Income approaches

Comparing the different income approaches that could be used for generating income for an ecosystems treasury

Web3 treasuries can help with maintaining and improving a network and the wider ecosystem over the long term. A number of approaches could help with generating income for an ecosystem's treasury. In the short term an ecosystem may need to think about how it will bootstrap any initial assets to fund the treasury that will support any new infrastructure, protocol or application development. It will also be important to consider how longer term income will be generated so that improvements to the ecosystem become more sustainable.

Approaches for generating treasury income

Communities that want their ecosystem to be reliably maintained and improved over the long term will need to think about how the required contribution efforts will be compensated. Some approaches for generating treasury income include:

• Donations - Community members could make donations to help with funding ecosystem initiatives.

• Genesis allocation - Community treasury assets are allocated prior to the launch of the network.

• Transaction fees - An amount from transaction fees is directed towards the ecosystem treasury as income.

• Wealth tax - A tax that every account and contract across the network is charged periodically.

• Inactivity tax - Accounts that have been inactive for a long period of time could be taxed an amount periodically so that their coins will eventually get reused.

To compare these income approaches a number of factors have been considered and then applied to each approach to try and determine any strengths and weaknesses of each one.

Key takeaways

• Very high risks when only adopting a donation approach - Relying on donations creates a big risk for Web3 ecosystems as it makes it more difficult to reliably fund the treasury and pay for any meaningful amount of development effort to maintain and improve the network. The asset collection complexities and game theory risks are much higher when relying on donations from the community due to the increased likelihood that these donations are heavily influenced by wealthier stakeholders, each of which could have their own motives. Without reliable treasury income there is an increased complexity for initiatives to get funded as now community members need to consider how many other people are donating and how much they should donate relative to everyone else. Donations increase the incentive complexity of coordinating contributions to support ecosystem initiatives. Donations can easily lead to situations where numerous people donate nothing but get ongoing benefits from other peoples donations. This represents a free-rider problem. Ecosystems that struggle to generate any income from donations may end up relying on contributors giving up their time for little to no compensation to get anything developed or maintained.

• Genesis allocations can be effective for bootstrapping network adoption - A new Web3 ecosystem can often have a chicken and egg problem where it doesn’t have enough use cases and applications to generate much transaction volume and adoption which means a limited amount of capital invested and transaction volume that could be useful for funding new applications and use cases. A genesis allocation could be an effective way to fund the initial initiatives that help with creating more demand for the network in the short term.

• Transaction fees cause deadweight loss and make a network less competitive - Transaction fees put the entire burden of funding a treasury into the hands of those that use the network. Holders of the coin can become free-riders and benefit from other peoples contributions by just investing in the network coin and holding it without transacting. A transaction fee approach for generating treasury income also means increasing the total cost of using the network on a daily basis. The higher the transaction costs the less competitive the network becomes when compared with alternative networks that do not use this income approach for generating treasury income.

• Wealth taxes provide reliable treasury income over the long term - A wealth tax has a number of benefits for incentivising positive behaviours in the network. Firstly it incentivises people to not just hold the coin and do nothing with it as if they do this they will pay more in taxes. It has another benefit of giving an ecosystem more options in how they use the taxes such as subsidising the node operators and decreasing the transaction fees. Lower transaction fees could make the network even more competitive in the market. Finally a wealth tax can also provide a predictable and reliable amount of income for the treasury that makes it much easier to fund ongoing maintenance and improvement efforts over the long term.

• Inactivity taxes offer an effective supplementary approach - It will take a while before an inactivity tax would make any meaningful amount of income for the treasury due to the delay in time before any coins could be taxed due to inactivity. As well as this there will also likely be a limit on how much income this can be generated from this approach as many users could prevent the loss of coins by utilising solutions that better protect their ability to move and use their coins to prevent the taxation from occurring. Overall this approach is still beneficial for the ecosystem as it can help to prevent coins becoming deadweight for the ecosystem as now they will always be eventually reused and circulated back into the economy.

• Ecosystems would benefit from combining multiple approaches - Genesis allocations, wealth taxes and inactivity taxes are all approaches that are complementary with one another. A genesis allocation can be used to get the treasury systems and processes up and running. A wealth tax can provide long term sustainability for funding the treasury. An inactivity tax can help with ensuring that inactive wallets do eventually get taxed towards 0 so that coins are always eventually reused elsewhere across the network. Together these approaches can help to ensure that an ecosystem's treasury is reliably funded so that it can fund impactful initiatives across the ecosystem.

Income approaches analysis

Income factors for considerationDonationsGenesis allocationTransaction feesWealth taxInactivity tax