Properties comparison

Network money and token money have different properties that need to be considered when thinking about how demurrage might be applied to each type of money. For this comparison we’re assuming that both network money and token money are adopting 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. The main question we want to answer is which type of money is going to be more desirable to hold due to their inherent properties and what this could mean when implementing demurrage within either of these systems of money.

Acceptance & awareness

Network money

Network money would be one of the most widely accepted forms of money in the world if a network is able to gain global adoption. Everyone that uses the network would need network money 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 network money would be even higher. Network money should generally have a larger amount of acceptance and awareness than any implementation of token money.

Token money

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

Competition

Network money

New networks can emerge and compete with the existing ones however these networks could achieve a higher 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 network money over the long term as these networks continue to gain more global adoption.

Token money

Token money would likely have a larger amount of ongoing competition over the long term due to the simplicity and ease of creating new tokens. New ideas and approaches can easily be experimented with, meaning existing implementations of token money 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 money

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

Token money

People aren’t forced to adopt any form of token money. They also don’t need to use just one form of token money. People might decide to use multiple tokens to minimise the risk of loss in case any of them fails. So the demand for token money is never guaranteed and it could be split across multiple forms of token money. Any ongoing competition between different types of token money 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 money

The global adoption of these networks should benefit network money in becoming an effective form of financial collateral that is used across the network. Everyone has demand for network money 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 network money. Network money has a better guarantee of sustaining longer term value when compared to token money. Token money can more easily be replaced by a competing solution. This could make network money more commonly the more desirable form of financial collateral.

Token money

Token money could still be highly effective as a form of financial collateral, especially in the communities that the money has been developed for. Token money could also be adopted globally, which could increase its utility and value as a form of liquidity across different financial protocols. However the demand for token money is never guaranteed and the competition with other forms of token money could limit the adoption of token money due its more limited reliability in terms of demand. There is more certainty in the long term demand for network money, which is why it might often be a safer choice as financial collateral.

Flexibility

Network money

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 networks system of money - such as implementing automated solutions that are self correcting. Generally speaking, the simpler and more automated the network and network money is the better.

Token money

Token money can be more flexible in how it is implemented due to a smaller community that it will be commonly used for. Network money will likely be adopted by a global population. Token money might only be adopted by a single nation state, online community or online game ecosystem. Token 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 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 higher than network money. Implementations for token money could be simpler but this can make that money more rigid and inflexible to change.

Predictability

Network money

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. Network money 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. Network money that is governed and managed by a global population would mean 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 often mean network money needs to be more simple and predictable. It would be expensive and time consuming to make any governance decisions when a global population of users is involved.

Token money

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

Price stability & appreciation

Network money

Network money will struggle to maintain stable prices due to global adoption and usage. Trying to change the supply of network money to accurately respond to growth of the global economy is complex and could introduce a number of systemic risks for the network. Network money benefits from remaining as simple as possible to reduce these risks. If the economy slowly grew over time and the supply of network money was fixed the price of network money would eventually increase over time as the money would likely be split across an increasing number of people, goods and services and use cases.

Token money

Token money is able to focus on the more specific requirements of the communities that adopt token 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. Token money should be able to maintain stable prices more easily than network money as token money does not need to be responsible for a global economy and user base. Token money could also have a simple monetary policy. If token money had a fixed money supply it could see similar amounts of price appreciation as the economy grows. In this event it would not be as effective at maintaining stable prices.

Summary

Network money would likely be the more desirable form of money when compared to token money. Network money would have a larger amount of global acceptance and awareness. It would have more guaranteed demand for the money due to it being required for any transaction fees. If a network achieves global scale and network effects this can also mean that network money faces weaker ongoing competition than token money. The sustained demand for network money 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 network money is far less flexible than token money in how it can be implemented. This is due to the global scale that it needs to handle, which means that network money needs to be as simple and predictable as possible. This simplicity and predictability can make network money a desirable form of money to store, as it should be more reliable and simply governed. Nothing prevents token money from adopting similar implementation approaches, or potentially even simpler ones. So these factors don’t reliably make network money anymore desirable than token money.

A key difference with network money and token money is the flexibility token money has to be implemented in different ways. Countries could manage their own token money and more easily maintain stable prices due to the more limited amount of data and variables they need to consider. Network money 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 network money can often make it a much more desirable form of money to hold when network money and token money have similar monetary policies. This increases the potential risks and concerns around how network money could become increasingly stagnant over time due to its desirable properties that make it more likely that people leave it idle and store it for future use.

Network money will need to effectively incentivise people to use it more productively or to use other forms of money for use cases such as a medium of exchange. To make token money more appealing it could be important that network money maintains a higher rate of demurrage than what is being used for token money. If not, token money would likely need some added incentives or system properties that make it more desirable than network money over the long term.