Demurrage network coin & network coin taxes

Demurrage means that overall there is a cost incurred for those that hold the network coin. For Web3 ecosystems, the most effective approach for implementing demurrage that has been identified so far is using a network coin tax.

A network coin tax means that people would periodically lose a small amount of the network coin over time. The value of the network coin might remain the same however the act of holding it results in taxation that reduces their coin holdings continuously over time. Network coin taxes represent a highly effective form of taxation for implementing the ideas around demurrage in a Web3 ecosystem as they also help to generate ongoing income for the network's treasury.

Very high system reliability (Score - 5)

A network that uses a network coin tax creates an incentive for people to use the network coin productively instead of storing it. This increases the velocity of the network coin and due to the reduced marginal efficiency of the coin as capital, this increases the amount of viable investment opportunities which should increase the willingness of people to use their network coins for investment, goods or services or for other more productive use cases than simply holding it. All users should benefit from easier access to the network coin due to the incentives that demurrage creates for people to be more productive with the coin rather than just store it.

High treasury income (Score - 4)

A network coin tax could generate consistent income for the ecosystem's treasury each and every day. This income could then be used to fund open source initiatives that improve and maintain the network or other initiatives that introduce new use cases and features. Networks that adopt a network coin tax will be creating a circular economy where the income can be used to fund initiatives that generate more demand for the network. More demand and use cases can lead to growth of the network which can then result in higher income for the treasury to fund even more initiatives. A network coin tax means that income becomes predictable and reliable for the ecosystem. Network coin taxes avoid the issue around varying levels of network usage that can lead to unpredictable income when using a transaction fee model. The number of daily transactions would not directly impact the taxation income. A network coin tax could impact the income that is generated in other ecosystems if they are able to offer consistently offer lower transaction fees for use cases that exist in the other ecosystems. Ecosystems that adopt a network coin tax can repeatedly do this across all use cases until they provide a cheaper alternative for every single use case that exists across the competing networks. This is only achievable due to the fact that the network coin tax income can be used to continuously subsidise and fully fund the node operators, meaning transaction fees can be reduced as much as possible over the long term.

Very low transaction fees (Score - 5)

An ecosystem that adopts even a small network coin tax is able to subsidise or fully pay for node operators. This means transaction fees can be reduced as they are not needed for paying node operators. A network coin tax helps to remove most of the unpredictability out of the income they receive.

Transaction fees can remain more predictably low using network coin taxes as when a network has scaled up the sudden changes in the network coins value should be more limited. If transaction fees aren’t being used to pay for node operators the fee could even be zero. However fees cannot be zero without some form of deterrent or identity solution with sybil resistance to prevent malicious actors from spamming the network with transactions. So in reality the fee would need to be high enough to sufficiently disincentivise people from spamming the network in this way.

Another reason this approach is better for reducing transaction fees is that it spreads the cost of operating the network across everyone that is holding the network coin rather than consolidating that cost across only those that are transacting.

Very high incentive alignment (Score - 5)

A network that adopts a network coin tax is able to create more fully aligned incentives in the ecosystem for maintaining and improving the network. In terms of income, everyone holding the coin would be contributing fairly towards the treasury as the tax would be proportionally based on the amount of network coins they possess. In terms of funding, everyone that funded that treasury would be incentivised to support any initiatives that generate impact for the ecosystem or that could increase the network's overall value. Contributors that get funded by the treasury would be incentivised to generate impact for the ecosystem wherever possible. Contributors would have the flexibility to contribute in any way that is most beneficial to the ecosystem and wouldn’t need to be locked into one specific project. This is all assuming the funding process has been designed with contributor flexibility in mind.

High network security (Score - 5)

A network coin tax means it becomes less attractive to hold due to the costs of holding it for a long period of time. Demurrage helps to ensure the coin is less effective as a store of value. This incentivises people to invest or exchange their network coins more regularly which creates more opportunities for people looking to start new businesses and that want to provide their labour for income. Demurrage helps to create a natural incentive for coins to disperse over time across the community to people that are offering their goods and services. These outcomes should be more useful to the ecosystem over people just storing a coin that they are gradually losing over time due to the network coin tax. Increased coin dispersion helps to increase the security of the network as the coin and its influence is being spread across more people. Demurrage helps to prevent concentrations of wealth from occurring, which can help with ensuring the network remains secure and decentralised over the long term.

Very high investment opportunity (Score - 5)

A network coin tax can create a large opportunity for people to invest into the network's coin and hold it throughout the growth phase of the network. A network coin tax could help to accelerate the development of the ecosystem. This is because the income generated by the network coin tax could be used to fund initiatives that improve the network and that introduce further use cases for the community to use. The cost of the taxation could be much lower than the growth of the network that is achieved from funding these impactful initiatives. A network coin tax could result in a large and ongoing amount of coin price appreciation due to this growth. In the earlier stages of the network this growth potential could represent a large investment opportunity for people to just hold the coin due to the ongoing price appreciation. Network coin taxes can create a highly effective circular economy that increases the value of the network coin due to ongoing funding that is made available for improving the network.

Total score = 28 / 30