Is the network coin necessary?

The network coin is the primary digital asset responsible for operating a Web3 network. It is used to pay for network usage, commonly through transaction fees as well as for compensating node operators to run servers that maintain the network.

The network coin helps with creating incentive alignment around using and operating the network. To understand whether the network coin is necessary as a fungible asset we can consider some of the alternative approaches that could be used to compensate node operators.

Alternative approaches for incentivising node operators

Tokens

Some Web3 networks enable the creation of token based assets however not all of them. For example, some networks might focus on providing compute resources and incentivising node operators to provide access to their servers. A network like this might not require token based assets so it cannot always be assumed that people will be able to create tokens on every Web3 network.

For the networks that do enable the creation of tokens we should think about whether it might make sense for node operators to be compensated using these tokens.

The network consensus mechanism is a good starting point to consider. The consensus mechanism is the process by which multiple participants (node operators) agree on the state of the distributed ledger. It ensures that transactions are verified, recorded and synchronised across the network in a secure and decentralised way, even if some participants are unreliable or act maliciously.

If multiple tokens could be used in the consensus mechanism there would be an ongoing concern about who owns and governs those tokens. These tokens could be changed to benefit certain individuals or to potentially harm the network. If one token became corrupted or collapsed it could be misused to pay for transactions or for potentially spamming the network until some action is taken to remove the token from the list of accepted tokens.

If the consensus was responsible for deciding which tokens are accepted then you would need some governance process to manage that list of tokens, this adds unnecessary complexity into the design of the network when compared to the alternative which is the adoption of a single network coin that can fulfil this responsibility.

If the node operators decide which tokens they want to accept then this compromises the responsibilities of the consensus mechanism as now when one token is used for paying for network usage only the node operators that accept that token would be considered. Every node operator would also need to self determine what amount of tokens they are going to accept for verifying and storing transactions. This is unnecessary additional complexity when compared to the alternative of a single dedicated network coin, node operators would still be able to convert the network coin into any preferred token when they are compensated for their contributions.

Web3 networks need to be improved and updated over time, which can include parameter or software changes. The network coin is commonly used within governance processes. It can be used to determine voting power, such as through the amount someone owns or using fee or tax contributions. If multiple tokens were used the network would be concerned about what weighting each of those tokens had on the governance process and the distribution of those tokens across each of those communities. The complexity would only be increased by using multiple tokens instead of a single network coin.

Externally funded

Node operators could be funded by external sources such as from a land value tax.

If the funding comes from an external source and not from the networks own consensus mechanism there is an immediate concern around what incentives someone has to verify and record transactions in a way that is compliant with the networks software. Node operators could operate their nodes however they wish as they wouldn’t have the concern of punishment as they are getting funding from an external source.

The other problem with external funding is the lack of reliability. No person, region or country is forced to run a node. One country or region could decide to not run any nodes due to the costs incurred from doing so. But that same country or region may benefit from using the network without contributing towards how it is operated. This lack of incentive alignment is why a consensus mechanism is desirable as it encourages any individual or group to start operating a node to maintain the network due to the compensation they can receive.

If the Web3 network grew over time the cost of operating a node could also increase. However the external source of funding might not grow over time, in fact it might reduce or even disappear. This lack of connection between the source of funding and the amount of compensation required to sustain the network creates a systemic risk that a Web3 network needs to avoid.

Summary

The network coin is purpose built for the network. It creates a circular economy where users create demand for the network coin to pay for network usage. Node operators provide the supply of servers to operate the network and receive the network coin as compensation for doing so.

Alternative approaches such as using tokens introduce an unnecessary amount of added complexity and risk into how the network is operated. External sources of funding are inherently less reliable over the long term and they also create misaligned incentives. Both of these problems can be avoided by adopting a network coin based implementation.

The network coin represents the most compelling approach for handling the responsibility of operating a Web3 network. It can be implemented as simply as possible and solely focus on this mission critical objective.