Network coin & tokens

Web3 networks require an incentive mechanism that rewards the node operators that contribute towards operating the network by running their own node. Most commonly this is solved by the network coin, which is a fungible asset that is used for paying transaction fees and for rewarding node operators for successfully verifying, processing and storing transactions.

Many Web3 networks are programmable and enable the creation of smart contracts and tokens. Smart contracts are computer programs that are deployed on Web3 networks that can automatically execute and enforce agreements when specified conditions are met. Tokens are digital assets created on Web3 networks that can represent a range of things such as ownership, membership, access or participation. Tokens could represent digital or physical assets and they could also be used for creating new systems of money. Users are able to create and adopt tokens as forms of money, allowing for greater choice and sovereignty over what currencies they use. Web3 networks are commonly open source and governed collectively by their user base, giving individuals the opportunity to act as their own banks. Users are able to benefit directly from lending their assets or from other financial activities.

The network coin and tokens are two distinct fungible assets that could both be adopted as forms of money. Some example network coins include ETH for Ethereum, BNB for Binance Chain, SOL for Solana and ADA for Cardano. Within each of these example Web3 networks, tokens can also be created and adopted by anyone that uses the network. Stablecoins are digital currencies that are designed to maintain a stable value by pegging them to assets like fiat money or commodities. Stablecoins are an example of a type of token that can be created on Web3 networks. USDC and USDT are some examples of USD backed stablecoins that are available on some of these Web3 networks. Web3 networks create an environment where many systems of money could exist.

Some of you might be asking yourself whether the network coin is necessary. The short answer is yes, it is the most compelling solution for creating a circular economy that has aligned incentives for using and operating a Web3 network. A separate page has been added to add some more detail on the importance of a network coin:

Is the network coin necessary?

The network coin and tokens have different properties that can be considered before thinking about whether the network coin or tokens could be suitable as systems of money. For this comparison we can assume that both the network coin and tokens adopt the same monetary policy, meaning they could both be storable where neither of them lose value over time or they could both adopt the same rate of demurrage. This comparison can then help with better understanding which fungible asset is going to generally be more desirable due to its inherent properties.

Acceptance & awareness

Network coin

The network coin would be one of the most widely accepted fungible assets in the world if a network is able to gain global adoption. Everyone that uses the network would need the network coin to pay for transaction fees. There might only be a few networks that achieve this scale. In that event, the awareness about these networks and the network coin would be even higher. The network coin should generally have a larger amount of acceptance and awareness than any implementation of token based money.

Tokens

The market for tokens would be far more competitive. No one is forced to use one token over another and many types of tokens could exist on a single network. People might use and accept many forms of tokens when conducting exchange. Tokens could still have a large amount of acceptance and awareness however they still might struggle to become as broadly accepted as the network coin due to the fact that users require the network coin to use the network however they are not required to use any single implementation of a token.

Competition

Network coin

New networks can emerge and compete with the existing ones however these networks could achieve an increased level of network effects once they have scaled and succeeded. If there is little to improve upon by creating a new network it becomes less likely that a new network will be able to compete with ones that have already been widely adopted. So competition could become a decreasing factor for the network coin over the long term as these networks continue to gain more global adoption.

Tokens

Tokens would likely have a larger amount of ongoing competition over the long term due to the simplicity of creating new tokens. New ideas and approaches can easily be experimented with, meaning existing implementations of money using tokens will likely need to adopt the best ideas if they want to remain relevant and desirable as systems of money. People might even adopt one form of money over others due to personal values and preferences rather than the merits of the technical implementation. This factor only increases the potential for long term competition.

Demand

Network coin

For the most successful networks there would always be an ongoing amount of demand for the network coin as it will be used to pay for network usage, such as transaction fees or other taxes. If the network is implemented as simply as possible the network coin should be highly reliable and secure, which can further increase the demand for the network coin due to these properties.

Tokens

People aren’t forced to adopt any implementation of token based money. They also don’t need to use just one form of money. People might decide to use multiple tokens to minimise the risk of loss in case any of them fails. Demand for token based money is never guaranteed and it could be split across multiple forms of money. Any ongoing competition between different types of token could make it difficult to sustain long term demand for a single form of token money due to the high levels of competition.

Financial collateral

Network coin

The global adoption of these networks should benefit the network coin in becoming an effective form of financial collateral that is used across the network. Everyone has demand for the network coin as it pays for network usage. This makes it a desirable choice for also using it in financial protocols as collateral as everyone knows there is long term demand for the network coin and they know it is less likely that it will suddenly fail or disappear. The network coin offers a more reliable guarantee that it can sustain longer term value when compared to tokens. Tokens could be more easily replaced by a new competing solution. This could make the network coin the more desirable form of financial collateral.

Tokens

Token based money could still be highly effective as a form of financial collateral, especially in the communities where that money has been developed for specific use cases. Token money could also be adopted globally, which could increase its utility and value as a form of liquidity across many financial protocols. However the demand for token money is never guaranteed and the competition with other forms of token based money could limit the full potential of these tokens due to a lower reliability in demand. 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.

Flexibility

Network coin

Web3 networks will likely be adopted at a global scale and this scale leads to a requirement of minimising the networks complexity wherever possible due to the challenge, risks and cost of governance and maintenance involved at a global scale. Web3 networks will benefit from simple and elegant solutions for governing the network - such as implementing automated solutions that are self correcting. Generally speaking, the simpler and more automated the network and the network coin the better.

Tokens

Tokens can be more flexible in how they are implemented due to a smaller community that it will be commonly used for. The network coin will likely be adopted by a global population. Tokens might only be adopted by a single nation state, online community or online gaming ecosystem. Token based money could be implemented in a way that is much more context specific to the needs of that community. This greater amount of flexibility in how the system of money can be implemented and governed could come at a cost of introducing risks around who has influence and control over the parameters of that system. It can also raise concern around how malicious attackers could take advantage of the implementation and any governance process. Token based money could also be implemented in a way that is as simple as possible to avoid these risks. So the implementation and governance complexity is not necessarily any higher with tokens than the network coin. Implementations for tokens could be simpler but this could make those systems of money more rigid and inflexible to change.

Predictability

Network coin

A globally adopted Web3 network needs to be as simple and resilient as possible if it is going to be reliable and robust over the long term. The network coin has more of a requirement to be as predictable as possible as this can help with increasing the amount of trust people have in the network and how it operates. The network coin would be governed and managed by a global population, meaning that a large amount of time and effort could be required to make any decisions due to the sheer scale of the number of people involved. This reality of global scale will mean the network coin will need to be as simple and predictable as possible.

Tokens

The smaller the community the quicker it should be for them to make decisions and change a token based system of money. This can make token based money less predictable in how it might change over time unless they have made the token immutable by design. Making the token immutable would make it more predictable but this could come at the cost of losing implementation flexibility. Some implementations of token based forms of money could be more predictable and even simpler than the network coin. Tokens generally have more flexibility in how they could be implemented when they are adopted in smaller communities.

Price stability & appreciation

Network coin

The network coin will struggle to maintain stable prices due to global adoption and usage. Trying to change the supply of the network coin to accurately respond to growth of the global economy is complex and could introduce a number of systemic risks for the network. The network coin benefits from remaining as simple as possible to reduce these risks. If the economy slowly grew over time and the supply of the network coin was fixed the price of the network coin would eventually increase over time as the coin would likely be split across a larger economy. Efforts can be made to slowly increase the supply of the network coin over time to prevent rapid price appreciation however it would be very difficult to maintain stable prices across the world using just the network coin.

Tokens

Tokens are able to focus on the more specific requirements of the communities that adopt token based money. Nation state countries could continue to govern their own form of money. In these localised geographic areas it becomes easier to maintain stable prices as there are less variables to be concerned about when changing the supply of money. This makes it easier to maintain stable prices in response to changing economic factors. Tokens should be able to maintain stable prices more easily than the network coin as tokens do not need to be responsible for a global economy and global user base. However tokens could also have very simple monetary policy such as a fixed supply approach. A fixed money supply means it could experience ongoing price appreciation as the economy grows.

Summary

The network coin would likely be the more desirable asset to hold and use when compared to tokens if the monetary policies were exactly the same. The network coin would have a larger amount of global acceptance and awareness. It would have more guaranteed demand for the coin due to it being required for transaction fees. If a network achieves global scale and network effects this can also mean the network coin faces weaker ongoing competition than tokens. The sustained demand for the network coin also helps it become an effective form of financial collateral due to the higher certainty that it will be in demand and valuable in the future.

Generally speaking the network coin is far less flexible than tokens in how it can be implemented. This is due to the global scale that it needs to handle, which means that the network coin needs to be as simple and predictable as possible. This simplicity and predictability can make the network coin a more desirable asset to hold, as it should be more reliable and simply governed. Nothing prevents tokens from adopting similar implementation approaches, or potentially even simpler ones. So these factors don’t reliably make the network coin anymore desirable than tokens.

A key difference with the network coin and tokens is the flexibility tokens have to be implemented in different ways. Countries could manage their own token based money and more easily maintain stable prices due to the more limited amount of data and variables they need to consider. The network coin does not have this simplicity as it will likely be adopted across the globe, which can make it harder for it to maintain stable prices due to the complexity of the global economy and how it can quickly change over time.

Overall the properties of the network coin will often make it the more desirable asset to hold when the network coin and tokens have similar monetary policies. This increases the potential risks and concerns around how the network coin could become increasingly stored and left idle over time due to these desirable properties.

The network coin will need to incentivise people to use it more productively or to use other forms of money. To make tokens more appealing it could be important that the network coin maintains a higher rate of demurrage than what is being used for tokens. If not, tokens would likely need some added incentives or added properties that make it more desirable than the network coin.