Hoardable money & transaction fees

Hoardable money is a form of money that can be stored and saved over time with either no or limited loss in value. Hoardable money is often superior to most goods and services that decay or lose value over time. Hoardable money commonly leads to holders of money demanding interest from others that want to access that money due to the fact that hoardable money is superior as a store of value when compared to other goods and services. For Web3 ecosystems that have adopted a proof of stake mechanism, those that hold coins can also commonly generate a return by simply staking their coins to secure the network. This creates a form of appreciating money that constantly grows in value over time. In these situations the user does not need to be productive with their money and can just hoard it and their financial position should grow over time.

A transaction fee approach means that the ecosystem is generating income for the treasury using transaction fees. Anyone that submits transactions on the network would be contributing towards the treasury.

Bad money system (Score - 1)

Appreciating money has all of the problems mentioned in the money resources such as reduced economic activity due to hoarding and the artificial ceiling on capital creation due to the impacts of interest. A small staking reward creates another problem for this implementation of money as it further incentivises hoarding and rewards people that hold their coins and lock them up. This approach could result in ongoing economic stagnation and low coin velocity due to the incentives people have to hoard this form of money and also due to the lack of incentives that exist for maintaining and improving the network.

Moderate treasury income (Score - 3)

Treasury income generated from transaction fees could be meaningful for the treasury however this approach is not highly reliable and predictable. Changes in transaction volume would change the amount of income that is generated for the treasury. It would also be difficult to generate large amounts of income as the larger the fees get the more compelling it becomes to switch to other networks. Higher fees make the network less competitive. Unreliable income could make it more difficult to plan larger initiatives that require larger amounts of funding.

Another approach could be that transaction fees are minimised as much as possible and once a threshold of income is generated for node operators the additional income generated by fees is then used as treasury income. This keeps transaction fees low and would prevent the deadweight loss problem however it would also limit the amount of income that’s generated and this approach would be less reliable for generating a sufficient amount of income.

Low transaction fees (Score - 4)

A transaction fee income approach doesn’t mean the transaction fees need to be high. No added fee needs to be added to the base transaction cost. Instead the transaction cost could still focus on being as low as possible. If the income generated from fees exceeds the compensation required for node operation the income could then be used as treasury income. This helps to keep transaction fees as low as possible but treasury income would be limited and less predictable.

Transaction fees should remain low as the network could attempt to dynamically predict how many transactions its going to handle based on historical trends and then adopt a transaction fee amount that ensures that the node operators will be sufficiently compensated. The benefit of this approach is it means fees would be as low as possible as the network grows over time. The problem with this approach is it’s a prediction of future transactions which could change quite drastically. This means a buffer would likely be necessary to prevent node operators from being underpaid. This means transaction fees wouldn’t actually be as low as possible as a dynamic fee structure would always be trying to predict how many transactions will get submitted in the future.

Moderate incentive alignment (Score - 3)

The main incentive problem with a transaction fee approach is it rewards people for just hoarding the network coin as they know people that transact will pay for any network maintenance and improvements through the fees they pay. So in terms of taxing those that benefit from funding the network the incentives are not fully aligned with generating the best outcomes for the network and its users.

The good thing about transaction fees is that they at least help with generating treasury income and creating a circular economy that supports and maintains the network. This is good for the funding process as it means the incentives can be fully aligned with generating impact across the entire ecosystem. No contributor would need to be locked into a single project or initiative for extended periods of time. Although this is assuming the funding process has been designed with contributor flexibility in mind.

Low network security (Score - 2)

Networks that adopt a transaction fee approach for generating treasury income would create an environment where people are not taxed or penalised for just holding the network coins and doing nothing with them. This means hoarding is rewarded as the attractiveness of holding network money would be higher than holding many other assets that commonly depreciate over time. This reduces the network security as it creates a long term risk that power consolidates into the hands of a few people that have managed to accumulate a large amount of the network coin. The inevitability of wealth concentration is increased only further by the presence of any risk free staking rewards.

Moderate investment opportunity (Score - 3)

There is an investment opportunity to buy the network coin and hold it as the circular economy that is created by the transaction fees can help to improve and maintain the network. The transaction fees could help with growing the network and creating price appreciation for the network coin. The problem with this investment approach is if many people act in this way and just buy and hold the coin as an investment it will be harmful for the network as they won’t be contributing towards the network and funding its maintenance and improvement. It will also create more stagnation in the network as an increasing amount of coins could remain idle in peoples wallets.

Total score = 16 / 30