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!
1 Like
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.
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.
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.
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.
