Harberger taxes, or “partial common ownership” as Eric Posner and Glen Weyl call it in “Radical Markets,” is an ideal business model for decentralized autonomous organizations (short: DAO). As it connects a mandatory non-zero percentage fee as a fundamental incentive mechanisms for truthfully self-assessing property value a Harberger tax market:
- may provide a sustainable funding resource to the protocol developer; while
- Incentivizing all “partial common” owners to truthfully self-assess property prices.
Open source code and the possibility of forking a codebase made rentism both highly monopolistic and difficult to pull off for developers sustainably; There are countless sunset, market-broken products.
The Harberger tax creates a non-forkable “necessary evil” with the potential to fund future app or protocol development. And more: Harberger tax doesn’t clash with security laws (at least that’s my non-lawyer opinion).
It almost seems too good to be true: but is Harberger tax really a DAO’s ideal business model?
Before I dive in, however, if you want to educate yourself on Harberger taxes and partial common ownership, I recommend looking at Radical Exchange’s concept page, as I won’t go into explaining how it works.
Harberger Taxes Aren’t Securities (I think…).
Hey, I’m not a lawyer, of course. But Harberger taxes do not even closely resemble tokens. Having spent some time coding them in Solidity, I’m confident in saying that tokens aren’t necessarily required.
My personal story that got me into researching Harberger taxes in the first place was all the work I had done with rugpullindex.com, my side project.
As with Ocean Protocol, users started being able to upload and fractionalize their business’s data using ERC20 tokens; I had the idea of building “the S&P 500 for data sets” (said project, Rug Pull Index). However, in a painful lesson much later, I learned that the legal landscape for launching tokens in Germany was uncertain.
Sure, I could have launched in Singapore and all that jazz. But given that I’d like to fundamentally comply with the German laws and additionally, since I truly believe in the possibility of launching a decentralized autonomous organization through extralegal mechanisms - the thought of properly incorporating always felt wrong.
I thought that if I “dao,” I wanna properly “dao” - ideally as a general partnership between contributors - or with as little institutionalized power as necessary.
In a similar vein to the above story, to reach further independence from having Rug Pull Index funded through monthly OceanDAO grants proposals, naturally, I once played with the idea of launching RPI’s database as a data token myself. Had it gone well, so I thought, I could use the token’s price appreciation as a funding mechanism for future development.
But was I really going to risk my legal status to sell a mediocre dataset as a fractionalized access token? Spoiler: I wasn’t.
Playing Harberger Games
At first, the realization made me sad and I felt victimized: “Why could I not simply launch a token?” But, realizing my unique position, I decided to keep pushing and eventually started to think of my token constraint as an edge.
My thinking is, that since I’m putting myself out of the available comfort zone, necessarily my brain will eventually start developing ideas to solve the problem.
However, throughout that process, I didn’t only come to see that it was legally cumbersome launching an ERC20 token - I also realized that such a financial instrument might not serve my project as the necessary vehicle for pushing it forward.
Instead, I learned that tokens might be harmful, that they don’t automatically incentivize everyone to do the right thing, and that being intrinsically motivated is more valuable than being incentivized.
Simultaneously, through working on StrikeDAO, I also became more interested in Weyl and Posner’s work: “Radical Markets”; I got re-introduced to Harberger taxes. And then it clicked.
I thought Sustainable Business Models in Crypto were Impossible
See, I had always been fascinated with “making it” in crypto, given the unique dynamics of the space.
Mixing money-making and open-source seemed fascinating; it is fascinating because it combines the rigorous transparency of the open-source community with the mandated scrutiny of public-facing financial institutions.
In 2018, when I, too, had been working on decorating the original Ocean Protocol whitepaper, my biggest questions had been around the market’s sustainability or, more generally, how any decentralized app was supposed to make money.
At the time, it seemed an impossible proposition: Since crypto happened mostly on an extralegal plane and since open source licensing wasn’t even necessarily defendable, e.g., when Sushiswap forked Uniswap, I thought that finding a sustainable business model in crypto was a feat of impossibility.
My thinking had been that if any DAO would start inserting a fee into their code, then logically, someone else could come along, fork the code base and compete with the original’s higher fee.
A few months ago, if you had asked me, I would have told you that there’s (practically) no way someone could sustainably seek rent in open source or the cryptocurrency space.
Harberger Taxes can be a Sustainable Crypto Business Model.
Today, better understanding Harberger taxation: I’m reconsidering this view.
I think that if someone can find a property class subject to fundamental monopoly dynamics, a type of property with qualities as land on Earth displays it. Then, if that individual can create a partial common ownership market around it, they will be able to reap the tax income’s benefits to develop the protocol further.
It’s because, fundamentally, with Harberger taxes, we want the self-assessment tax to be non-zero (to avoid property becoming private) but at the same time optimized for the right property turnover rate.
To create the desired positive externality for all market participants, a Harberger tax must both be non-zero but also not too expensive.
Contrary to taxing markets with non-mandatory fees (e.g. through naive rent-seeking), Harberger’s tax is fundamentally an incentive mechanism - with the actual income generated from the tax collection being technically a by-product.
Creating a Harberger tax property market is sustainable as competitive “market breakers” can’t simply clone the product and lower the fees - the best turnover rate producers and market maintainers in a partial common ownership world would financially outcompete copycats.
Harberger taxes, and in general, the proposals in Radical Markets are exciting new ideas for the nutritious substrate that are smart contracts. I’m excited to see more of them in action!