Demurrage advantages & opportunities

There are a number of advantages and opportunities for Web3 ecosystems that adopt demurrage via a wealth tax. Demurrage helps to improve the system of money. But it is also advantageous for the network and its treasury and also potentially society more broadly.

Money

Increased money velocity

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

Smaller money supply changes

Network money could benefit from having a fixed or dynamically changing money supply so that community governance isn’t required to operate the system of money. Global governance of the network money would be extremely expensive and time consuming. A benefit of demurrage is if a money supply change was necessary the impact of even small changes could be all that’s needed. Demurrage helps to increase the velocity of money, which means that any supply changes are more effective at impacting economic activity in the network. Any increase in supply with new money should be under the same compulsion and incentives for it to be used productively due to the effects of demurrage. Higher coin velocity within a Web3 ecosystem should help with justifying only small changes to the money supply if these changes are ever necessary.

Increased exchange & investment

If users don’t hoard their coins, due to the incentives created by demurrage, they will need to find a place to spend or invest their money. Demurrage can 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 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 be currently 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 to lower the prices of goods and services and make 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 being a better return on investment than hoarding the network money.

Easier access to money

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 occurred. But thanks to demurrage the whole economy benefits from a new business.

Network

Increased coin dispersion and decentralisation

Creating incentives for people to exchange or invest their money rather than hoard it is highly beneficial for a Web3 network. If people were incentivised and rewarded for hoarding you could expect to see some individuals eventually reach escape velocity where they can easily live off the interest they generate from just hoarding the money they have whilst also increasing their coin holdings in perpetuity. In these situations, people can become increasingly wealthy over generations without contributing much value or economic activity to the network. Increasing amounts of wealth concentration means more wealth inequality. In a Web3 network this wealth could also equate to economic and governance influence in the network. Wealthy individuals may attain an ever increasing amount of influence and power in the network. This outcome could be catastrophic for the network over the long term and lead to its failure. Demurrage helps to prevent this outcome by removing the incentive to hoard the network money. The larger the amount of coins someone holds the more they will lose to taxation. With demurrage, it becomes harder to retain large amounts of money due to the loss from demurrage. Increasing the amount of coin dispersion will help with increasing decentralisation of the coin and help with spreading any power and influence across the network. Demurrage helps to greatly reduce the likelihood of power concentrating into the hands of a few people, an outcome that is often inevitable with hoardable forms of money.

Node operator subsidies

A wealth tax could either subsidise or fully pay for the operational costs of running a node. This means transaction fees could be reduced. This makes the network even more competitive in the market. A wealth tax is an ongoing tax that would generate predictable treasury income. This means it represents a long term solution for keeping transaction fees as low as possible. It would also help with giving node operators a more reliable and predictable revenue stream.

A wealth tax can also help with opening up the design space for how transaction fees are handled. With a wealth tax, transaction fees would not necessarily be needed to pay for node operators. Instead these fees could go straight to the treasury and the wealth tax could be what primarily funds the node operators. Node operators could receive a more predictable income instead of one that is more varied when it is solely based on transaction fees.

Node operator income stability

If the value of the coin is fully derived from its usage for transaction fees then it could be similarly volatile based on demand.

If the network coin has multiple sources of demand such as being used for exchange or lending liquidity then this should help with maintaining a more stable price when the ecosystem is mature. The transaction volume could potentially vary more drastically. Adding liquidity is often done to generate a return over the long term. This isn’t achieved by moving in and out of the position all the time due to transaction costs and the lack of protocol income from fees if the money isn’t actively being used. So liquidity as a demand use case for network money should help with providing more stability to the network coin price. The number of transactions that happen each day could vary more drastically as this is based on what everyone is doing in the network. This could change from day to day and month to month. If many people reduce their transactions at the same time this could mean a big drop in income for the network which could make it less reliable as a source of income for paying node operators. If the network coins value can remain more stable a wealth tax would be a more reliable source of income as the percentage of tax is happening regardless of how many transactions are happening.

Flexible supply change mechanisms

Demurrage implemented as a wealth tax does not force any constraints on how the supply of money is handled. Web3 networks could implement a wealth tax and then adopt any approach for making supply changes. These include fixed, inflationary, deflationary 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 wealth tax.

Treasury

Reliable & predictable income

The income generated by demurrage would be reliable and predictable. A wealth tax would be periodically executed. A wealth tax event could occur every day and charge a very small percentage. Over a year this could represent in aggregate a certain wealth tax percentage. This approach would generate reliable and predictable income for the treasury as the exact income would be known ahead of time. Funding processes benefit from this predictability as it can be taken into account when planning and funding any larger initiatives.

Faster ecosystem growth

The wealth tax provides an opportunity to drastically increase the ecosystem's rate of growth. The founding entities need to prove that the funding process is highly effective at improving, maintaining and growing the ecosystem. If the return on investment from the funding process is higher than the cost of the wealth tax it could be beneficial to increase the tax. People might lose more money from the wealth tax but they could benefit from faster price appreciation of the network money that they still hold. Web3 networks also operate in highly competitive markets, so increasing the growth of the ecosystem could be highly desirable due to the opportunity to increase their network effects.

Conditional advantages

In the later stages of network growth it will become more difficult to sustain higher wealth taxes due to the fact that people can copy the existing network and remove any taxation to create an incentive for people to migrate to a new network that has the same functionality. These duplicate networks could reduce the taxation to only cover the operational costs.

Due to this factor incentives and network effects will be an important part of retaining users over the long term and sustaining a higher wealth tax than the base level operational costs. The most compelling solution to this problem so far is to focus on maximising the amount of liquidity in the network. This will help with creating a highly efficient market that would be hard to replicate in a new network. If this is achieved it will influence how high the wealth tax can be over the long term. The following advantages are reliant on the effectiveness of any of these incentives or network effects that prevent users from migrating to new or duplicate networks.

Identity and reputation layers

An identity or reputation layer could be developed on top of the network's protocol. This could mean that an identity solution could become a core part of the network stack. Sybil resistant mechanisms could be developed that make it easier to verify good actors by using reputation, financial or identity based contributions or collateral. Achieving this could open up the design space for the ecosystem to consider things like zero cost transactions for people that are verified or that have a certain amount of reputation, contributions or collateral that is attached to their identity.

A wealth tax creates the opportunity to properly consider these ideas as the development and operational costs of maintaining an identity or reputation based layer would now be more realistic. These solutions may require incentives for handling ongoing moderation and security checks. The benefits of these solutions may outweigh the costs of maintaining them. The predictability of the income generated by a wealth tax creates an opportunity for these solutions to be properly considered due a more reliable source of funding.

Large treasury income potential

A wealth tax creates an opportunity to generate a large amount of treasury income each year. A wealth tax would be charged automatically and periodically, creating a guarantee on how much income is generated. The opportunity to generate a large amount of income is achieved due to growth of the ecosystem. The larger the ecosystem becomes the more valuable the same percentage of tax income can represent. Growth of the network could eventually increase the range of initiatives that are funded by the treasury.

Global public goods

A wealth 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 self 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 very small potential improvements to the network. Instead, what could happen is the financial requirement for 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 wealth tax could equate to a large and growing amount of available funding. For instance an annual 1% wealth 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 wealth tax should lead to an increasing likelihood that global public goods could be funded using that income.

This is a huge opportunity for society, Web3 networks and their funding process could create highly aligned incentives for contributing towards 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 via a wealth tax represents a massive opportunity to create the largest and most effective funding process for global public goods that has ever been conceived.

Location public goods

There are a lot of global public goods that could be funded that could be beneficial to everyone on the planet such as scientific breakthroughs or cutting edge medical research. Location based public goods are a more complex funding responsibility, as this could mean some countries receive more funding than others. And this might be in spite of the fact that globally everyone might have contributed towards the treasury with their own tax contributions.

Although this complication exists for network money it is not necessarily the case for token money. A country could create its own token money as a medium of exchange that also adopts demurrage via a wealth tax. These mediums of exchange could generate income for maintaining their own system of money and that taxation could be used for location based public goods. Although network money could be used for funding location based public goods, nations that create their own token money could be one of the most suitable approaches for funding location based public goods.