Responsibility comparison

Network money and token money have a number of responsibilities they will need to handle. Let’s take a look at which responsibilities are most suitable for each type of money.

Network governance

Network money

A Web3 network only needs to be governed by one type of money - commonly the network money. 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 that with Web3 networks no one is forced to use a particular network over another one. 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 with a large amount of investments, fees and taxes towards the network. Network money can be a valuable part of determining voting power for any network governance process as people would need to contribute towards the network by investing capital to acquire network money.

As part of the system of money, network money could be used to help with governing how the system of money changes such as for any money supply changes. 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 any system of money. However simplicity will be even more important for network money due to the increased voting complexity of handling a global user base.

Token money

Token money doesn’t have the responsibility to maintain the network itself. Token money could be used as part of determining voting power for the governance process that manages the system of money for the token itself. This could be for money supply changes or any other monetary policy changes. The complexity for governing the system of money could be similar for network money and token money as they could adopt similar approaches. However overall, network money will commonly have more governance responsibilities than token money as it could be also used to manage the network itself. So overall, token money could have simpler governance processes due to the simpler usage of token money.

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 then be used to pay for node operators or for other ecosystem initiatives. 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 for 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, such as the risk around increasing wealth concentration over time.

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 different tokens. This could 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 exchange pairings it could increase the number of swaps that are necessary to execute certain token exchanges. This could create fragmented liquidity due to the problem of tokens being spread across numerous liquidity pairings due to the usage of many forms of money. Network money could be a highly suitable candidate as a primary form of liquidity for facilitating token exchanges.

Token money

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

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

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 could make 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 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 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 risk that the network systemically fails 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 community and 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 would more likely occur if a global medium of exchange was adopted, where different economies would likely have different growth rates and requirements. Web3 networks help to enable ongoing competition between different mediums of exchange, so many new ideas for systems of money could be experimented with using tokens. This makes token 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

Network money

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 network money for future use 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 left idle for long periods of time. Although network money shouldn’t be a good store of value 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 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. It is this competition that will likely limit how high the rate of demurrage can be for network money. Web3 networks will likely rely on network effects to maintain a sufficiently high rate of demurrage.

Token money

Token money has much more flexibility to decide how it should be implemented. Token money 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 but beyond that point it starts charging them a demurrage fee. Although potentially desirable, this type of implementation would have sybil attack risks as people could split their holdings across multiple wallets to not pay the demurrage fee. Identity solutions could help to potentially prevent this problem and in that event these types of ideas could then be implemented. This is just an example, however it makes it easier to see how large the scope is in regards to how many ideas could be experimented with.

Although the store of value property is not a desirable one for creating an effective system of money there are still many opportunities to explore different implementations of token 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.