have the majority vote become active. Bills that do not have the majority vote are assigned a new tax rate which equals the old tax rate of the proposal multiplied by its normalized score.
Coalition
It is possible to delegate the vote to delegates not just on one on one basis but also to delegate to a legislative body. Let's call the contract that establishes a legislative body a coalition. It must specify a list of coalition members and the terms for delegation. Members can introduce and vote on bundled sets of proposals. Voting rules must be specified such as simple, qualified or unanimous majority vote, and also if the votes cast by coalition members are secret or public. Delegation revenue is uniformly distributed among coalition members. Coalitions A and B can establish Coalition C as members. If a coalition member leaves a coalition then their account has to be transferred to their successor.
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