Web3 & Demurrage Money

🧙 🧙‍♀️ Ideas and Open Discussion
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The adoption of network coins that are storable across the Web3 industry is a broken system.

I’ve seen people like Vitalik talk about demurrage before but I’ve never seen a reason or sufficient justification to not adopt this approach as the implementation at the base layer for a network and its network coin.

Recently I finished an article exploring the topic of applying demurrage and Web3 - Web3 & Demurrage Money - by George Lovegrove

The article is based on some more in depth analysis that explores how demurrage could be implemented using a network coin tax - https://money.web3economy.io/

Demurrage via a network coin tax could help with creating some of the most impactful and incentive aligned economic systems that have ever existed, a network coin tax could help with:

  • Paying node operators - Transaction fees would no longer be required for compensating node operators. Network coin taxes reward active users and coin velocity and incentivise people to use the network coin more productively, helping to prevent stagnation.
  • Reduced risk of concentrations in coin ownership - Even a small network coin tax makes it very hard to accumulate large and growing amounts of the network coin tax. Storable network coins with even a small risk-free reward from staking or fully collateralised single asset lending can be easily accumulated and consistently over generations.
  • Reducing transaction fees or even eliminating fees entirely - This could be achieved if a sybil resistant solution can be implemented securely at scale.
  • Improved network effects - You can apply the network coin tax very granularly so that it maximises the productive usage of the network coin, this could help to increase network effects due to increases in financial market efficiency.
  • Generating reliable ecosystem funding - The network coin tax would be collected periodically so ongoing amounts of funding would be available for node operators and ecosystem initiatives.
  • Accelerating ecosystem growth - Increasing the network coin tax can result in more income for funding more ecosystem initiatives to feed a growth fly wheel.
  • Global public goods funding - Even a small rate of demurrage in a very large ecosystem could generate a very large amount of income, eventually this could fund global public goods once a network is more mature and is one of the leading networks.

I believe demurrage is eventually inevitable as the current implementations of storable network coins are a highly flawed design. Eager to discuss this in as much detail as people like as I’ve been looking far and wide for any good counter arguments to this approach - I am yet to find anything.

Would love to hear from anyone who has thought about this before or what reasons people might have why they think demurrage is not the correct solution for Web3 network coins or for systems of money more broadly. Happy to chat about this in more detail on a video call if anyone is interested in this topic!

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I like the idea of demurrage, because I think hoarding is detrimental to an ecosystem. My latest blog post is entitled Beyond Hoarding: How Ethereum Can Break the Tragedy of the Digital Commons.

A coin with demurrage has a bootstrapping problem, though. I will only accept a coin that I know will lose value if someone else will accept it, etc. If you look at why Wörgl succeeded while Freicoin did not, it has to do with guarantees of acceptance. If you want to bootstrap a currency with demurrage, you must take into account merchant adoption–and since you can’t guarantee acceptance, it must be able to co-exist with outside currencies throughout the bootstrap phase–otherwise everyone will just exit the system. You can see what I did with OGC/Diario as far as incentivizing merchant acceptance with downside price protection relative to outside currencies.

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One of the compelling reasons to use it in a Web3 network in the mid term is to fund ecosystem initiatives. It’s a highly aligned incentive mechanism for funding ongoing maintenance and improvements. No funding means you rely on genesis allocations which eventually run out. Transaction fee based income causes deadweight loss. So if you have a good funding process it’s one of the fastest ways to develop new use cases and increase the rate of growth. Web3 networks have to compete against other networks to gain adoption and a network coin tax gives them a huge advantage.

A network doesn’t need demurrage in the early stages - as many still have genesis allocations they can use for funding things. The first priority of the network is to create a good funding process so that the network coin tax would be used effectively. When this is done you can introduce it to create a circular economy with better incentives and prevent wealth from concentrating over time into the hands of a few people. A storable network coin cannot be relied upon for a global network as it can be increasingly accumulated over time - it makes a mission critical system vulnerable to capture.

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On the OGC Diario UBI topic, UBI is definitely a contender for a token based monetary system that adopts demurrage via a token tax. This could potentially make sense. The scope of implementation possibilities for monetary systems i think is pretty wide.

I do not think the network coin is a good choice for becoming a medium of exchange and it shouldn’t focus on trying to be. It has huge responsibilities already creating a reliable global piece of infrastructure. Tokens can be made for any community that wants a medium of exchange with any features and properties that make sense for their requirements. I talk about network coins and tokens from this point onward in the money analysis - Network coin & tokens | Money

The network is suited to incentivise people to use the network coin as financial collateral that improve the financial markets efficiency and as a form of contract collateral which is a way to increase trust when making any formal agreements.

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Is it because you think a new network will start out getting enough income from its network coin tax that it will outcompete Ethereum (for example)?

I agree, but what does this have to do with adoption?

A network token with demurrage, where its value constantly decreases to fund public goods, would face significant challenges as collateral. While it’s a creative way to fund innovation and discourage hoarding, it directly undermines the key attributes of an ideal collateral asset. Given the choice between a demurrage token and a stablecoin or a blue-chip crypto like Ethereum, borrowers and lenders would overwhelmingly prefer the latter.

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The open source and interoperable nature should make it easier to compete if you have better aligned incentives. A storable network will eventually stagnate and this gives opportunity to competitors and even before this there is an incentive for people with few assets to exploit a potential opportunity for investing in another network if it could grow rapidly. As the problems of storable networks can be well defined it shouldn’t be that hard to convince people if they’re just responding to the potential for profit. So whether in the short term or long term I think a demurrage based system will be inevitable as it better aligns the incentives and doesn’t cause stagnation, wealth concentrations and all the other benefits i mentioned.

As it can be proven with data modelling on the ease of wealth concentrating over the long term you create a powerful rationale and incentive for people to adopt other networks that adopt a demurrage based approach. You need a compelling reason to adopt a new network if a storable one has gained significant adoption - which of course is possible and pretty likely at the moment based on the current storable implementations across the industry.

A network coin tax means they lose coins rather than the coin itself losing value. So if people have their coins deposited into lending and borrowing or as a token exchange pairing that collateral could have a lower percentage taxation rate, it needs to be high enough so on average people lose a small amount over time but the price of the network coin will on average rise due to deflation. There’s a page on supply models if you want to go into why there.

So the network coin has little interest in people owning large amounts of it, the incentives can point people towards an exact amount such as total supply divided by active users as the target amount they incentivise. The point of the network coin is to make sure the network is always live, reliable and available to use, and the incentives you can make using a network coin tax (increasing and decreasing it based on use case) means you can greatly increase the financial market efficiency. The incentives will lead to less variance in peoples ownership of the network coin over time due to the incentives over the long term. Too long to go into all the factors in this post, if you take a read of the analysis and want to comment on it i’m always here to chat so can reach out to me any time :smiley:

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This sounds like a circular argument: more people will join because more people will join.

Tokens could be more easily replaced by a new competing solution. This could make the network coin the more desirable form of financial collateral.

There is more certainty in the long term demand for the network coin, which is why it might often be a preferred choice as financial collateral.

This also creates a circular argument: people will prefer to use the network coin as collateral because they’ll prefer using the network coin as collateral.

I see you have a section for Financial liquidity incentive options. It seems to have a bootstrapping problem. For people to value these incentives, the network token has to have value. Or they’ll forgo rewards in the short term because they believe in the long-term vision. Unlike Bitcoin, they won’t gain any financial reward for being an early adopter.

To overcome the bootstrap problem, my advice is to find networks that have other reasons to exist and other goals and convince them they should incorporate mechanisms to create a more equitable distribution of network tokens and self-fund innovation. It’s probably best to do this when networks are young and their mechanisms are more malleable.

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Recreating the same network with no changes and i’d agree you’re relying on other people to buy into a new network yet not a sufficient reason for doing so. The network doesn’t need demurrage immediately and could have a genesis allocation that’s used for maintaining the network and subsidising transaction fees to make things more competitive, it’s over the long term where demurrage is important to prevent stagnation and concentrations. So there’s a compelling narrative to adopt a new network or have some exposure to it for that reason which helps with bootstrapping initial capital in the network. There’s a few reasons the adoption could happen though, one is simply the belief is strong enough that the storable network will eventually be problematic and the new one is a better solution, two that the new network can offer cheaper usage due to lower transaction fees paid for by the network coin tax or three that the storable network has started to face problems due to its storable implementation.

A network coin having liquidity preference can make sense when it is required to use the network as not everyone is required to use a specific token, the token can be more easily duplicated or replaced than the network coin. I listed a number of properties and things that are different between the two in the resources. So this is looking at the internal comparison between a network coin and tokens that are created on the network.

In the early stages of the network you want to attract lots of investment, coupled with the availability of any genesis allocation, the network doesn’t need to be demurrage based in the short term. The network coin could have massive price appreciation during this period, so it’s less suited as a form of financial collateral. It doesn’t need to initially focus on its usage as financial collateral - if people are experiencing rapid price increases it’ll be easiest to just hold it and some people will ofcourse use lending and borrowing etc. So the incentive short term is price appreciation in the network coin.

It’s the long term where it really becomes important to prevent stagnation and concentrations in ownership and this is where demurrage is extremely powerful for solving those solutions but also for incentivising the most productive usage of the network coin - which i think is for financial use cases such as token exchange. The network coin for a digital asset network can become the primary facilitator of exchange for the most important tokens. People can still profit from holding a demurrage based network coin. If you lose a small amount of the coins but the coins you hold are getting more valuable on average you could still be better off. The impacts of demurrage on economic growth and activity needs more data points to help with arriving at a rate of demurrage and what rate of change happens if any.

Yeh so i don’t think demurrage is needed in the short term for a network, it is beneficial when the genesis allocation has run out and you have a properly functioning funding process. A good funding process is what makes demurrage highly compelling as the growth lever to funding more applications and protocols.

At this stage i’m more looking for anyone who has good counter arguments to the adoption of demurrage. If I can’t find any it adds more confidence in my belief that all storable networks will eventually fail to demurrage based ones as they can never truly become a reliable public utility unless the network prevents the possibility of coin consolidation.

It might be the case that an existing network adopts demurrage or that the best storable network is duplicated in the future and demurrage is adopted from that point. So i’ll likely keep focussing on improving the resources and making videos to make more people aware of this approach.

Someone shared this Circles project in another forum post that uses demurrage, was a good whitepaper, and for creating a medium of exchange as a token I like what they’ve done and seems pretty compelling - https://docs.aboutcircles.com. The self issuance of the token is interesting, I need to think about how that could be potentially applicable to the network itself.

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All of my arguments against a system with demurrage are about bootstrapping and adoption. I can’t find any counters against its actual function. It provides a lot of benefits and can potentially solve the wealth disparity problems we see in a lot of systems, especially cryptocurrency.

I’m a long-time circles ubi user. Sent me a private message and I’ll give you an invite.

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I actually found the beginning the most compelling part for demurrage as you can offer coin price appreciation in exchange for collecting the network coin tax if the ecosystem has a good funding process. As these networks are very competitive, even if you can offer the same return on investment but one offers higher growth than this network would be the more highly compelling investment due to the network effects opportunity. The growth and potential returns should be higher than other networks that can’t create the same circular growth flywheel that a network coin tax could more easily create.

The long term was the area I spent most my time wracking my brain thinking about what happens if you build a good network up using demurrage and then just duplicate it and remove the taxation down to the minimum or nothing. And after more thinking i realised that demurrage doesn’t inherently mean the holder needs to lose value every year by holding it, you can both lose coins but increase the value of remaining ones on average and this give the holder more purchasing power each year but less coin ownership. And even a small loss each year wouldn’t mean it’s quickly abandoned - our fiat systems have money that loses value each year and that’s lasted decades even though it is flawed.

After battling with it all for ages, I now stick with the opinion that demurrage is inevitable, even if it is only a small percentage amount in the end, some amount of demurrage will be needed.

I’ll send a message, and thanks for taking a look at these ideas and resources, much appreicated :green_heart:

Messaging isn’t working for me - so here’s my X: https://x.com/lovegrovegeo