Network money & token money

Many Web3 networks enable the creation of token based assets. This creates an environment where many forms of money could exist as anyone is able to create a token that then gets adopted.

In token enabled networks there are two types of money. Network money and token money. Network money is the network's own coin. In the case of Ethereum it is ETH, for Solana it is SOL, for Cardano it is ADA and so on. Token money is any of the token based assets that gets adopted as a form of money.

Both of these types of money could have multiple responsibilities that they need to handle from the ones that have been identified so far. Let’s take a look at which responsibilities are most suitable for each type of money.

Network governance

Any system of money could benefit from parameter changes or system updates that improve the available functionality or how the system is being operated. Both network money and token money could benefit from governance decisions that involve the system of money. Voting power could be influenced by how much money people hold or what tax contributions they have made. Keeping governance processes as simple as possible will be desirable for both network money and token money. Simplicity will be even more important for network money due to the voting complexity that is involved with a growing global user base.

Network operation

Network money

Network money is highly suitable for paying for the operational costs of the network. Users would pay transaction fees or other forms of taxes using the network money. This income can be used to pay for node operators. Web3 networks can create circular economies that incentivise people to operate nodes that maintain the network.

Token money

Token money could be used to pay node operators however there are a number of security risks to consider. If the money is created by a subset of the community there is a risk about how that community could change that system of money to benefit themselves or how they could potentially 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. Using community made money to operate the network could introduce more risks than there are benefits due to the unpredictability of how that money is governed. There is also uncertainty around whether the token money adopts suitable functions and properties, as this could influence whether there might be any long term problems or not.

Financial liquidity

Network money

Network money is highly suitable for being used as financial liquidity such as for token exchange pairings as it is a form of money that everyone already uses and needs to pay for network usage. Network money could become the primary exchange pairing for many tokens. This can help to reduce the number of swaps that people need to make when swapping one token for any other token. If multiple forms of money were used for these pairings it could increase the number of swaps that are necessary to execute the desired exchange. This could also mean fragmented liquidity due to the problem of tokens being spread across liquidity pairings with many forms of money. Network money could be a highly suitable candidate as liquidity for facilitating token asset exchanges.

Token money

Token money could also be used as financial liquidity, such as for facilitating token asset exchange, though it would be beneficial if there was only one primary pairing against the other tokens that are available. This would mean that the token money would benefit from being globally governed by the ecosystem to manage the token money if it was going to be used as a primary pairing for token exchanges. So token money could be a viable candidate as a primary token asset exchange pairing however network money could also fulfil this role.

Communities that create their own form of money may also want to use localised exchanges where their own money is paired against different tokens based assets that only that community uses. So although the responsibility of token asset exchange liquidity could be globally handled by network money it could also be locally handled by token money within each community.

Medium of exchange

Network money

Network money will be one of the most adopted and widely known forms of money in the network. The broad acceptance and adoption of network money makes it suitable as a potential medium of exchange. However this doesn’t mean network money should be used as a medium of exchange. Web3 networks are commonly intended to be global and permissionless networks. Network money needs to be always available so it can facilitate the exchange process. If network money 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 uncertainty or if they think the money could quickly lose value. Alternatively they might decide to hoard money if they believe it will gain value, as it might become cheaper to buy goods and services in the future. If the money supply needs to be adjusted to improve the system of money it could be highly challenging to do so if a large global population of users is depending on it. Those changes would need to be beneficial for the majority of the users. A global network of users would likely need to be involved in any governance decisions to change it. 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 money a global medium of exchange is an unnecessary complexity that could increase the risks of the network systemically failing in the future.

Token money

Web3 networks create an open and permissionless free market for mediums of exchange to compete with one another. Communities can create a medium of exchange that is context specific and purpose built for their environment. For instance, each country could create their own medium of exchange and adapt the money supply and mechanics of that money as necessary to ensure prices remain stable. This could help to prevent the problems that might occur if a global medium of exchange was adopted, where different economies would likely have different growth rates and requirements. Web3 networks enable ongoing competition between different mediums of exchange, so many new ideas for systems of money could be experimented with using token based assets. This makes token money highly suitable for creating the mediums 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 their own money themselves.

Store of value

Network money

Web3 networks could become increasingly responsible for a very large population of users from across the world. This means that they will need to be far less lenient on people hoarding the network money as people would increasingly depend on access to this money to use the network. Therefore it will be important to balance the demand for the network money with enough influence from demurrage to prevent it from being hoarded. Network money shouldn’t be a good store of value but it also doesn’t need to be something that loses value at a fast rate.

Network money will benefit from being as precise as possible with how much demand it is generating for the network money and how the money actually gets used. Digital asset based networks will be fiercely competing with other networks to create the best environment for creating, exchanging, using and storing digital assets.

Token money

Token money has more flexibility to decide how it should be implemented as token money could be created for any community large and small. Some communities may prefer a mixed system of money where the user can hold a small amount of it but beyond that point it starts charging them a demurrage fee. This type of implementation would be at risk due to sybil attacks as people could split their holdings across multiple wallets. Identity solutions could prevent this problem and then these types of ideas could be implemented.

Although the store of value property is not a desirable one for creating a good system of money there are still many opportunities to explore with different implementations of token money. Communities could experiment with different approaches for implementing their own system of money that may or may not be tolerant to a store of value property under certain conditions.