Web3 network development phases

Different objectives and incentives exist for a Web3 network and its stakeholders depending on where it is along its development path. In the earlier stages it is highly beneficial for the network to focus on attracting as much investment as possible to bootstrap the initial liquidity in the network and to increase the network coin value. As the ecosystem progresses the importance of coin velocity and usage increases as more use cases and applications are developed. When the ecosystem starts to mature it needs to focus more heavily on the amount of coin dispersion so that everyone can reliably access the network coin and benefit from using the network. The importance and effectiveness of a demurrage currency increases over time as the network achieves more adoption and as more people become increasingly reliant on the network in their daily lives.

Genesis phase

Demurrage doesn’t need to be implemented immediately. A genesis allocation of coins is often allocated at the start of a network. This allocation can be used to fund impactful initiatives in the short term. A good starting point for a Web3 network is to focus on setting up the treasury and funding process to start developing the first set of applications and use cases.

Objectives & incentives

• Founding entities - Founding entities need to pay for ongoing development costs to improve and maintain the network's infrastructure. Founding entities have the objective to create an initial funding process that can demonstrate how existing and future funds could be used effectively. This is important to get right as it will be used to justify the introduction of a network coin tax. There is also a need to market the network and maximise the size of the community and overall investment into the network. More investment means more funding for different initiatives and it should also help with increasing overall development velocity.

• Contributors - Contributors want to benefit from the genesis allocation of coins that they could receive to build new use cases and applications on the network. They benefit from the coin's value being as high as possible so that the ecosystem can fund more contributors and different initiatives.

• Community members - Community members are looking to maximise their investment returns by investing into the Web3 ecosystems that they most believe in. Community members will be looking at how effective the founding entities have been at using the available funding and how effective the initial funding process is at generating impactful returns on investment. This can influence how much investment the ecosystem is able to attract.

• Overall ecosystem - Maximise investment into the ecosystem and create initial treasury systems and funding processes. Investments will be used to bootstrap network development and for funding for initial applications and use cases.

Coin storing

People storing the network coin to benefit from investment returns would be at its highest in the earliest stages of the network as this is when there is the least amount of applications and protocols available and the most upside potential for price appreciation. The lack of demurrage via a network coin tax creates an incentive to invest in the network and store the coin to take advantage of any potential price appreciation. Coin storage is highly beneficial at this early stage of the network. The ecosystem wants as many people as possible to hold the coin so that its value can increase. Investment into the ecosystem and storing coins can help to maximise the value of the funding that is available from any genesis allocation of coins. These coins can be used to fund impactful ecosystem initiatives.

Coin usage

Coin usage would be at its lowest in the earlier stages of the network, which means you would expect to see little coin velocity due to a lack of applications and protocols. You would still expect to see a moderate amount of coin velocity due to people buying and selling the coin as an investment.

Growth phase

The growth phase is when the ecosystem introduces demurrage via a network coin tax. This will start generating ongoing income for the treasury that needs to be spent each year. The network would use that income in the funding process to develop new use cases, protocols and applications.

Objectives & incentives

• Founding entities - Founding entities need to prove how effective they have been at creating a funding process that can generate a positive return on investment. The network coin tax will be used to fund ongoing development and ecosystem initiatives. Their objective is to refine and improve the funding process as much as possible to maximise the impact and growth potential of the funded initiatives. The overall objective at this stage is to introduce a network coin tax that accelerates the growth of the network by funding impactful initiatives and ongoing development and improvements that can be made to the network.

• Contributors - The objective for contributors is to generate as much impact as possible in the ecosystem so that they will be selected to receive funding. The incentives to achieve this objective should grow stronger over time once the network coin tax is introduced. This is because if the network grows it increases the amount of funding that is available. Contributors could be paid very well to work in the ecosystem. This would align the incentives with attracting top performing talent.

• Community members - Community members still have the objective to maximise their return on investment from investing into the network. Community members might lose money from a network coin tax however they could also see large amounts of coin price appreciation due to the new use cases and applications that get developed. Community members will be able to benefit from a number of these new use cases that get developed. Community members have an ongoing incentive to just store the coin whilst the network is growing quickly and at a rate that is above the cost of the network coin tax.

• Overall ecosystem - Investment remains highly important for the ecosystem as this will help to retain and grow the value of the network coin. The coin can be actively used to fund a lot of different initiatives. The quality and effectiveness of the funding process becomes a large focal point as this will heavily influence the overall growth of the network and this will either enable future network coin tax increases or limit them. If a network is able to generate returns on investment that are higher than the tax they are collecting they are incentivised to keep increasing the network coin tax to maximise the growth rate. A performant funding process plus high network coin taxes could translate into the fastest possible growth rate for the ecosystem, which could be an effective approach in a highly competitive market.

Coin storing

Coin storing is still highly beneficial during the growth phase of the network. Any treasury income that is generated by the network coin tax will benefit from the coin maintaining or growing in value. A coin that is in high demand and being stored can help to increase the amount of initiatives that can be funded from the income that is generated from the network coin tax.

Coin usage

As the number of applications and use cases increase the reasons for people to transact and use the network should also increase with it. This should create a demand for the coin for using it beyond it being an investment. The larger the network becomes the more you could expect to see the coin velocity increase. Demurrage will also help with increasing and maintaining coin velocity due to the incentives it creates to not store it. The incentive to use the coin productively in the ecosystem increases over time as the growth of the network slows down as this will mean that storing the coin will become less financially viable over the long term.

Dispersion phase

The dispersion phase of the network is when the yield that can be generated by storing the network coin tax in a low risk financial protocol is lower than the network coin tax rate. When this becomes true the holder of the network coin will be losing coins each year unless they buy more of the coin. It becomes increasingly expensive to replace the lost coins each year if the coin's value is increasing due to economic growth. This helps lead to an inevitability that people will start losing coins over time. Holders of the network coin still can experience a positive return on investment each year as the value of the remaining coins they hold could be higher than it was the previous year. People are now more highly incentivised to use the coin more productively to minimise the loss of coins each year.

Objectives & incentives

• Founding entities - Now that the ecosystem is mature the objective for the founding entities is to ensure that the stewardship of maintaining and improving the network is fully transitioned towards the community. Governance structures should now be developed and sufficiently effective for managing and adjusting any parameters involving the network, treasury or funding process.

• Contributors - Contributors would still have the same objective of making the most out of the funding that is being made available from the treasury. Now that the ecosystem is large and mature it means that many contributors could be reliably funded by the ecosystem's funding process. Working for the Web3 ecosystem could now represent a highly lucrative career path that attracts top performing talent from across the world.

• Community members - The incentives for community members have now changed. Storing coins is no longer the obvious strategy. Holders would be losing coins each year but the remaining coins might still be increasing in value. The objective for community members is now to respond to any incentives on how to minimise their loss of coins and to identify any opportunities that might yield a better investment.

• Overall ecosystem - The funding process should now be highly refined and effective at this stage of the network. The network should have a large amount of use cases, applications and protocols for people to use. The overall objective for the network is now to ensure that everyone is able to benefit from what has been developed and for the network to become a global public utility. It is at this point where demurrage and reducing the amount of storing becomes an increasingly important objective for the network. The cost of holding the coins needs to be higher than the gain from the aggregate of any low risk yield bearing financial protocols, if this is achieved the amount of coin dispersion should continue to increase over time as the cost of holding large amounts of the network coin are too high to replace the taxed coins.

Coin storing

The network coin tax should now become increasingly effective at minimising the excessive storage of the network coin. In this phase it is no longer highly lucrative to hold the network coin. Instead people are now incentivised to identify more compelling investment opportunities and hold as much of the network coin as they are incentivised to. The network can incentivise people to hold an exact amount of the coins to ensure the demand for the network coin remains high, demand for the network coin is still important for securing the network.

Coin usage

The effects of demurrage via a network coin tax will be much more effective at this stage for incentivising people to use the money they have productively such as using it within financial protocols that the network incentivises or for other investments. There should also now be a lot more protocols, applications and use cases for people to use. Coin usage should now be at its highest and remain high due to the functionality that is available and due to the ongoing incentives created by demurrage.