Web3 & Demurrage Money

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The adoption of network coins that are storable across the Web3 industry is a broken system.

I’ve seen people like Vitalik talk about demurrage before but I’ve never seen a reason or sufficient justification to not adopt this approach as the implementation at the base layer for a network and its network coin.

Recently I finished an article exploring the topic of applying demurrage and Web3 - Web3 & Demurrage Money - by George Lovegrove

The article is based on some more in depth analysis that explores how demurrage could be implemented using a network coin tax - https://money.web3economy.io/

Demurrage via a network coin tax could help with creating some of the most impactful and incentive aligned economic systems that have ever existed, a network coin tax could help with:

  • Paying node operators - Transaction fees would no longer be required for compensating node operators. Network coin taxes reward active users and coin velocity and incentivise people to use the network coin more productively, helping to prevent stagnation.
  • Reduced risk of concentrations in coin ownership - Even a small network coin tax makes it very hard to accumulate large and growing amounts of the network coin tax. Storable network coins with even a small risk-free reward from staking or fully collateralised single asset lending can be easily accumulated and consistently over generations.
  • Reducing transaction fees or even eliminating fees entirely - This could be achieved if a sybil resistant solution can be implemented securely at scale.
  • Improved network effects - You can apply the network coin tax very granularly so that it maximises the productive usage of the network coin, this could help to increase network effects due to increases in financial market efficiency.
  • Generating reliable ecosystem funding - The network coin tax would be collected periodically so ongoing amounts of funding would be available for node operators and ecosystem initiatives.
  • Accelerating ecosystem growth - Increasing the network coin tax can result in more income for funding more ecosystem initiatives to feed a growth fly wheel.
  • Global public goods funding - Even a small rate of demurrage in a very large ecosystem could generate a very large amount of income, eventually this could fund global public goods once a network is more mature and is one of the leading networks.

I believe demurrage is eventually inevitable as the current implementations of storable network coins are a highly flawed design. Eager to discuss this in as much detail as people like as I’ve been looking far and wide for any good counter arguments to this approach - I am yet to find anything.

Would love to hear from anyone who has thought about this before or what reasons people might have why they think demurrage is not the correct solution for Web3 network coins or for systems of money more broadly. Happy to chat about this in more detail on a video call if anyone is interested in this topic!

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I think demurrage is an interesting concept, but I believe it may not work out in practice.

Running a node requires covering operational costs in fiat currency, yet what nodes can actually receive is the chain’s native token. This means that node operators (and even ecosystem funding recipients) will ultimately need to sell the native token in order to convert it into fiat. For this mechanism to remain sustainable, the value of the native token must be maintained.

To maintain that value, it is not simply about increasing usage or transaction volume—it requires more buyers and higher purchase amounts. This is precisely the challenge that Algorand is currently facing. In Web3, if the native token’s value cannot be increased, then buyers, capital inflow, and even developers will not be attracted. Strengthening the value of the native token is, in many ways, the most effective form of marketing in Web3.

The demurrage model is designed so that users hold only the minimum amount of the native token necessary for utilization. However, this does not create a mechanism for sustaining the token’s value. In addition, for nodes to remain minimally viable, the tax rate would likely need to be dynamic. This means that if the native token’s value drops, the tax rate rises. Such a system discourages users from joining the network. And without users, developers are also unlikely to build on that chain, as they would foresee monetization challenges.

Today, users are not limited to a single blockchain. If they feel penalized through taxation, they will simply move to other chains.

Staking models, by contrast, aim to minimize the sense of “loss” for users through redistribution. Fees paid to node operators—whether newly issued by the system or granted by a foundation—are ultimately sold for fiat to cover operational costs, which does put downward pressure on the price overall. Also, if nodes are delegated stake by token holders, they can charge a portion of rewards as fees. Those who do not participate in staking still indirectly contribute to node costs through price depreciation, but in a way that is less direct and punitive than taxation.

There is also the issue of tax law with demurrage. At least in the country I live in, the amount deducted through such a mechanism cannot be written off as a loss for tax purposes. Any model design would need to take into account how different jurisdictions handle such matters, which could add significant complexity and cost.

If the concern is that rising native token prices create barriers for network usage, then solutions like Circle’s Arc chain or Algorand’s Fiat chain might be worth considering. These chains use stablecoins (such as USDC) as the native currency, so rising token prices do not hinder network adoption.

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The network coin doesn’t lose it’s value just because it adopts demurrage. A storable network coin can’t raise much money to maintain and improve the ecosystem, so it becomes stagnant when you run out of genesis funds - or you simply rely on everyones goodwill even with a lack of incentive to do the work as a long term solution. Demurrage via a network coin tax solves this problem and the growth and improvement to the network help to increase its use cases and adoption - leading to a higher network coin price. You’re purchasing power can increase when holding a demurrage coin as you might be taxed and lose a small amount of coins but your coins on average will become more valuable.

A network coin tax is the most incentive aligned way to accelerate the development of applications and protocols. Trying to fund applications and protocols with outside investment often leads to the creation of tokens that are often not necessary just to create a return on investment for investors. A network coin tax prevents this problem as everyone in the network (who benefits from more applications and protocols) is investing via the network coin tax, and everyone then gets the benefit from network coin price appreciation. Now it becomes easy to fund truly public goods like a new software library that is beneficial to all other applications but that isn’t looking to make a return on investment for some investors, it simply is making impact in the ecosystem.

A network coin tax doesn’t need to be introduced in the beginning, this is outlined in the resources. You want to make a good funding process first and when the genesis allocation is running out you can then introduce it with a small tax. If the funding process is effective you can increase the tax like a massive growth lever. Adoption and growth is highly important for creating network effects so the network that is best at doing this will out compete the ones that have misaligned incentives and lack of circular funding.

As mentioned above this is not the case, investors want to hold the network coin with the most price appreication and network coin growth. A demurrage solution can mean increasing the rate of growth and adoption. If one storable network had a 3% growth rate and a demurrage had a 3% demurrage rate but a 6% growth rate the demurrage one is still more compelling as the rate of growth leads to more network effects. Growth is essential and demurrage offers the most compelling solution for making an extremely effective growth engine. But the pre-requisite is a good funding process - networks should develop this first before they introduce demurrage to properly utilise the taxation.

Again this is not understanding the issues of stagnation and coin ownership concentrations over time with storable networks and the ongoing aligned incentives to help with maintenance and growth.

Staking is still present in a storable or demurrage network. Only in demurrage you incentive it by decreasing the network coin tax rather than giving them a form of unearned income - which is the case when it is risk free. Even small amounts of positive risk free interest can easily lead to people reaching financial escape velocity where they can live off less than they make from the interest. This creates a strong likelihood of wealth concentration over time as you only need a few people to reach this escape velocity. Then each year less supply is available for active usage, more is owned by a smaller subset, which increases the price if the same demand is relying on less supply, which rewards people who store the coin and the cycle repeats. Storable money, when properly understood, is immoral and economically harmful. Highly recommend learning about Silvio Gesells work. If you know and agree with Henry George’s work on land value taxes then you can see the same scarcity and rent seeking problems there as well.

This can certainly be a short term issue for some places but this is not a good reason to not adopt demurrage.

A network coin tax means you could remove transaction fees entirely if you can make a sybil resistant solution to prevent excessive spam. You can’t do this in the storable network approach as you rely on transaction fees for paying for node operators. And the higher the transaction fees the more the deadweight loss. Network coin taxes create the opportunity to maximise economic activity by minimising the fees to transact.

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You are very attached to your own opinion, so honestly, you don’t seem to listen to others. I don’t think this can be considered a real discussion. If you have already reached a conclusion in your mind, then you should gather like-minded people and execute it, even on a small scale. The crypto environment already allows for that.

However, whether you are gathering people or raising funds, clarity is extremely important. This can be conveyed through words or visual information. As an investor who doubts whether people will actually join, please explain why I should pay money to support that network. If you cannot attract people, you will neither achieve network effects nor gain high returns.

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There was a time decades ago when I studied various ways of doing money and mutual credit, and was quite fond of demurrage. Below I will just highlight a few problems I have arrived to without the necessary detail to fully argue them (it’s after my bed time).

The first and most obvious problem is that it is fundamentally centralized and coercive. It only works in a closed system where one party has the control and can dictate the terms to all users. Historically kings would force everyone to turn in their coins and would remint them but would give them back less. Today it could be done with a ledger controlled by the network “lord.”

Another problem is it reduces the predictability of the value of the currency over time a la prices and wages. We’re currently seeing the effects of the lords of money printing excess money into circulation and how that is debasing the value over time making it increasingly difficult to price things and wages. This can be argued is a form of demurrage by reducing the value of the unit of account over time.

Web3 only exists because of the genius who invented Bitcoin. It’s clear that being was very aware of the problem with the excess money printing by the monetary elite and intentionally designed this absolutely future changing new money to have a fixed supply. This was an astonishingly great gift to humanity.

The top Web3 networks will eventually be treated mainly as layer 2s for Bitcoin. Look at what Cardano is doing to make it possible to bring Bitcoin over and then protect it in the Midnight network. This is real value to society helping it to throw off the enslavement to the banksters who have been committing waste fraud and abuse for so many generations we just assume it’s normal.

I think you really would benefit from going down the Bitcoin paradigm rabbit hole a bit to understand the overall reason this forum even exists. Sovereignty is a key word.

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This resource and the logic presented took 6 months to get to where it is. I only wanted to share it when I had a more informed opinion on how you could implement it and why implications of it. So now I’m looking for more counter arguments or anything I’m missing. I currently believe it’s inevitable to implement demurrage for the network coin in a Web3 network - otherwise you get unreliable economic systems where coins can concentrate into the hands of a few.

A key thing I point out in the resources is that you don’t need demurrage in the beginning if you have a genesis allocation. The sole focus of the foundation is to create an effective funding process. If it can achieve this and the genesis is starting to run out the introduction of the network coin tax is then the ideal time. It is then marketed to the community as this will increase the growth of the network more rapidly - meaning you will get a much more valuable coin but you will lose a small percentage of them each year. If the holders purchasing power is increasing they are getting wealthier in the economy - which is possible even when holders could also be losing a small amount of the coins each year.

My plan is to keep educating people about demurrage and its possibilities and integrating any feedback that I haven’t thought about and then working with whatever ecosystems want to adopt demurrage on their funding process as getting this right is key. Get this right and Web3 adoption should explode with circular economies that have highly aligned incentives :heart_with_arrow:

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If the coins are dispersed across the community of users that rely on the network I would say the network coin is decentralised. If coins can concentrate into the hands of a few people it can become more centralised over time. Demurrage is necessary to prevent centralisation and make the network coin more readily available for those that need it. The network coin tax means the entire community needs to be responsible for allocating the taxed funds across impactful initiatives. This is where a scalable funding process is needed. Now there’s plenty more work to do around this topic but i’ve spent a good amount of time on it already - https://funding.treasuries.io. I know the answer will involve attracting and retaining high quality contributors into an ecosystem - similar to how companies require high quality employees for the company to thrive. Having treasury income and a funding process doesn’t mean the network is centralised, though it does mean you need to solve complex allocation problems at scale - non trivial but the upside is huge for the network and society.

Demurrage doesn’t need to be implemented as a coin that loses value over time. Instead it’s more of a carrying cost for holding the network coin. A network tax achieves that goal but the supply of the coin isn’t impacted so the same amount of the network coin is circulating through the economy. The network coin supply would need to be adjusted if it wanted to achieve price stability and I do have some thoughts on that in the resources - Network coin supply approaches | Money. Basically it makes sense to start with a fixed supply for simplicity and consider conservative expansionary or elastic models in the future when tools and solutions can be made that reliably prevent inflation by being conservative with the increases. Deflation can be counter acted by the network coin tax and increase in coin value creates demand for the network coin - which is important for a proof of stake network where the network coins value is a big part of securing the network.

A fixed supply was the simplest starting point and is a good one for most Web3 networks however the storable properties of Bitcoin make it a poor choice for incentivising transaction usage. The higher the price the more expensive the fees become meaning the less viable it is to use it which makes it less and less effective for paying node operators. As the current inflationary supply diminishes the fees are not keeping up with the security budget requirements. Bitcoin in its current implementation is doomed to fail, without the network it is just a token on another network - basically no different than a meme coin but with more history. The network design doesn’t incentivise the right behaviours - it rewards people who store and hoard bitcoin and punishes those that transact with it, only active users pay for the network whereas hoarders of BTC pay next to another yet gain the benefits of other peoples payments to maintain the network and can benefit from price appreciation when less supply is available for active usage which can leads to price appreciation if the demand is the same for a decreasing amount of actively available supply. Great system for number go up, bad system for a network that is trying to optimise for economic activity through cheap transactions