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CityCoins, ALEX and Direct Democracy
November 5, 2021

We at ALEX Bitcoin DeFi want to contribute to acknowledging the success of MiamiCoin and the CityCoins community. Though recently covered by Vitalik on his excellent post “Crypto Cities” we consider MiamiCoin to be one of the most under-reported stories in crypto and municipal finance of the past several months.

As of Nov 4, 2021, the value of the MiamiCoin City Wallet is over $17 million dollars. Mining began on June 8, 2021. At any time, Mayor Francis Suarez can elect to accept the reserve wallet to access the treasury for use by the city.

There was no pre-mine, no ICO, no primary issuer. MiamiCoin was launched by the community. There were 20 individuals that launched it, 20 independent miners that signaled the beginning of mining.

A future of over 200 CityCoins is coming. Already AustinCoin seems ready to launch in the next weeks, San Francisco is in talks and NYC Mayor-Elect Eric Adams says he wants to turn New York into a crypto-friendly city, saying of Mayor Francis Suarez, “He has a MiamiCoin that is doing very well — we’re going to look in the direction to carry that out,” in an interview on Bloomberg Radio.

How Does It Work

To summarize how MiamiCoin functions, there are essentially two components, miners and stackers. The miners give away Stacks ($STX) to be put in a smart contract for the opportunity to win MiamiCoin ($MIA). The $STX that the miner’s put into the mining smart contract goes into the city wallet of Miami (30%) and to the wallets of stackers (70%). The stackers stack their $MIA and receive a passive $STX reward and limit the $MIA supply on the market. The stackers can take their $STX reward and mine their own $MIA or stack the $STX to earn $BTC.

The system allows holders to earn Bitcoin and Stacks yield while simultaneously generating crypto to fund their city.

Revolutionizing Municipal Finance

If your city wanted to raise funds for a new project, what were the options available:

  • Taxes: The least popular option. The taxes are paid by local residents and businesses that often feel taxed enough already. Raising taxes decreases economic morale and reduces the local employment dynamic.
  • Requesting State or Federal funds: This carries political risk, there’s no guarantee the State or Federal government will approve of the spending.
  • Municipal Bonds: Municipal governments can issue bonds to attract investors as a loan to be paid off at fixed rate until maturity.

Muni Bonds carry interest rate risk, specifically sovereign interest rate risk. Municipal bonds are subject to the yield of the US Treasuries curve. The bond is often issued at 15 years or 30 years. If interest rates rise the bond’s price goes lower, investors then stand to lose money if they want to sell the bond before maturity. Muni bonds also carry credit risk, the municipality may lose its tax base and go bankrupt, defaulting on bond payments. There’s liquidity risk too, if the bond becomes illiquid with few buyers or sellers, you may be “stuck” with bonds as prices are tanking. Lastly but not least, call risk exists, referring to the potential for an issuer to repay a bond before its maturity. Conditions like interest rates decline could trigger an issuer to do so and as many municipal bonds are “callable,” investors could be exposed to such risk.

More importantly though consider this, how many average citizens do you know of that hold muni bonds? Hardly any. The muni bond market is hardly a “community” so much as groups interested in the tax discounts municipal bonds offer.

(Source: Federal Reserve as of September 30, 2020)

Yields on municipal bonds are typically quoted in terms of their tax-equivalent yield, which represents the equivalent yield on a fully taxable bond. Because of their tax-exempt status, municipal bonds typically offer a lower yield than their taxable fixed income products. The taxable equivalent yield formula (TEY) is expressed as:

The table below shows comparison between Tax-free yield and Taxable equivalent yield at each level of rate of return as well as return between different tax brackets.

Especially for US taxpayers, municipal bonds interest payments are exempt from federal income tax and state income taxes for in-state residents. This very feature provides more incentives for wealthy individuals placed at higher tax brackets, explaining the above table of muni bonds ownership dominated by mostly by high income individuals who could maximize their tax saving. To quote the Wall St. Journal this past July, “Advisers to high-income investors say the potential for higher taxes has been a focus of conversations in recent months, drawing attention to munis.”

Now Enter MiamiCoin

Compared to traditional funding options, CityCoin eliminates social risk, political risk, interest rate risk. Since no one is being asked to pay taxes to fund MiamiCoin, you do not have social risk. There are no political battles with State and Federal governments. MiamiCoin is not a fiat currency leveraged asset, as such it is not impacted by sovereign interest rate risk.

Therefore, investing in CityCoins is like accessing the equity component of a city’s capital structure, as opposed to the fixed income component (muni bonds). Once there are dozens of CityCoins, people can invest in diversified portfolios of different Citycoins.

The City of Miami — Trends and the Status of Debt Obligation

Source: Disclosure by City of Miami, Finance Department

This doesn’t mean there isn’t any risk. As MiamiCoin is backed by Bitcoin via Stacks, it’s price may exhibit the same high volatility. To give an idea of how volatile, the annualized volatility of Bitcoin is approximately six times great than the annualized volatility of the SP500. It’s also possible that if everyone sold their MiamiCoin at once the price could drop to near zero. With technology comes technology risk, though the Bitcoin blockchain is the most secure network in human history, any project involving significant funds will attract hackers that search for protocol exploits.

Direct Democracy

What we appreciate most about MiamiCoin’s success is the civic engagement it creates. Municipal bonds are a financial instrument. Period. MiamiCoin has unlimited potential because it is a unity project.

The opportunity for citizens to be involved and feel even a small piece of ownership cannot be underestimated. CityCoins creates a world where the citizens have a positive outlook on what the government does because they have a stake in it, and the government has a stake in them. There is minimal civic engagement with municipal bonds. With MiamiCoin holder’s worldwide have a direct interest in the continuing prosperity of Miami City, and are therefore more motivated to care about and participate in local elections (non-residents can participate through political organizing).

Another key feature and distinction is that MiamiCoin is programmable and municipal bonds are certainly not. This further increases community participation by allowing developers and other content creators to use the platform to add value to the city. The possibilities are endless: from holding even a single $MIA providing “special access” and discounts in Miami City, to token holders being able to vote on what they want to spend the money on, the purest form of direct democracy.

MiamiCoin is a statement that people have value: MiamiCoin values their energy, their creativity and commitment.

MiamiCoin, ALEX and Beyond

In all this we are reminded of Michael Faraday’s remark asking “What good is a newborn baby?” about his early discoveries in electromagnetism.

We are both learning about the potential of MiamiCoin as well as helping to create it through new applications the Stacks community is continuously building.

ALEX for instance will be fully integrated with CityCoins, increasing the capital efficiency of CityCoin holders by providing a full service DeFi platform. On ALEX they’ll be able to:

  • Use an advanced DEX (Decentralized Exchange), with both AMM (Automated Market Maker) and off chain order-book, so they can exchange their tokens and CityCoins.
  • With ALEX CityCoins can be used as collateral for borrowing with a competitive LTV (Loan-To-Value) without risk of liquidation, with the loan put to work liquidity mining or pursuing other opportunities.
  • Lending wrapped BTC, stablecoins, and any Stacks or ALEX native tokens
  • Earn fixed-rate and fixed-term interest on deposits
  • Obtain high yield through yield farming
  • Participate in launching new projects by funding bootstrap liquidity pools on our launchpad

Figure 1: See explanation in footnotes

Notably, being able to borrow without liquidation risk is a game changer with highly volatile assets. As mentioned previously, the annualized volatility of Bitcoin is six times higher than that of the SP500. On other DeFi platforms you must constantly manage your LTV of your collateral to avoid liquidation and high penalties. With ALEX we use dynamic collateral rebalancing pools that shift the pool weight between “risky” and “riskless” assets, to limit downside in a falling market.

Through ALEX MiamiCoin holders can borrow without concern of being liquidated, as their collateral is protected, and use the loan to yield farm or fund a new project without fear of interruption. For more information please see our Whitepaper 2:

CityCoins and ALEX together establish a decentralized financial ecosystem, one that is open, permission-less and emerges from the networking effects of communities and projects interacting.