Network coin tax data modelling
Last updated
Last updated
A number of comparisons can be made to better understand the implications of adopting a network coin tax within a Web3 network.
The approaches we want to compare are as follows:
Storable network coin & added transaction fees generating treasury income - The network coin doesn’t lose value over time and the base transaction fee is increased to generate ongoing income for the ecosystem treasury.
Storable network coin & excess transaction fees generating treasury income - The network coin doesn’t lose value over time and the transaction fees are as low as possible with only excess fees being used as treasury income that are above the compensation threshold for node operators.
Demurrage network coin & 0.1% network coin tax - The network coin simulates the effects of demurrage using a 0.1% network coin tax.
Demurrage network coin & 1% network coin tax - The network coin simulates the effects of demurrage using a 1% network coin tax.
The data model applies some examples values to illustrate the difference between these approaches based on whether the user is storer, an active user or a combination of the two. The data modelling can be found here:
Storable networks are great for savers and bad for active users
The most important users for a Web3 network are those that actually use the network and generate economic activity. Those that just store the network coin are generating no activity and are limiting other peoples access to the network coin. A storable network means that storers will pay nothing towards supporting the network. Only active users will pay for fees that support the network. Active users are unfairly punished with a larger financial burden as the fees to maintain the network are only split across those that are actively using the network and not those that are storing the network coin and not submitting transactions.
Generating treasury income with added transaction fees punishes active users
If treasury income is generated through active users this is a form punishment for active users as they now would also be the only ones that are paying towards the treasury. Storers of the network coin wouldn’t need to contribute towards the treasury. This approach leads to the worst outcome for active users as it is the most expensive approach for them to use the network regularly. This creates an incentive to use other networks where the transaction fees are lower. A storable network that only generates treasury income from excess transaction fees solves this problem however now the income potential for the treasury could be drastically reduced if transaction fees are being reduced as much as possible.
Storable networks could have transaction fees that are nearly as cheap as demurrage networks
If node operators were paid a predictable or fixed amount based on performance both storable networks and demurrage networks could reduce their fees once this threshold of compensation has been reached.
With storable networks it is more difficult to lower transaction fees as low as possible as node operators rely on the income generated from transactions. This means the network needs to predict how many transactions it will receive to reduce the fees accordingly to make sure the node operators are only compensated what is necessary. Alternatively it means using a single fee amount that could have been reduced due to the excess income that was generated beyond the intended compensation amount. Storable networks will likely need to introduce a buffer so that node operators are always sufficiently compensated otherwise this could create a systemic risk for the network. Node operators also rely on the price stability of the network coin as if the price drops the same transaction fee amount might not be enough to incentivise ongoing operation.
Network coin taxes don't rely on transaction volume which makes the income more predictable. They do however rely on price stability of the network coin. Overall this should mean that network coin taxes provide more reliable income for node operators than transaction fees. The transaction fees can be reduced to the absolute minimum and it can remain there in perpetuity. The only increase in fee that is commonly required is one that prevents transaction spammers. Demurrage networks should be able to more reliably keep transaction fees as cheap as possible. The other benefit of the network coin tax approach is it spreads the cost of paying for node operators across the entire network of people that hold the network coin rather than just being the responsibility of active transacting users.
Network coin tax networks will need to add additional incentives or have sufficient network effects to maintain a high network coin tax
A network with a network coin tax could be easily duplicated and the network coin tax could be reduced to only pay for node operation. When these networks mature there will likely be less development effort required to improve and maintain the network. This situation creates an opportunity to reduce the network coin tax or for other networks to duplicate the network and reduce it.
This could make it difficult to keep the network coin tax above the cost of operating the network unless an additional incentive is added to generate ongoing demand for the network coin. Alternatively network effects could help with preventing people from leaving the network due to the difficulties in getting everyone to migrate elsewhere.
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