Web3 money use cases & responsibilities

In Web3 networks there are a number of potential use cases and responsibilities that could be handled by Web3 money.

Network governance

Web3 networks need to be maintained and improved over time. The community will often need to consider the existing network parameters and when they might need to be changed. New versions of the network protocol might need to be approved through a governance process before deployment. Treasury income that is generated by transaction fees, wealth taxes or other forms of taxation would need to be governed by the community to determine how those funds should be spent. Web3 money could play an important role in some or all of these governance decisions. Web3 money could be used to determine someone's voting power in these decisions. How much Web3 money someone holds is one form of contribution. The network benefits from some form of ongoing demand for the money as this helps to maintain the price of that money. How much fees or taxes someone has paid is another valuable contribution. The network benefits from people that actively use the network as this generates treasury income or pays for the node operators that maintain the network.

Network governance is a vital part of ensuring a Web3 network survives and thrives over the long term. It is difficult to adopt parameters that never need to be updated or to create protocols that never require any future changes. Web3 networks are open and permissionless, no one is forced to use one network over the other. This is why contributions are an important part of determining voting power as that can prove which people are participating and using the network. Whether people hold or use the Web3 money regularly or not can be an important contribution to consider when determining who should have more or less voting power in any governance decisions.

Network operation

Web3 networks are digital systems of money. They require people to purchase hardware and then run software to operate the nodes that run the network. These nodes will verify any transactions that get submitted and store any successful transactions on a distributed ledger. Node operators need to be incentivised to participate in the network as otherwise there would be no financial reason for anyone to maintain the network. Web3 money is commonly used to pay for the node operators. Transaction fees could be used to pay for node operators or they could also be paid through other forms of taxation.

Network operation is a highly important responsibility for money as the incentives need to be reliable and effective over the long term. Problems with incentivising the node operators at any stage could lead to systemic failure risks for a Web3 network.

Financial liquidity

Web3 networks enable the creation of tokens that can represent any asset that is physical or digital. They could have any number of properties or be used for any number of use cases. Distributed ledger technology should bring many more assets online and make them available as token based assets. Tokens could represent full ownership or fractional ownership over an asset. They could also provide the holder with other rights that might be useful. Web3 money could be paired up with any of these token based assets and be provided as liquidity in an exchange. Web3 money could also be used as liquidity for lending and borrowing. More financial liquidity means enabling people to quickly swap the network coin and any existing tokens for one another or for borrowing or lending different forms of money. Deep liquidity is an important part of making the exchange process more efficient by reducing slippage. Liquidity could become increasingly fragmented if every token had to make an exchange pairing with every other token. And this could become increasingly problematic due to a growing number of tokens over time that each gain adoption. It is therefore beneficial for only one or a few forms of Web3 money to be used for facilitating the exchange process to increase the speed and cost effectiveness of moving from one token to any other token that is available in the network.

Financial liquidity is a very important responsibility for Web3 money as these networks are competing with other networks to provide the most seamless experience for accessing, purchasing, swapping and holding digital assets. Those that can incentivise the deepest and most accessible liquidity with the least slippage will be more likely to become the most desirable network for handling digital assets due to their scale and efficiency.

Medium of exchange

Historically money has been governed and maintained by nation state central banks. Money would be assigned the classification of legal tender and this meant everyone would need to accept that currency as a medium of exchange for any goods or services. Web3 networks change this paradigm, as users can decide which forms of money they want to create, use and accept themselves. Nation states may still determine what is legal tender in their own countries, and that may still be required for tax related payments. However Web3 changes the monetary system. People can decide themselves what forms of money they want to hold and use to exchange value in their day to day lives.

People use money on a daily basis to pay for goods and services. Web3 money can be adopted as the medium of exchange to transfer value from one person to the other. A medium of exchange that is broadly adopted and used can benefit from responding to economic changes so that prices can remain stable. This can mean that the supply of the money might need to increase or decrease depending on different economic factors. People want money that is reliable and stable so that economic exchange isn’t interrupted due to volatility or a lack of availability of that money. Web3 networks enable anyone to create their own medium of exchange in the form of token based assets. This means that there could be an ongoing amount of competition between different forms of money that compete against each other to be the most effective medium of exchange.

The medium of exchange is a vital part of any economy and Web3 money will likely play an increasing role in how people exchange goods and services. Web3 networks create a completely new environment for money. There is an opportunity for multiple mediums of exchange to exist at the same time and compete with one another in a free market.

Store of value

It is not desirable for Web3 money to be an effective store of value due to the problems that arise from adopting hoardable money. However even if demurrage is applied onto a Web3 money that doesn’t mean the money doesn’t maintain most of its value. A small demurrage fee, such as a 1% annual loss of value, would still mean that Web3 money is a better store of value than a number of products such as fruit and vegetables, dairy products, meat, cars or mobile phones that all commonly depreciate in value over time at a faster rate. It would still be desirable to hold Web3 money over these products if the objective was to maintain purchasing power. With a 1% annual loss the holder would be able to retain 99% of the original value.

Demurrage helps to decrease the effectiveness of money as a store of value so that it isn’t hoarded to the extent that it is currently. Different forms of Web3 money could explore what rate of demurrage is going to be the most effective and relevant for them.

Web3 money that adopts demurrage will be competing with other assets that could be effective as stores of value. This could be problematic for Web3 money if this means there is little to no demand for using the money. A balance needs to be struck where enough incentives or network effects exist that increase the demand for demurrage money so that people use it. But those incentives and network effects shouldn’t be so effective that they result in people hoarding the money!