Use cases & responsibilities

The network coin and tokens have a number of different use cases and responsibilities they could handle. Let’s take a look at which use cases and responsibilities are the most suitable for each type of fungible asset.

Network governance

Web3 networks need to be maintained and improved over time. The community will often need to consider the existing network parameters and whether they might need to be changed. New versions of the network protocol might need to be approved through a governance process before deployment. Treasury income that is generated by transaction fees or taxes would need to be governed by the community to determine how those funds should be spent. How much fees or taxes someone has contributed could be used to determine someone's voting power in network decisions. The network benefits from some form of ongoing demand for the fungible asset that is going to be used for voting power as this helps to maintain the price of that asset. This impacts the security of the network due to the cost of acquiring the asset.

Network governance is a vital part of ensuring the survival of a Web3 network. It can be difficult to adopt parameters that never need to be updated or to create protocols that never require any future changes. Web3 networks are open and permissionless, no one is forced to use one network over the other. Contributions are one of the more compelling approaches for determining voting power as these can help with proving which people are participating and using the network. Whether people hold or use the network coin regularly or not can be an important contribution to consider when determining who should have more or less voting power in any governance decisions.

Network coin

A Web3 network only needs to be governed by one type of fungible asset - commonly the network coin. There are alternative approaches for handling network governance, such as attempting one person one vote, however this is often problematic due to sybil resistance issues and due to the fact that with Web3 networks no one is forced to use one particular network over another. Anyone can create or migrate to other networks at any time they like. So the one person one vote approach would mean that people that don’t have the best intentions for the network would receive equal voting power as someone who has contributed a large amount of investments, fees and taxes towards the network. The network coin and any contributions people have made with fees or taxes could be a valuable part of determining voting power for a networks governance process. People would then need to contribute towards the network by investing money or paying fees and taxes to receive any voting power.

The network coin could also be used to help with governing the network coin policies such as supply changes. Keeping governance processes as simple as possible will be desirable for any Web3 network. However simplicity will be even more important for the network coin due to the increased voting complexity when a global user base is involved.

Tokens

Tokens don't need to have the responsibility of governing the network itself as the network coin would already fulfil that responsibility. Instead tokens could be used to manage their own policies and use cases. Similar to the network coin, tokens could be used to determine the amount of voting power someone has for a governance process that manages the token as a system of money.

Network operation

Web3 networks are digital systems. They require people to purchase hardware and run the networks software to setup a node. These nodes then help with operating the network. Nodes will verify any transactions that get submitted and then store the successful transactions on the distributed ledger. Node operators need to be incentivised to participate in the network as otherwise there would be no financial reason for anyone to help operate the network. The network coin is commonly created and used by Web3 networks to reward node operators. Demand for the network coin often comes from the need to use it when paying for any transactions.

Network operation is a highly important responsibility as the incentives need to be reliable and effective over the long term. Introducing any problems with incentivising the node operators at any stage could lead to systemic failures.

Network coin

The network coin was created for this responsibility. Web3 networks create circular economies by using the network coin. Demand exists for the network coin through fees or taxes and the value of the coin then means it can be used to reward people for running a node and operating the network.

Tokens

Making tokens responsible for operating the network instead of a network coin would introduce some security risks that can be avoided. If the tokens are created by a subset of the community there is a risk about how that community could change the monetary policies of the token to benefit themselves or how they could try to harm the network. The network needs to be as robust and resilient as possible. If the network is going to be adopted at global scale there is little room for enabling any opportunity for systemic failures. Relying on community made tokens to operate the network could introduce more risks than there are benefits due to the unpredictability of how those tokens are governed. This is why a network coin that is focussed on this use case and that everyone requires to pay for transactions is a more compelling solution.

Tokens could become a supplementary way to pay for node operation however even this is unnecessary. Users could pay for their transactions with any fungible asset and the network could handle the exchange of those tokens into the network coin and then the token that is preferred by the node operator when they are rewarded. Node operators may want to convert any network coins they receive into another token immediately after receiving them. The network doesn’t need to handle either of these scenarios at the network level. This complexity can be handled at the wallet level instead. Wallets implementations could automatically handle the conversion of tokens into the network coin and back into other tokens as needed based on user preferences.

Financial liquidity

Web3 networks enable the creation of tokens that can represent any asset that is physical or digital. They could have any number of properties and can be used for a wide number of use cases. Distributed ledger technology will eventually bring many more assets online and make them available as token based assets. Tokens could represent full ownership or fractional ownership. They could also provide the holder with other rights that might be useful. Either the network coin or tokens could be paired up with any of the other fungible token based assets and be provided as liquidity in a token exchange. These assets could also be used as liquidity for lending and borrowing. More financial liquidity means people should be able to quickly swap the network coin or tokens into any other asset or use them for borrowing or lending different forms of money. Achieving deep liquidity is an important part of making the networks financial markets more efficient as this can help with things such as reducing slippage during token exchanges.

Liquidity could become increasingly fragmented if every token had to make an exchange pairing with every other token. This could become even more problematic due to a growing number of tokens over time that each gain adoption. It would be beneficial for only one or a few fungible assets are used for facilitating the exchange process, as this will help to increase the cost effectiveness of moving from one token to any other token that is available in the network.

Financial liquidity is a very important responsibility for certain fungible assets as these networks are competing with other networks to provide the most seamless experience for accessing, purchasing, swapping and holding digital assets. Networks that can incentivise the deepest and most available liquidity with the least slippage will be more likely to become the most desirable network for handling digital assets due to the scale and efficiency of the financial markets.

Network coin

The network coin is highly suitable for being used as financial liquidity such as for token exchange pairings as it is an asset that everyone already uses and needs to pay for network usage. The network coin could become the primary exchange pairing for different tokens. This could help with reducing the number of swaps that people need to make when swapping one token for any other token. If multiple fungible assets were used for these exchange pairings it could increase the number of swaps that are necessary to execute certain token swaps. This could create fragmented liquidity due to the problem of tokens being spread across numerous liquidity pairings due to the usage of many fungible assets. The network coin could be adopted as the primary candidate for fulfilling this use case of facilitating global token exchange.

Tokens

Tokens could also be used as financial liquidity, such as for facilitating token exchange, though it would still be beneficial if there was only one primary pairing against the other widely adopted tokens. This would mean that if a token was going to be used as the primary pairing, it would benefit from being globally governed by the ecosystem to manage how it is going to be used. Tokens could still be a viable candidate as a primary token exchange pairing however the network coin is already a highly suitable candidate that could fulfil this role.

Communities that create their own form of money may also want to create localised exchanges. In these exchanges their own tokens could be paired up with other token assets that are more specific and relevant to the community itself. So although the responsibility of global token exchange liquidity could be handled by the network coin it could also be locally handled by token based money within each community, as then the token can facilitate more specific and localised financial use cases.

Medium of exchange

Historically money has been governed and maintained by nation state operated central banks. Money is assigned the classification of legal tender and this means everyone needs to accept that currency as a medium of exchange for any goods or services. Web3 networks change this paradigm, as users would be able to decide which forms of money they want to create, use and accept themselves. Nation states may still determine which money is legal tender in their own countries, and that money may still be required for tax related payments, however Web3 changes the monetary system and the options that users have when deciding which forms of money they want to use.

A medium of exchange that is going to be broadly adopted will benefit from responding to economic changes so that prices remain stable. This can mean that the supply of the money might need to increase or decrease depending on different economic factors. People want money that is reliable and stable so that economic exchange isn’t interrupted due to volatility or a lack of availability of that money. Web3 networks enable anyone to create their own medium of exchange in the form of token based assets. This means that there could be an ongoing amount of competition between different forms of money that compete against each other to become the most effective medium of exchange in a free market.

The network coin and tokens are both fungible assets that could be adopted as money. An important question to answer is whether it is desirable to have one globally adopted system of money or multiple systems of money? A single system of money might initially seem appealing, as everyone would be able to use the same currency anywhere else in the world and never have to worry about currency conversions again. However the problems with a single monetary system approach are numerous:

• Global governance complexity - A single adopted medium of exchange would mean a global population of users would need to be involved with the governance process for managing that system of money - such as for changing the supply to maintain stable prices. The scale of user participation in governance would increase the overall complexity and slow down the decision process as each decision would need to allow for enough time for a global user base to vote on that decision. If the voting power was delegated to other people then you can end up giving a subset of the global population a lot of power and influence over a form of money that the entire population might depend on.

• Single point of failure - If everyone was reliant on a single medium of exchange there would be no room for error. This is extremely difficult at a global scale. People also depend on the network coin to properly operate the network, using the network coin as a globally adopted medium of exchange could result in the entire network becoming more vulnerable to a systemic failure.

• Rigid implementation - There are a wide range of different communities that exist, and each one of them can have different use cases and requirements for their system of money. Nation states, local regions and online games are all examples of communities that might have different requirements. A single medium of exchange would struggle to adopt every preference that each community has, and some of the preferred monetary policies of each community might be conflicting. It would be more difficult to agree on an implementation and policies that works for everyone at a global scale.

• Lack of price stability - Local and national economies can grow at very different rates from one another. Some can stagnate or decline whereas others might be thriving and growing very rapidly. Adopting a single medium of exchange could result in inflation or deflation in different areas depending on the expanding or contracting demand for money. It therefore becomes extremely difficult to stabilise prices for a globally adopted medium of exchange as changes to the supply will have different outcomes based on the current state of each localised economy. This would likely lead to ongoing challenges with changing the supply of the money as it could be advantageous for some communities and detrimental to others.

Adopting multiple systems of money that are context and implementation specific for whichever community needs them is a far more compelling approach than trying to make everyone adopt a single medium of exchange. Adopting multiple systems of money is a more flexible and reliable approach than relying on a single system. If one system of money stopped working, an existing or new one could immediately take its place in an environment where multiple systems of money coexist.

Network coin

If the network coin was adopted as a global medium of exchange it would likely need to take on the added responsibility of maintaining stable prices. If prices are not stable this can have a negative impact on economic activity. People may make quick decisions due to price uncertainty. They could start acting on the belief that the money could quickly lose or gain value. For instance, if people believe it might gain value in the short term, they may decide to store it, as then it should become cheaper to buy goods and services in the future. If the money supply needs to be adjusted to improve the system of money as a medium of exchange it could be highly challenging to do so with a large global population of users that depend on it. Those changes would need to be beneficial for the majority of the users. A global network of users would need to be involved in any governance decisions to change the network's monetary policy.

Web3 networks could also be adopted at a global scale, meaning they could increasingly become mission critical systems. The scale of the usage and reliance that people could have on these networks highlights the importance of keeping the network's infrastructure as simple and reliable as possible. Achieving that goal will mean that Web3 networks should only focus on fulfilling its core responsibilities and nothing else. Unnecessary responsibilities can be delegated elsewhere.

Due to the value of having multiple systems of money and the ongoing availability of tokens to fulfil this responsibility of being a medium of exchange, the network coin does not need to become a form of money. In fact, it is undesirable for the network to take on this added responsibility as it would introduce unnecessary complexity and risk into the design of the network's infrastructure. Communities can create their own form of money using tokens and these systems can be governed and operated in a way that matches their requirements and preferences. Web3 networks need to prioritise simplicity and reliability in the design of the network to minimise the chance that the network could systematically fail. Trying to make the network coin a global medium of exchange is an unnecessary complexity that could increase the risk that the network systemically fails in the future.

Tokens

Web3 networks create an open and permissionless free market for mediums of exchange to compete with one another due to the ability for anyone to create token based forms of money. Communities can create a medium of exchange that is context specific and purpose built for their community and environment. For instance, each country could create their own token as a medium of exchange and adapt the money supply and mechanics as necessary to ensure prices remain stable. This could help to prevent the problems that are more likely occur if a global medium of exchange was adopted rather than multiple systems of money. Which is due to the reality that different economies have different growth rates and requirements. Many new ideas for systems of money could be experimented with due to the ease of creating new tokens. This makes token based money highly suitable for creating a medium of exchange that people use day to day. Governance decisions can also be handled much more quickly and efficiently with a token money approach, as these communities are able to create and locally govern the money themselves.

Store of value

It is not desirable for either the network coin or token based forms of money to become an effective store of value due to the problems that arise from adopting storable money such as concentrations in coin or token ownership over time. If demurrage is applied onto a Web3 money this doesn’t mean the money won’t maintain its value. A small demurrage fee, such as a 1% annual rate, would still mean the money is a better store of value than a number of products such as fruit and vegetables, dairy products, meat, cars or mobile phones. These all commonly depreciate in value over time at a faster rate. It would still be desirable to hold Web3 money over these products if the objective was to maintain purchasing power. A 1% annual loss still means the holder would retain 99% of the original value.

Demurrage helps to decrease the effectiveness of money as a store of value so that it isn’t stored and left idle to the extent that it is currently. Different forms of Web3 money could explore different rates of demurrage to find out what is going to be the most effective and relevant for their community.

Web3 money that adopts demurrage will be competing with other assets that could be more effective as stores of value. This could be problematic for Web3 money if this means there is little to no demand for using the money. The money should benefit from having enough demand through incentives or network effects to sustain the value of the money over the long term. But the incentives and network effects shouldn’t be so effective that they result in people storing the money for long periods of time!

Network coin

Web3 networks could become increasingly responsible for a very large population of users from across the world. This means that these networks will need to be far less lenient on people storing the network coin for long periods of time as other people would increasingly depend on access to the network coin to use the network. Therefore it will be important to balance the demand for the network coin with enough influence from demurrage to prevent it from being left idle for long periods of time. Although the network coin shouldn’t become a preferred store of value it also doesn’t need to be something that loses value at a fast rate.

The network coin benefits from being as precise as possible with managing how much demand exists for the coin and how the coin is actually being used. Digital asset networks will fiercely compete with other networks to create the best environment for creating, exchanging, using and storing digital assets. This competition could influence how low or high the rate of demurrage can be for the network coin.

Security is another key concern. The higher the value of the network coin the more difficult it becomes to capture a large supply of it to influence the network. This could limit how high the rate of demurrage could be due to the impact this can have on reducing the demand for the coin.

In relation to tokens, something else to consider is due to the desirable properties of the network coin, such as its more guaranteed demand and use cases in the network, the rate of demurrage that is applied to the network coin could limit the rate of demurrage that can be applied to tokens. If the rate was the same for a given token there would be enough reasons for the user to hold the network coin rather than the token due to the network coins properties. The network coin could create an artificial ceiling for how high the demurrage rate could become for most tokens that get created on the network.

Tokens

Tokens have much more flexibility around how they are implemented. Tokens could be created for any community large and small. Some communities may prefer a system of money where the user can hold a small amount of it without them experiencing a token tax but beyond a certain point it starts charging them a token tax. Although some communities might find this desirable, this type of implementation would have sybil attack risks as people could split their holdings across multiple wallets to not pay the token tax. Identity solutions could help to potentially prevent this problem and in that event these types of ideas could then be implemented. This was just an example, but it does help with making it easier to see how large the scope is in regards to how many different ideas could be experimented with.

Although the store of value property is undesirable for creating a reliable medium of exchange there are still many opportunities to explore different implementations of tokens as a form of money. Communities could experiment with different approaches for implementing their own system of money that have different tolerances for the store of value property under different conditions.

Contract collateral

Both the network coin or tokens could be used as collateral within contractual agreements. When two people want to enter an agreement there can be a lack of trust between the two parties. If either of the two parties break the agreement the contract collateral can be used as compensation to resolve that problem. Contract collateral can help to establish a deterrent for either party to break the agreement. This can improve the trust and reassurances that both parties have before they enter agreement as they now one or both parties need to consider the risk of loss. Some use cases where this could be useful include during the exchange of any goods or services or when someone agrees to the terms of use when using a digital platform. For instance a social media platform could have the terms of use that users are not allowed to upload explicit or harmful content. Contract collateral could be used to enable people to submit public facing content anywhere on a digital platform as now there is some collateral that could be slashed or taken away. Many contractual agreements could benefit from some form of collateral to increase trust and overall confidence that the agreement will be upheld. For permissionless networks, the identity of the individual might not be fully known. Contract collateral could also be considered as a potential alternative to verifying the identity of someone.

Network coin

The network coin could greatly benefit from being used as contract collateral as this create another source of demand for the network coin. A reason why this use case is particularly valuable is it can be coupled with the financial liquidity use case. The network could incentivise people to provide the network coin as collateral into a token exchange or lending and borrowing protocol. It could then incentivise people to use that liquidity as the contract collateral for other use cases. The network coin would be productively used as financial liquidity and also be used as collateral for establishing trust in contractual agreements.

Tokens

Tokens will also benefit from being used as contract collateral. The network will want to incentivise people to prioritise the usage of the network coin as a form of contract collateral. This helps to improve the demand for the network coin. However it also doesn’t want to over incentivise the usage of the network coin so that a few people use a large amount of it as collateral. The network would focus on incentivising people to hold a certain amount of the network coin as collateral and then beyond this point encourage people to use tokens for any larger requirements. Tokens would be a complimentary form of contract collateral to use alongside the network coin.

Summary

Overall the network coin is the most suitable candidate for handling network operation and network governance and tokens are the most suitable candidate for creating systems of money. Both the network coin and tokens are suitable for being used as financial liquidity and as contract collateral, however the network coin is particularly well suited for becoming the primary liquidity pairing for global token exchanges. Both the network coin and token based forms of money benefit from not being implemented as highly storable assets due to the risks of ownership concentration over time.