Transaction fees

A percentage of fees from transactions could be used as treasury income

Fees can be collected when transactions get submitted on a network. Transaction fees commonly pay for node operation costs but they could also or alternatively be collected as income for the ecosystems treasury. Transaction fees could potentially create a sustainable circular economy where ongoing income is generated to support a number of different treasury funding responsibilities.

There are two distinct ways that transaction fees could contribute towards the treasury as income. The first is by adding a fee onto every transaction that will be sent to the treasury such as a 20% transaction fee increase. The second way is that the lowest possible fees are applied and once node operators get compensated up to a certain threshold the excess income is used for the treasury. The first approach is good for generating more consistent income for the treasury but is problematic for causing transaction deadweight loss as the fees aren’t as low as they could be. This creates an opportunity for another network to be introduced that removes this fee to become a consistently cheaper network for them to use. The other approach doesn’t have a large transaction deadweight loss problem however it would lead to less predictable and less meaningful income for the treasury. Due to the incentives that exist for people to use the cheapest network over the long term the second approach is the most compelling one that will be applied to the analysis below. The added transaction fee approach might make more sense in the growth phases of the network where generating treasury income is more important than reducing transaction deadweight loss.

Low short term income potential (Score - 2)

A new and growing Web3 ecosystem will often have a limited amount of transaction volume. Low transaction volume will often translate into a limited amount of generated income through transaction fees. Some income could still be generated in the short term, however for this to be a meaningful amount the network would likely need to scale and increase adoption to generate more transaction volume.

Moderate long term income potential (Score - 3)

A moderate amount of income could be generated for the treasury if the transaction fees exceed the cost of compensating the node operators. There will be no guarantee that much income is generated for the treasury as the network will be constantly trying to adopt the lowest possible fees. The amount of transactions could vary quite drastically which means this approach for generating income could be unreliable.

High incentive complexities (Score - 2)

All community members that use the network and create transactions would pay fees that help to fund the treasury. This can be an easy and simple taxation model for generating income to fund the treasury but it is not fair for all participants in the network as only the ones that create transactions would pay for the maintenance and improvements of the network. If these fees increase the value of the network then the people that simply held the coin and didn’t contribute would now be receiving a benefit that they didn’t contribute towards. Transaction fees create a free rider problem. This income approach creates the incentive for people to invest in the network but to transact elsewhere if there are cheaper options as they can benefit from other people's contributions in the network that they invest in but then also benefit from not paying for higher fees that other people might be paying. This outcome is undesirable as the people who are just holding the coin are making the economy more stagnant and also are doing the least to contribute towards the network but are still getting the benefit of other people's contributions. A transaction fee approach rewards these actors that just hold the coin the most and then also punishes the most active and important users in the ecosystem, those who actually use the network regularly! The incentives are not fairly aligned with this approach.

Low malicious actor risks (Score - 4)

Everyone would pay the same transaction fees based on the adopted fee approach. A sufficiently high minimum fee will be needed to protect against spam transactions that could attempt to harm the networks liveness. Apart from this users would not get any advantage from increasing or decreasing the number of transactions they make or the amount they transact with. The main way that someone could try to game this income approach would be by investing and just holding onto the coins without transacting to avoid fees and then use other networks with the lowest fees wherever possible.

Low transaction deadweight loss (Score - 4)

If fees are as low as they can be and transaction fees only contribute towards the treasury after the node operators have been fairly compensated there is less risk around transaction deadweight loss as the transactions are always as low as they can be. The main problem with dynamically changing transaction fee prices to adjust for transaction volume is that it is always a prediction of how many transactions will come in. This means it would be problematic if the transaction volume fell short of the prediction as this could mean under compensating the node operators. To safeguard the network it will make sense to add a small buffer to ensure that node operators are sufficiently compensated in the event the number of transactions are lower than expected. This buffer and increase in fees can lead to deadweight loss. The larger the changes in the number of transactions the larger the buffer that is needed to prevent the issue of under compensating node operators.

Total score = 15 / 25