Demurrage money & wealth taxes

Demurrage means that the money should depreciate in value over time. For Web3 ecosystems, the most effective approach for implementing demurrage identified so far is through a wealth tax.

A wealth tax is able to simulate the effects of demurrage as it means that people would periodically lose a small amount of their money over time. The value of the money might remain the same however the act of holding it has the same effect - the value of their money would decrease as they would simply be losing a small amount of it continuously over time. Wealth 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.

Good money system (Score - 5)

A network that uses a wealth tax creates an incentive for people to use their money instead of hoarding it. This increases the velocity of the money and due to the reduced marginal efficiency of capital, which increases the amount of viable investment opportunities and the willingness of people to exchange their money for goods and services. Users should benefit from easier access to money due to the incentives for people to be more productive with it rather than hoard it.

High treasury income (Score - 4)

A wealth tax based network 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 wealth 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 wealth tax means that income becomes predictable and reliable for the ecosystem. Wealth taxes avoid the issue around varying levels of network usage. The number of daily transactions would not impact the taxation outcome. A wealth tax could negatively impact the income generated in other ecosystems if they are able to offer consistently lower transaction fees for use cases that exist in other ecosystems. Ecosystems that adopt a wealth 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 achievable due to the fact that the wealth tax income can be used to continuously subsidise node operators to make transaction fees cheaper over the long term.

Very low transaction fees (Score - 5)

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

Transaction fees can remain more predictably low using wealth taxes as when a network has scaled 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 be zero. However fees cannot be zero without a sybil resistant mechanism 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 being able to spam 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 wealth 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 wealth. 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. Although this is assuming the funding process has been designed with contributor flexibility in mind.

High network security (Score - 5)

A wealth tax means money is less attractive to hold due to the costs of holding it for a long period of time. This makes it less effective as a store of value. This incentivises people to invest or exchange their money 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 hoarding a coin that they are gradually losing over time due to the wealth 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 wealth 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 wealth tax could help to accelerate the development of the ecosystem. This is because the income generated by the wealth 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 wealth 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. Wealth taxes can create a highly effective circular economy that increases the value of the network money due to ongoing funding that is made available for improving the network.

Total score = 28 / 30