Demurrage advantages & opportunities

There are a number of advantages and opportunities for Web3 ecosystems that adopt demurrage via a network coin tax. Demurrage can help to improve the reliability of a Web3 network coin. It is also can be advantageous for the network, its treasury and society more broadly.

Fungible assets

The following are some advantages that are applicable to many fungible assets that adopt demurrage, this also includes systems of money.

Increased network coin velocity

Implementing demurrage would help with increasing the velocity of money due to the incentives it creates for users to not leave money idle in their wallet. The longer that someone holds demurrage money in their wallet the more money they will lose due to demurrage. For Web3 networks this will likely be due to a network coin tax. Users are incentivised to do something productive with the money rather than just hold it, such as by purchasing goods or services or investing it into business ventures.

Smaller network coin supply changes

Systems of money could benefit from having a certain supply change mechanism that is suited to their use cases, such as fixed, expansionary, contractionary or elastic. These money supply change systems may be automatically adjusting, which is desirable to avoid the need for community governance at a global scale. Demurrage can help with improving the systems around supply changes as it can help with increasing the velocity of money. Higher velocity should mean that even small supply changes are more effective at impacting economic activity in the network. Increases in the supply of money should be under the same impulse and incentives for it to be used productively due to the effects of demurrage. Demurrage and higher coin velocity within a Web3 ecosystem should help with reducing the number of size of any money supply changes.

Incentivises productive network coin usage

If users don’t leave their coins idle in their wallet, due to the incentives created by demurrage, they will need to find a place to spend or invest that money. Demurrage could help with persistently increasing the amount of economic activity that occurs in the network. Every holder of money would have an incentive to put it to better use rather than just hold it. Increasing the amount of economic exchange is desirable as it means someone's goods or services are being paid for and those sellers can then use that income to either provide more goods and services, invest it or use it elsewhere in the economy. Investments are highly beneficial for economic activity as now someone who might not have been working is now given the opportunity to contribute towards the economy and start providing their own goods or services. The ongoing incentives created by demurrage can help with lowering the prices of goods and services and making a more competitive market due to the ongoing incentive for people to either exchange or invest their money. Demurrage also helps to reduce the marginal efficiency of money as capital, which increases the number of investment opportunities that now become viable due to them now representing a better return on investment than simply saving the network coin.

Easier access to the network coin

People that don’t have much money could greatly benefit from demurrage. Demurrage would increase the demand for labour as it increases the number of business ventures that become viable. As an example, a farmer might be interested in growing mango trees. This investment might only breakeven or generate a small return on investment. This business opportunity might only become viable thanks to the adoption of demurrage. The investor would benefit from not losing money by just holding their coins. And the farmer growing mango tree’s benefits from getting access to the capital that will help them start their business. Without demurrage this investment might not have ever occurred. But thanks to demurrage the whole economy benefits from easier access to money that can help with starting a new business.

Reduced coin based inequality

If someone receives interest from simply holding or staking the network coin there is a strong likelihood that inequality in coin ownership will increase over time. Any form of a storable network coin should be able to generate positive and risk free interest due either staking rewards or from lending it out in a single asset borrowing and lending protocols. The amount of interest they would earn could vary however it would still be a positive rate of return.

Let’s consider a 1% interest rate. A person holding $1 million worth of the network coin would receive $10,000 in interest each year. If they are able to live off less than that amount they reach escape velocity where they can perpetually increase their network coin position each year without contributing anything else to the economy. Demurrage prevents this likely inevitability as instead of gaining 1% each year they would be losing 1%. Now instead of reaching escape velocity it instead gets harder and harder to retain large amounts of the network coin over the long term due to the loss from demurrage. A positive interest rate for holding or using the network coin in a risk free manner is an example of unearned income - someone is receiving income without contributing anything else to the economy. Demurrage helps to reduce these issues around unearned income and reduce the possibility of coin related inequality over the long term.

Network

Increased coin decentralisation

Demurrage incentivises people to exchange or invest their coins rather than leaving them idle. This can help with increasing the amount of coin dispersion across the network, which is highly beneficial for a Web3 network due to preventing the concentration of coin ownership over the long term. The network coin can be commonly used to determine someone's voting power when participating in governance decisions, such as network parameter changes. Decentralisation of coin ownership is highly useful in these contexts as it would help with improving the security of the network. Decentralised ownership means the power to influence the network's operational parameters is distributed across more people. Even a small rate of demurrage can help to ensure the network coins will not consolidate into the hands of a few people due to the cost of holding a large amount of coins.

Node operator income stability

A network coin tax could either subsidise or fully pay for the operational costs of running a node. This means transaction fees could be reduced or even potentially removed in the future. This makes the network more competitive in the market. A network coin tax is a periodic form of tax which can generate predictable and reliable treasury income. It represents a long term solution for keeping transaction fees as low as possible whilst also generating income to compensate node operators.

Flexible supply change mechanisms

Demurrage when implemented as a network coin tax does not involve any constraints on how the supply of money is handled. Web3 networks could implement a network coin tax and then adopt any approach for making supply changes. These include fixed, expansionary, contractionary or elastic supply models. For example, for an elastic supply mechanism, a network could introduce more coins into the network via the treasury and then remove some of the supply from the income that is generated by the network coin tax.

Granular incentive mechanisms

Another opportunity with applying demurrage to Web3 networks is how granular the coin taxation rate could be applied towards different use cases. It could be higher when the coin is sitting idle in a wallet and lower when it is deposited in a financial protocol. A more granular approach to applying the network coin tax creates an opportunity to incentivise the exact outcomes that a network is trying to achieve.

As an example, creating more efficient financial markets is one potentially desirable goal for these types of incentive mechanisms. This could be valuable for a Web3 network as the coin's value might be mostly or fully derived from its usage for transaction fees. Without multiple sources of demand the price of the network coin could become more volatile due to changing amounts of transaction volume. The network coin could be used as token exchange liquidity or as lending and borrowing liquidity as some examples. These use cases could help with better maintaining stable prices for the network coin over the long term. The network coin could be focussed on being used for either transaction fees or as financial liquidity. The more effective the network coin is at facilitating token exchanges the more efficient the network's token market becomes. A network coin tax could help with creating these types of outcomes, resulting in more efficient financial markets by reducing the taxation rate when the network coin is deposited as financial collateral. Getting these incentive mechanisms right could help with creating more powerful network effects that help a network with thriving over the long term.

Treasury

Ecosystem funding

The income generated by a network coin tax would be reliable and predictable. This income can then be used for funding ecosystem initiatives that introduce new use cases or that improve the network's infrastructure. Even a small percentage tax rate could generate a meaningful amount of income to help with maintaining and improving a Web3 network. Network coin taxes would be charged periodically, such as every day, meaning they would only collect a very small percentage amount. Over a year the aggregate taxation value collected would represent the annual percentage tax rate. The exact amount of income would be known ahead of time due to it coming from the existing supply. The predictability of the taxation income is beneficial for the ecosystem's funding process as it can be taken into account when planning and funding any larger initiatives. Ecosystem funding can help with creating a positive flywheel for improving and growing the network. The better the return on investment is for funding ecosystem initiatives the faster the price of the network coin could appreciate. More coin price appreciation means the same network coin tax can pay for a larger amount of ecosystem initiatives. This creates a growth flywheel that could keep repeating until the network is globally adopted.

Accelerated ecosystem growth

The network coin tax could dramatically help with increasing the ecosystem's rate of growth. The founding entities first need to prove that the funding process is sufficiently effective at improving, maintaining and growing the ecosystem. If the return on investment from the funding process is higher than the cost it would be beneficial to consider increasing the tax rate. The higher the coin tax rate the larger the amount of income for the treasury, income that can then be used for funding more ecosystem initiatives. Holders of the network coin might lose more coins from the network coin tax but they could benefit from much faster coin price appreciation due to the initiatives that get developed due to the funding process. Web3 networks operate in a highly competitive market, so increasing the growth rate of the ecosystem would likely be highly desirable due to the opportunity of rapidly improving their network effects faster than any competing networks.

Society

Global public goods funding

A network coin tax creates a massive opportunity to fund large scale and highly impactful global public goods initiatives. If a large and consistent amount of funding is available for funding the ecosystem's own development there are two key reasons why an increasing amount of funding could become available for global public goods over the long term.

The first reason is that the ecosystem will eventually start to mature and this could mean it requires less funding for development efforts. This is not to say that funding will become no longer necessary, as research efforts would likely always be valuable for exploring even small potential improvements could be made in the network. Instead, what might happen is the financial requirement for network research and development could plateau and stabilise instead of needing to continuously grow alongside the network.

The second reason more funding should inevitably become available is that if the ecosystem is successful, the value of the ecosystem should grow over time. This means that even a small percentage network coin tax could equate to a large and growing amount of available funding. For instance an annual 1% network coin tax for a $10 billion ecosystem would mean $100 million in treasury income each year. For a $1 trillion ecosystem this would mean $10 billion each year. A network coin tax should lead to an increasing likelihood that global public goods can be funded using that income.

This is a huge opportunity for society, Web3 networks and their funding process could create highly aligned incentives for people to get funded to work on global public goods. High performing contributors could be paid extremely well and their contribution efforts could be directed towards highly impactful initiatives that globally benefit society.

Engineering, scientific, medical and environmental based research and development efforts are just a handful of example areas that could be well funded through a Web3 networks funding process over the long term. Demurrage when implemented via a network coin tax represents a massive opportunity to create one of the largest and most effective funding processes for supporting global public goods.