> For the complete documentation index, see [llms.txt](https://money.web3economy.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://money.web3economy.io/web3-network-coins/why-apply-demurrage-to-the-network-coin.md). # Why apply demurrage to the network coin? Demurrage is a recurring charge applied to the possession of a monetary balance. Its purpose is to increase the cost of prolonged retention and create an incentive to spend, lend, invest or otherwise make the asset available. A network coin introduces additional considerations because it is not merely a transferable monetary asset. It may also: * Provide access to network resources * Compensate node operators * Support consensus * Influence governance * Provide liquidity or collateral Applying demurrage to the network coin can make an asset required by the entire network more available, productive and difficult to concentrate indefinitely. When the charge is transferred to a treasury, it can also provide recurring income for node operation, ecosystem development and other useful work. These outcomes depend on the rate, implementation and use of the collected coins. Demurrage does not automatically create productive investment, decentralised ownership or effective treasury expenditure. It creates incentives and resources that can make those outcomes more achievable. ## **Advantages and opportunities** The advantages and opportunities of network-coin demurrage can be divided into four areas: 1. Improving the network coin as a fungible asset 2. Improving the operation and decentralisation of the network 3. Creating reliable treasury funding and supporting ecosystem growth 4. Funding wider public goods ## **Improving the network coin as a fungible asset** **Increasing network-coin availability** A large nominal supply does not guarantee practical availability. Coins may remain concentrated in inactive wallets or positions that do not make them accessible to other users. Digital money is particularly easy to store. A network coin does not rot, rust or require physical storage space, and a large balance can be held using the same type of wallet as a small balance. Once a participant has secured the relevant credentials, the direct cost of leaving a balance idle may be very low. Staking and financial protocols can make retention even more attractive. Rather than merely preserving a balance, a holder may receive additional coins while maintaining exposure to the asset’s price. If the network grows and the coin appreciates, the holder can benefit from both increasing coin ownership and increasing purchasing power. This creates strong incentives to accumulate and retain the asset. When retention has little cost, holders can wait indefinitely for higher prices and remove coins from the market. A user may need only a small amount for a transaction, but that amount must still be obtainable from someone willing to sell, lend or provide it. Demurrage changes this calculation. A holder leaving coins idle experiences a gradual reduction in their balance, making it more attractive to sell the coins, spend or lend them, provide liquidity, stake them, use them as collateral or invest them in productive activity. This can increase the amount of the coin available through token exchanges and lending protocols. Users and applications can obtain the coin more easily, reducing the risk that a small number of holders control access to an asset required by the wider ecosystem. Greater availability does not require every coin to change hands constantly. Coins committed to staking, liquidity, lending or collateral may remain in a position for an extended period while still supporting network operation or making resources available to others. **Increasing network-coin velocity** Coin velocity describes how frequently the network coin changes hands during a given period. If a large proportion of the supply remains in the same wallets for years, the actively circulating supply may be much smaller than the nominal supply. Demurrage creates an incentive to move idle coins into active economic use. A holder may spend the coin on goods or services, use it for network fees, provide token exchange liquidity, lend it to another participant, exchange it for another asset or invest it in a business or application. The same units can then support multiple transactions over time. Higher and more consistent velocity allows a given nominal supply to support more network activity. The objective is not to maximise velocity without limit. Users require working balances, node operators need reserves, and staking, collateral and long-term liquidity positions may provide value while remaining committed. The objective is to make the actively available supply more reliable and less dependent on speculative expectations or changing confidence. **Making smaller supply changes more effective** Demurrage can operate alongside fixed, expansionary, contractionary or elastic supply policies. This provides two distinct tools: * Supply policy determines how many units exist. * Demurrage influences the cost of retaining those units. More consistent circulation may reduce the scale of supply adjustments required to support network activity. Without demurrage, a decline in velocity may create pressure to issue more coins even though the existing supply is theoretically sufficient. Previously inactive balances may later return to circulation alongside the newly created units, increasing uncertainty. By encouraging existing coins to remain available, demurrage can make smaller supply changes more effective and predictable. Newly issued coins would also face the same incentive to enter productive use rather than remain idle. Demurrage does not eliminate the need to consider supply, and it cannot compensate for unlimited issuance or rapid changes in demand. It can, however, reduce the number and scale of supply changes required. **Encouraging productive use through granular incentives** Demurrage changes the relative cost of leaving coins inactive while allowing the network to create precise incentives for valuable uses. An inactive wallet balance could pay the base rate, while recognised productive positions could receive reduced rates. Qualifying uses might include staking, token exchange liquidity, single-asset lending or contract collateral. This is more granular than general inflation or uniform rewards, which can affect coins regardless of how they are used. It also allows the network to encourage productive activity without creating large additional rewards. Holders receive a benefit by avoiding part of the standard carrying charge rather than by receiving substantial newly issued rewards. The network can therefore direct incentives towards outcomes that are collectively useful. For example, reducing the charge on network coins supplied as exchange liquidity could deepen token markets, reduce slippage and make the network coin easier to obtain for fees. These reductions should be limited to clearly valuable, durable and verifiable positions. Overly broad or activity-based incentives could encourage artificial transactions, inactive token markets or other forms of avoidance. **Supporting more efficient financial markets** The network coin can provide liquidity for token exchanges or be made available through lending protocols. These functions can help maintain reliable demand and improve the efficiency of the network’s financial markets. The coin may act as a common pairing across token markets. This reduces the need for every token to maintain a deep direct market against every other token. Deeper network-coin liquidity can help to reduce exchange slippage, make tokens easier to trade, make the network coin easier to obtain, improve price discovery and support applications that require collateral or liquidity. Coins locked for fixed periods can provide especially reliable market depth. A lower demurrage rate for productive financial positions can encourage these outcomes without requiring the network to issue large rewards. Getting these incentives right can create powerful network effects. More efficient markets make the network more useful, attracting users and developers and creating further demand for the coin. **Reducing passive concentration of ownership** Low-cost storage combined with positive returns can cause ownership to become more concentrated over time. A participant with a sufficiently large balance may fund their expenses using only part of their staking or lending return and reinvest the remainder. Their ownership can continue increasing without a corresponding new contribution of labour, goods or services. For example, a participant holding £1 million of the network coin and receiving a 1 per cent low-risk return would receive approximately £10,000 each year. If their expenses were lower than this amount, they could continue increasing their position while making no additional contribution to the economy. A proportional carrying charge changes this outcome. At a 1 per cent annual rate: * A holder of 100 coins would pay approximately 1 coin a year. * A holder of 1,000,000 coins would pay approximately 10,000 coins a year. The percentage is the same, but the larger holder must earn substantially more merely to preserve the existing position. If the effective demurrage rate exceeds the low-risk return available from staking or lending, ownership cannot grow indefinitely through passive or low-risk activity alone. Holders can still increase their balances by providing goods, services, labour, capital or risk-bearing investment. Demurrage does not prevent wealth accumulation. It reduces the advantage attached to ownership itself by requiring continuing income or contribution to preserve a large position. Demurrage addresses only one source of concentration: the ability to preserve and increase a large monetary position through low-cost, low-risk retention. Participants may still accumulate coins through successful businesses, risky investments, control of productive resources or preferential financial opportunities. ## **Improving the network** **Treating the network coin as a shared operational resource** The network coin is privately controlled by individual holders, but its availability affects shared infrastructure. Users and transaction sponsors may need it to pay for network resources. Node operators receive it as compensation, and it may also be required for staking, governance, liquidity and collateral. Everyone using the network therefore depends on the coin remaining obtainable. If a large proportion of the supply is held idle, the nominal supply still exists, but fewer units are available through markets or productive positions. A concentrated and inactive supply can make the cost of obtaining the coin more volatile, increase dependence on a small number of holders, restrict access to network services, concentrate consensus power and concentrate governance influence. Demurrage applies a carrying cost to private control of this shared operational resource. Holders retain ownership and remain free to decide how to use their coins, but indefinite inactivity is no longer costless. **Supporting coin dispersion** Demurrage can support the gradual dispersion of the network coin. Holders have an incentive to transfer coins in exchange for value rather than allow their balances to decline. Coins may move towards workers, businesses, developers, node operators, service providers, borrowers, liquidity providers or other active network participants. Treasury expenditure can reinforce this effect by distributing collected coins to node operators, developers and other contributors. The outcome depends on how treasury income is used. Returning collected coins proportionately to existing holders would weaken the effect. Repeatedly funding the same organisations could reinforce concentration rather than reduce it. Demurrage therefore creates an opportunity for greater dispersion, but treasury and governance design determine whether that opportunity is realised. **Improving consensus decentralisation** In a proof-of-stake network, coin ownership can translate into influence over consensus. A concentrated supply may allow a small group to control a substantial proportion of validation power, coordinate censorship or otherwise influence the accepted ledger state. Demurrage makes a large position more difficult to preserve indefinitely without continued contribution or expenditure. Treasury payments can also distribute coins to a wider population of operators and contributors, allowing more participants to stake and validate transactions. The effect depends on how staked coins are treated. Staked coins may receive a reduced rate because they contribute to network security, but the reduction should not create a low-risk net return that allows large holders to increase their ownership continuously. An excessive demurrage rate could also weaken security. If it causes demand and market value to decline substantially, an attacker may be able to acquire a significant position more cheaply. Demurrage supports consensus decentralisation only when the rate discourages persistent concentration without undermining demand for the coin. **Improving governance decentralisation** If coin ownership affects voting power, the distribution of the coin also affects governance. Without a carrying cost, large holdings can remain intact indefinitely and grow through staking or financial yields. Influence over protocol rules, treasury expenditure and monetary policy may therefore become permanent without requiring continued contribution. Demurrage makes ownership-based influence costly to preserve. This can make governance more responsive to continuing participation rather than historical ownership alone. It does not remove every governance problem. Wealthy participants can still purchase additional coins, coordinate through organisations or obtain substantial treasury funding. Governance must separately address delegation, participation, conflicts of interest, treasury capture, organisational coordination and concentration among infrastructure providers. Demurrage provides one supporting mechanism for resisting the persistence and compounding of ownership-based power. **Creating predictable network income** A periodic charge on network-coin balances can provide more predictable nominal income than transaction fees alone. Transaction-fee income changes with the number and type of transactions submitted. Activity may rise during periods of high demand and decline during economic contractions or shifts to competing networks. Demurrage income depends primarily on the total coin supply, the base rate, the proportion of coins in reduced-rate positions and the duration of those positions. The network can therefore estimate expected income over longer periods and plan expenditure with greater certainty. Transferring collected coins to a treasury keeps the units within the economy and provides an ongoing source of funding. The treasury must return them to circulation through node compensation and payments for useful work. Allowing them to accumulate indefinitely would reproduce the inactivity that demurrage is intended to discourage. **Providing reliable node-operator compensation** Demurrage income could subsidise or fund node operation. Under a fee-only model, operator income declines when transaction volume falls even though the network must continue operating. Operators remain exposed to changes in both transaction volume and the coin’s market value. A recurring balance charge provides a more stable nominal base from which operators can be compensated. More predictable funding can support a stable and decentralised operator population. Compensation should correspond to actual work or resources provided, including availability, validation, storage, reliability and other protocol responsibilities. Demurrage income should not simply be distributed to all holders in proportion to their balances. That would return the charge to the same participants and weaken its effect on concentration. The amount allocated should be sufficient to sustain a decentralised set of operators without providing excessive rewards that transfer unnecessary value to large infrastructure providers. Operators would still be exposed to the coin’s purchasing power. A predictable number of coins does not guarantee that the income will cover real operating expenses if the market value declines. Balanced demand and moderate price stability therefore remain important. **Reducing transaction fees** If demurrage income pays for part or all of the cost of node operation, the network can reduce or remove its dependence on transaction fees. This spreads part of the operating cost across coin holders rather than placing the full burden on active users. Holders benefit from a maintained and secure network, as well as any appreciation associated with network growth, even when they do not transact. Lower fees can help to reduce barriers to participation, support low-value exchanges, improve competitiveness, benefit users in lower-income economies and encourage application adoption. Some transaction charge may still be required to allocate scarce network resources and prevent spam. The advantage is that fees can focus on resource management rather than financing the network’s entire operating budget. This separates two functions: * The network-coin charge provides predictable infrastructure funding. * Transaction fees discourage excessive resource consumption. The goal is not necessarily to eliminate fees. It is to avoid charging active users more than is required for resource allocation and security. **Aligning network funding incentives** Under a transaction fee based model, active users bear the cost of maintaining the network. People who hold the coin without transacting make no direct contribution, even though they benefit from the network’s security, maintenance and growth. Demurrage spreads part of this cost across holders according to the amount of the network coin they control. Participants who make their coins available through recognised productive positions can receive reductions, while inactive holders bear more of the cost. This connects contribution more closely to both the benefits of holding the coin and the way it is used. **Supporting flexible supply policies** Demurrage does not require a particular supply model. Collected coins can enter the treasury while total supply remains fixed, be burned under a contractionary policy, operate alongside the creation of new units or form part of an elastic supply mechanism. For example, an elastic model could issue coins through the treasury and remove part of the supply obtained through demurrage. A fixed supply is the simplest starting point because it allows participants to understand the monetary structure without relying on external data or discretionary issuance. As the network gathers evidence about adoption, velocity and purchasing power, other policies can be considered. ## **Treasury advantages and ecosystem growth** **Funding maintenance and development** A genesis allocation can fund development during the network’s early stages, but it is finite. A recurring balance charge can provide long-term treasury income after that allocation has been spent. The income can support node operation, protocol maintenance, security reviews, research, technical improvements, application infrastructure, open-source tools and shared standards. Predictable funding allows contributors to plan work extending across several years. It can also reduce dependence on donations, founding organisations and private investors. Private investment remains useful for commercial applications, but it may not fund open-source infrastructure or shared standards whose benefits cannot be captured by a single investor. Treasury income can support this work without requiring every project to create a separate token or rent-generating mechanism. The effectiveness of this model depends on governance. Collecting income does not guarantee productive allocation. A poorly governed treasury could waste resources, repeatedly fund the same organisations, become a target for political or financial capture, accumulate idle coins or reinforce ownership concentration. Funding should be released according to milestones and observable contributions rather than through unnecessarily large lump-sum transfers. Where possible, contributors can be paid directly to reduce the risk that a single organisation captures a substantial allocation. If the treasury cannot use its income effectively, the network should consider reducing the charge rather than accumulating idle coins. **Creating an ecosystem growth cycle** If treasury expenditure produces benefits greater than its cost, demurrage income can accelerate network development. A potential growth cycle is: 1. Demurrage generates predictable treasury income. 2. The treasury funds useful infrastructure, maintenance and applications. 3. Better infrastructure attracts users and developers. 4. New applications create additional reasons to use the network. 5. Greater usage increases demand for the network coin. 6. Higher coin value increases the purchasing power of future treasury income. 7. The treasury can fund additional improvements. This can become a reinforcing cycle in which ecosystem growth increases the value of future funding. The cycle is not guaranteed. Funded initiatives may fail to produce sufficient value, and a high carrying charge may discourage investment more than treasury expenditure encourages adoption. The community must evaluate the success and outcomes from funded work rather than assume that greater expenditure always produces greater growth. An increased tax rate is justified only when the additional expenditure is likely to produce benefits greater than its costs. **Capturing part of coin appreciation** A fixed or slowly changing coin supply may appreciate as network activity grows. Existing holders benefit from this appreciation even when they make no further contribution. The increase in demand may result from work performed by developers, node operators, businesses and users across the network. A percentage-based charge allows the network to capture part of that growth and return it to the ecosystem. Holders may possess fewer units while their remaining coins increase in purchasing power. During a growth phase, appreciation may exceed the carrying charge, allowing both treasury funding and a positive return for holders. Demurrage is therefore directed at passive accumulation of units rather than necessarily eliminating every investment return. This connects investment returns more closely to the success of the ecosystem rather than relying solely on engineered scarcity. As the network matures, productive participation can become more important than passive retention. ## **Wider benefits for society** **Funding global public goods** If the network achieves widespread adoption, even a low percentage charge could eventually generate income beyond what is required for node operation, maintenance and ecosystem development. Some of this income could support public goods such as scientific research, engineering research and development, medical research, environmental projects, open-source infrastructure and other initiatives beneficial to the global community. For example: * A 1 per cent annual charge on a network coin with a total market value of £10 billion represents approximately £100 million in nominal annual coin value. * At a market value of £1 trillion, it represents approximately £10 billion. These amounts do not guarantee equivalent spendable income because distributing or selling coins can affect their price. They nevertheless illustrate the potential scale of a mature network treasury. Two developments could make more funding available over time. First, ecosystem development expenditure may eventually plateau as the network matures. Maintenance and research will remain necessary, but their funding requirements may stabilise rather than grow continuously. Second, if the ecosystem succeeds, its total value may increase. The same percentage charge would then generate income with greater purchasing power. Public goods funding would require legitimate governance and strong protection against capture. However this is a meaningful opportunity that is created thanks to demurrage income.