Web3 Network States & Subscriber Citizens: Learning from Charter Cities, SEZs, and the ZEDEs of Honduras
December 16, 2022 - 19 min read
Cloud communities will eventually be looking to link up at Web3 strongholds around the world, but what about simply making our own cities?
Introduction
The Web3 sector and digital assets more broadly are looking for safe places that they can call home. They need places which foster innovation with things like regulatory sandboxes, friendly tax and business incentives, and the infrastructure that can accommodate a wave of subscriber citizens arriving. There are millions of individuals scattered across the globe, yet their use of digital assets and interpersonal connections to each other online are undeniably strong.
Balaji Srinivasan calls these “Network States” in his new book of the same name: they’re digital, cloud-based archipelagos of individuals with pooled capital and shared interests. Think of a DAO-based network dedicated to a meditative lifestyle and ketogenic diet, for instance. These individuals will first gather online, perhaps even forming their own functioning P2P economies which rival the GDPs of small nation states. Why wouldn’t they also wish to live in a common area in which their shared values and lifestyles could manifest in the physical realm as well, if it were possible?
Balaji’s abstraction of these network states, combined with our knowledge of history, may offer us insights regarding where to look for new opportunities to establish global Web3 strongholds. El Salvador is trying out its own experiments by making its whole country into a sort of special economic zone, rolling out Bitcoin ATMs, and rebranding itself as a haven for digital assets and foreign investors. The Central African Republic has also reportedly legalized the use of cryptocurrencies in the financial markets, allowing individuals and businesses to even pay taxes via authorized entities.
While these situations are certainly interesting, it can hardly be expected that others will replicate their models without good reason to do so. For example, both El Salvador and the CAR have citizens in need of cheaper and more efficient remittance payments. Instead of focusing on countries or even major cities, we’ll consider smaller, more applicable analogies with lessons to be learned regarding the founding of network states or charter cities, if they are possible at all.
After a high-level summary of what charter cities are and several recent attempts at adopting the charter city models, we’ll discuss Balaji’s network states and how this all applies to Web3 and potentially geopolitics. Finally, we’ll discuss alternatives to charter cities, and the feasibility of creating smaller versions of them by applying lessons learned from the past.
What Defines a Charter City?
In 2009, Nobel Prize laureate and former Chief Economist of the World Bank Paul Romer proposed the concept of charter cities in a TED Talk. Charter cities are semi-autonomous municipalities with significant legal jurisdiction over their own economic, social, taxation schemes, or legal tender laws. Charter cities are effectively given a blank slate upon which to attract and allocate resources and capital, with perhaps the most promising yet being Próspera on the island of Roatán, Honduras; but more on that below.
A charter city is one in which a host nation agrees to receive external investments in efforts to build a new municipality from the ground up. It may be easier to start with the conceptualization that a charter city is actually a company with a board of directors and supporting staff to run it efficiently before extrapolating the details.
According to Romer, establishing charter cities requires that the host country should be willing and receptive. Obviously, this can get into murky territory because discussions of charter cities almost always generate controversy in some form, which we’ll get into later. The host country will also provide guarantees that it will govern the charter city’s land with some kind of leniency towards free markets and the safeguarding of property rights. The charter city and residents agree to remain under the administration of the host country without seeking independent sovereignty.
Charter cities are thus expected to differ in many ways from the nations that host them, though this poses one of the main problems with bringing such proposals forward. Charter cities would likely involve foreign investors or corporate bodies approaching local governments to tell them that their policies are not conducive to doing business without the importation of new courts, international schools, and different legal protections for residents. Without the right diplomatic spin, it could come across as downright insulting. Nevertheless, the potential benefits to the local people and economy are noble enough, but they need to be properly communicated.
Charter cities involve voluntary “subscription” by the investors and host countries. By introducing the transparency of blockchains to the concept of democracy, it may result in fewer sport stadium boondoggles, and a more efficient allocation of resources for community life.
The value proposition of charter cities hinges on three selling points. First, the host country benefits directly from an influx of capital investment, and an engine of economic growth for local residents and incoming expats. Second, that the economic dynamism and increase in disposable incomes can be scaled across the host nation after successful pilot programs are implemented by the charter cities. Third, the charter cities enjoy military protection, a more laissez-faire regulatory and tax treatment, and somewhat more flexible governance structures within the overarching structure of the host’s constitutions.
A charter city is not an easy sell to the local governments or to investors. Attempts at establishing charter cities have since made progress in places like Honduras and Madagascar, with the latter ending with a government overthrown and the charter city losing its favor with the new government. As for the project in Honduras, its success is already being placed in doubt, but it cannot be definitively deemed a success or failure without enough time having passed yet.
Hong Kong as a Model Charter City
The nearest corollary to charter cities is what’s often called a special economic zone (SEZ). SEZs were famously and quite successfully implemented by former Chinese Prime Ministers, granting more free market-oriented economic policies and flexible governmental measures in four zones, before later expanding the number to twenty. The major difference with SEZs are that charter cities are built more from the ground up, while SEZs made changes to domestic policy to establish tax and business incentives meant to attract foreign capital and technology inflows.
Another conceptualization of charter cities can be thought of as somewhat similar to the growth and development enjoyed by Hong Kong under British rule. This example works better than Chinese SEZs since HK was being administered externally by the English. Without going too far down the rabbit hole of European colonialism, Hong Kong’s governorship by the Brits from 1841 to 1997 may arguably have been due to its ability to focus primarily on commerce.
This was mainly since its safety could be guaranteed by the British crown and its navy. Once economic stability and property rights were established and demonstrably protected, the economy boomed. In other words, the government got out of peoples’ way, and stood by to make sure things proceeded smoothly. The same ethos could and should be applied to Web3 and technological developments in the digital space: set some safety guardrails, let capital flow in, and the sky’s the limit.
Special economic zones tend to demonstrate growth, though their relative performance to national statistics could be skewed by their early success, as size makes growth numbers more difficult over time. After all, SEZ laws were only established in China back in 1979, meaning these zones now have a forty-year head start on their neighboring economies.
The establishment of a non-interventionist governance model also gave early international investors the confidence to establish strong roots in Hong Kong since they knew their property rights would be respected and if needed, protected by a legal system to which they subscribed. According to Romer, the subsequent flow of capital breathed life into Hong Kong’s local economy, eventually leading it to be an international financial center today.
Hong Kong’s success story allowed it to institutionally leapfrog its counterparts, and became the envy of many cities around the world due to its economic prowess. Regardless of where one falls on the issues of charter cities, and even granted that there will always be a number of factions with nefarious intentions, proponents for charter cities want the rest of the world to follow a successful model and flourish accordingly. That is, for the purpose of this article, we will presume benevolent intentions on the part of participants.
Plans Foiled: Madagascar Leadership Overthrown
In theory, the idea or the concept of having a charter city in an economically developing country, where the ‘low-hanging fruit’ has yet to be picked. That is, there is a lot of raw natural land either in disrepair or sitting by idly. This provides extraordinary opportunities for growth if only the right conditions are put in place to cultivate it.
Proponents of charter cities see it as a perfect win-win opportunity for the cities and their host countries alike, while critics worry that the cities will end up extracting valuable resources without bringing measurable value to the host country. Unfortunately, such a controversy so far made it difficult for charter cities to gain much traction before losing steam.
One of the challenges with charter cities is demonstrated in the chart above, with successive political crises in Madagascar causing their economy to continue trending in the wrong direction.
As mentioned, there was a brief attempt to establish a sort of charter city or company town on the island of Madagascar, a former colony of the French off the southeastern coast of Africa. The then-president of Madagascar Marc Ravalomanana proposed to sell over a million hectares of farmland to South Korean industrial giant Daewoo in exchange for $6 billion of local infrastructure investments over the span of several decades. It became a controversial political issue soon after.
The proposal was immediately canceled in 2009 after President Ravalomanana was overthrown, with the new government claiming it was unconstitutional in the first place. Even putting such agreements on a blockchain wouldn’t have saved Daewoo’s deals from a hostile government and its military. This is one example of why political stability is so important to the development of a Web3 charter city, in addition to business and tax incentives. It’s difficult to say if investors will be rushing back for any forthcoming ventures.
Lost Momentum: New President of Honduras Repeals ZEDE Laws
Leading up to elections in 2009, the President of Honduras led a movement to amend the constitution, which his detractors said was an attempt to remove term limits, and even ordered the military to press forward with a referendum after the Supreme Court ruled it unconstitutional. Soldiers stormed into the President’s home in a coup d’état, and he was exiled to Costa Rica.
Following the 2009 coup, the new government of Honduras made fundamental legal changes in its constitution in preparations for establishing REDs (Regiones Especiales de Desarollo). These have also been called “Model Cities.” Apparently, the new president’s chief of staff had seen Romer’s TED talk, and invited him to Honduras to test the waters in Honduras.
Though REDs were deemed unconstitutional and after some political back and forth, the constitution was amended to allow what came to be called ZEDEs. An international body of 21 board members called the Committee for Adoption of Best Practices was also organized to manage the oversight of new ZEDEs.
Three were launched: Próspera (tech and services), Ciudad Morazán (manufacturing), and ZEDE Orquídea (agriculture). However, that’s when things got complicated rather fast. Próspera’s CEO Erick Brimen detailed the history of its inception in a recent interview on Anthony Pompliano’s podcast.
According to Romer, he was appointed as head of a Transparency Committee to oversee that the process did not become corrupted by unscrupulous speculators. In 2012, he resigned from the project in protest after discovering that the government had secretly been working on deals with a hospitality consulting firm called MKG Group from Paris. The Honduran government denied that Romer was ever involved with a transparency committee at all; needless to say, it was not a good look.
Honduran protestors opposing the sale of land to ZEDEs and foreign investors. The image contrasts with Próspera CEO Erick Brimen’s characterization of their local popularity. Image credit: Radio Progreso
In 2022, and under a new President (wife of the former ousted President from 2009), the Honduran Congress repealed the constitutional amendments which allowed for ZEDEs. However, the three existing ZEDEs are expected to be grandfathered in for 50 years, as per their international legal stability agreements. If not, the Honduran government would face significant litigation exposure to the tune of hundreds of millions of dollars or more, particularly if ZEDE investors had their land expropriated.
More than likely, there will be underhanded attempts to apply pressure so as to force investors out. For example, the Honduran government has publicly urged these firms to submit themselves to new economic regimes voluntarily. First comes the carrot, then comes the stick.
The fate of ZEDEs in Honduras lays bare the riskiest aspect of attempting charter cities in the first place, and informs any of those looking to try again elsewhere. Scalability does not have to only refer to transactions per second or block size. Scalabilityover the course of decades and centuries is what charter cities would require.
Prominent Criticisms of Charter Cities
First of all, charter cities require a host nation that is willing to cede substantial authority to a new jurisdiction, often governed by foreign interests and multinational corporations. Ideally, this would be a low- to middle-income nation with a robust population of young workers, and a relatively stable political climate.
Furthermore, since charter cities are meant to be entirely new developments, the host nation must also have a suitable site for construction, and the resources to accomplish everything in a timely manner, and up to the expected standard of specifications. This is not always easy, and can lead to extremely costly delays.
The sites chosen for charter cities are almost always sparsely populated, undeveloped, but with easy trade access via seaports. Aside from environmental concerns, charter cities also involve private investors partnering with the host nation to help finance the project, with total costs reaching hundreds of millions or even billions of dollars and decades of construction. Since this would take several political cycles to carry out, the risks of instability makes this difficult to finance at the scale needed to make it viable.
“Corruption must therefore be stymied by transparency, the separation of powers, strong property rights, and a culture which subscribes to these values.”
In addition, charter cities are controversial in that they so closely resemble the colonization of poorer countries by wealthy benefactors expecting special privileges over the locals. Even broaching the subject can often evoke opposition due to the optics of rich foreigners buying up desirable land in a poorer country, even if no wrongdoing is taking place. Corruption is almost expected, with rich speculators coming in and cutting secret deals which turn out to be exploitative of locals. Not only is this abhorrent to conceive of and morally wrong, but it is unsustainable.
However, fraud and duplicity can ruin any endeavor, as it is a part of human nature. Corruption must therefore be stymied by transparency, the separation of powers, strong property rights, and a culture which subscribes to these values. This, of course, happens to coincide with the central tenets of Web3’s ethos. For any charter city to take hold might require it to be a grassroots campaign from locals, who then “shop around” for the best fit in terms of investors.
It should, however, be expected that any “Web3 Charter City” would be strong advocates for the decentralization of power, users having a proper stake, transparency, sound money, and the rule of law. It seems far-fetched, but perhaps there is a way to start our own versions of Web3 charter cities, but first we’ll likely need to form them online as Balaji recommended.
Web3 Network States and “Subscriber Citizens” Looking For a Home
As touched on earlier, Balaji’s network states, or cloud communities, could first take shape in the digital world before forming physical strongholds where they are most welcomed. In fact, his book outlines the potential evolutionary processes that are already underway in many ways from the formation of cloud communities up to growing a network state’s physical footprint in strategic locations based on ideal location stacks. This could involve good weather, healthcare services, natural beauty, cost of living, religion, niche lifestyles, and so on.
Eventually, community members become concentrated enough to form political blocs, and therefore seek political concessions and in extreme cases, even diplomatic recognition. This could be more readily accomplished if the locale is small enough, though political stability must be considered as well in order to find the optimum balance. Once this is achieved, major developments can move forward as wealth accumulates and time horizons lengthen for investors.
Aside from the already well-known places like Dubai and Singapore, New York City, San Francisco, and Miami also come to mind as obvious Web3 hubs. Some other places have also been seeing the new trend, and are courting investors heavily. However, large places like these definitely carry expensive costs, and large swathes of the population would be either unaware or indifferent to Web3.
That means no Web3 nirvana, and almost no noteworthy or effective footprint as a political bloc. Thus, the infrastructure, luxury amenities, and convenience afforded to large, fancy cities also makes it hard to recreate the breathtaking potential of a bespoke Web3 City.
Carlton Landing, Oklahoma serves as an example of what aspiring charter-city citizens might want to crowdfund, if land were available and enough people “subscribe” to a given lifestyle.
On the other hand, there’s a lot of empty land out there just waiting to be turned into a community fit for modern living. Though not Web3, Carlton Landing in Oklahoma is a resort community with a variety of unique “pocket neighborhoods,” each with distinctive features and architecture like courtyards, parks, and fountains. They nevertheless remain interconnected to promote a sense of community. If the right investors were interested, a quiet lakeside woodland could turn into a charming Web3 resort haven before expanding further.
Really, consider the sorts of development which could take place in smaller or underdeveloped locales, with a more focused populace of subscriber citizens, like in a charter city or something akin to it. A relatively small number of people could have an outsized impact on the local economy in terms of bringing momentum and optimism along with it, which is infectious. The most obvious friction point is choosing somewhere too small or remote, which lacks variety regarding housing and services, or lacks a reliable transportation and electrical infrastructure.
What this means is, if even ten or twenty thousand “subscriber citizens” bring their network state to a small town or university campus, their impact can be massive. Though not a DAO, an example of this in action is the Free State Project in New Hampshire, whose website reads: “By concentrating our numbers in a single state, we are maximizing our impact as activists, entrepreneurs, community builders, and thought leaders.” The project bills itself as a mass migration of 20,000 people who’ve pledged to move to New Hampshire for their shared libertarian values. It’s a pity they didn’t choose someplace warmer, but if they just want to be left alone, c’est la vie.
Retrofitting Existing Infrastructure for a Web3 Stronghold
From a practical standpoint, given that university enrollment numbers seem to have peaked, universities will be looking for suitable tenants for any vacant campus housing. Purdue University in Indiana already has a Work From Purdue program, offering housing discounts, on-campus dining credits, and up to $4,000 cash in relocation stipends.
Web3 companies specifically could work with these university campuses to recruit, build, and house talent through blockchain education pipelines at the university. Companies could cultivate and leverage talent via work-study and internship programs, hosting hackathons, fundraising events, and other Web3 initiatives.
Neo, for instance, recently announced an educational tour across universities in the US called “Decoding Web3,” with visits to Harvard, Yale, Stanford, UCLA, UC Berkeley, and many more. Also, eligible students can apply for grants of up to $3,000 to jump-start projects on Neo’s blockchain. This is a step in the right direction, and more DAOS and other foundations are sure to follow in their footsteps.
Outside of campuses, several urban development success stories in the US have involved abandoned railways, likely since they are well-connected and don’t involve a large number of stakeholders to be involved in land development negotiations. For instance, there is a 22-mile stretch of railway called the Beltline in Atlanta, which has been converted into a mixed-use walking and biking trail. As of 2020, this had already attracted over $8 billion in private economic development including green spaces and public art.
New York City’s High Line Park is another example of a rail-to-trail project which not only made use of, but beautified some abandoned infrastructure by attracting billions in private development. Perhaps this is a wake-up call for cities out there to take an abandoned space, rebrand it, and turn it into a technology park without traffic, but with plenty of green spaces, shops, and other appropriate commercial opportunities.
Again, the difficulty of these issues is why college campuses seem like decent places to start building hybrid network-state charter cities in microcosmic form, though not the cheapest. Nevertheless, they would serve as Petri dishes for hashing out many of the details before attempting something on a larger scale.
Risks in Token-Based Governance, but Web3 Plays a Role
While the aforementioned ideas range from somewhat practical to completely idealistic, the question of on-chain governance hasn’t been discussed. It may not seem immediately obvious, but the governance of a Web3 charter city or the like should probably not be done on-chain. Token-driven governance is not only vulnerable to attacks, but it facilitates the formation of plutocratic rule which is undesirable and unsustainable.
For example, even without attackers meddling with governance, small groups of wealthy participants or whales have greater incentives to participate in voting. This is in part due to their outsized influence, but also since they may have a conflict of interest in increasing their token value which could end up being at the expense of newcomers and other good-faith participants.
On the other hand, citizens of such a city might make use of local ID cards which are a bit like non-transferable NFTs. This could be adopted from the sort of technology being developed by BrightID or POAP, which records digital momentos of tokenized experiences. These make sense because they both issue tokens which are essentially bound to users.
For instance, users could mint one of these NFTs after attending a certain music festival or other life event. One of these tokens can’t just be transfered, since the tokens represent an experience that was had by a specific individual. These person-bound NFTs would be suitable for issuing voter IDs to better protect the fidelity and integrity of governance, though there are still challenges remaining as to how privacy can still be protected, like with ZK proofs, for instance.
On the other hand, there are other ways to integrate the blockchain into municipal services and life. CityCoins already offers tokens in several American cities, which residents can “mine” using a Stacks wallet and tokens. A significant portion of funds used to mind CityCoins go directly to a custodial wallet which city mayors can tap for funding. Miami Mayor Francis Suarez announced that yield from MiamiCoin would be converted to Bitcoin and given out as dividends to residents.
CityCoins are available in Miami, Austin, and NYC. Users can visit the CityCoins website to vote for their city to be added next.
While the concept may not yet be perfected, this model could offer a new form of revenue generation by cities which rely on voluntary subscription models as opposed to coercive taxation schemes. If cities could reliably generate revenue from voluntary fundraising efforts like CityCoins seems to offer, could state, city, property, or even income tax be eliminated? It’s doubtful, since there is no real determining as to how much tax revenue is ever “enough.”
Perhaps there is a hybrid model in our future in which subscriber citizens and their Web3 smart cities find ways to transparently govern and fund themselves voluntarily while simultaneously negotiating down other tax burdens which create economic friction.
The ideal situation seems to be the establishment of a subscriber city or community which agrees to effectively “grow the pie” so that everyone keeps getting larger shares because they chose to be there, they own it, and have a stake in continuously cultivating it. It seems so simple, but the planning and execution is not going to be a simple task, by any means. The question still remains though as to whether it’s best to adopt and retrofit existing infrastructure, or just BUIDL it, and let them all come.
References
- Berg, R. C., & Ziemer, H. (2022, 27 Apr.). What are the zones for employment and economic development in Honduras? Center for Strategic and International Studies.
- Brustein, J. (2021, 27 Mar.). A private tech city opens for business in Honduras. Bloomberg.
- Doherty, B. (2022, 27 Apr.). Honduras ends its experiment with charter cities. Reason.
- Kroth, M. (2014, 1 Sep.). Under new management. Foreign Policy.
- Lough, R. (2009, 18 Mar.). Madagascar’s new leader says Daewoo land deal off. Reuters.
- Newar, B. (2021, 12 Nov.). Miami will hand out free Bitcoin to residents from profits on city coin. Cointelegraph.
- Palencia, G. (2022, 21 Apr.). Honduran congress unanimously nixes special economic zones. Reuters.
- Romer, P. (2009). Why the world needs charter cities. TED Global Talks.
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