Voluntary fees are a tax on builders. Protocols like Ethereum L2s and Solana rely on public goods like RPC endpoints and block explorers. When users pay nothing, the teams building these services must subsidize costs or monetize through extractive means like front-running.
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The Hidden Cost of Voluntary Taxation Models
An analysis of how opt-in funding models systematically under-provision the essential public goods—security, infrastructure, crisis response—required for sustainable crypto-native societies.
introduction
THE SUBSIDY TRAP
The Free Rider's Paradise is a Builder's Hell
Voluntary fee models create a tragedy of the commons that starves core infrastructure.
The 'public good' is a misnomer. Infrastructure like The Graph or POKT Network is a private cost center. The result is centralized choke points as only venture-backed entities can afford the burn rate, defeating decentralization goals.
Evidence: Arbitrum sequencers process millions of subsidized transactions daily. The cost for RPC providers like Alchemy or Infura scales linearly with usage, but revenue does not, creating an unsustainable model for any non-subsidized operator.
key-insights
THE VOLUNTARY TAX TRAP
Executive Summary
Protocols are increasingly offloading security costs onto users via voluntary taxation models like MEV auctions and priority fees, creating a hidden, regressive cost structure.
01
The Problem: MEV Auctions
Protocols like Flashbots SUAVE and EigenLayer outsource block building to the highest bidder, turning security into a commodity. This creates a two-tiered system where only whales can afford transaction finality.
- Cost: Users pay ~20-200% more for priority.
- Risk: Centralizes block production power.
- Outcome: Liveness becomes a paid service.
20-200%
Surcharge
~5
Dominant Builders
02
The Solution: Credibly Neutral Sequencing
Networks must enforce fair ordering and liveness guarantees at the protocol layer, not the market layer. This is the core thesis behind Espresso Systems and Astria.
- Mechanism: Decentralized sequencer sets with enforceable rules.
- Benefit: Eliminates pay-to-win transaction inclusion.
- Trade-off: Accepts marginally lower extractable value for base-layer fairness.
0%
Priority Fee
L1 Security
Guarantee
03
The Reality: User-Subsidized Security
Voluntary models are a stealth scaling tax. Users directly fund validators' profits instead of the protocol funding its own security budget, as seen with Ethereum's priority fee and Solana's tip market.
- Result: $500M+ in annual MEV is paid by users, not captured by the protocol.
- Irony: Protocols boast of low issuance while their security is funded by a volatile, regressive user tax.
$500M+
Annual User Tax
Regressive
Cost Structure
04
The Architectural Flaw: Separating Consensus & Execution
Modular stacks (e.g., Celestia, EigenDA) decouple data availability and consensus from execution, but outsource the critical sequencing function. This creates a vacuum filled by for-profit entities, replicating the L1 MEV problem.
- Vulnerability: The sequencer is the new centralized attack vector.
- Example: Arbitrum and Optimism sequencers currently capture all MEV.
- Requirement: Sequencing must be a protocol-level primitive, not an app.
1
Central Sequencer
All MEV
Captured
thesis-statement
THE INCENTIVE MISMATCH
The Core Contradiction: Sovereignty Without Coercion
Voluntary taxation models for public goods funding fail because they cannot resolve the inherent conflict between individual sovereignty and collective action.
Voluntary funding is a prisoner's dilemma. Each rational actor's dominant strategy is to free-ride, anticipating others will pay. This creates a tragedy of the commons for network security and development, as seen in early Ethereum where core dev funding relied on sporadic grants.
Retroactive funding models like Optimism's RPGF attempt to solve this by rewarding past contributions. However, they introduce a new problem: post-hoc valuation is inherently political. Disputes over what constitutes a 'public good' create governance overhead and factionalism, mirroring the pitfalls of MolochDAO.
Protocols cannot coerce, only incentivize. Without the power to tax, systems rely on social consensus and moral suasion, which are weak substitutes for mandatory mechanisms. This is why Ethereum's PBS (Proposer-Builder Separation) includes a mandatory builder payment to the protocol—a form of hard-coded, non-voluntary revenue.
The evidence is in the metrics. Compare the consistent, predictable revenue from Ethereum's base fee burn (coercive via block space demand) to the volatility and undersupply of funds in Gitcoin Grants rounds (voluntary). The former funds security automatically; the latter requires perpetual marketing campaigns to avoid collapse.
market-context
THE HIDDEN TAX
The Current State: Beggar-Thy-Protocol
Voluntary fee models create systemic inefficiencies by misaligning incentives between users and the protocols they rely on.
Voluntary fees are a tax. Users pay for security and liveness, but protocols like Uniswap or Aave free-ride on this infrastructure without contributing. This creates a classic tragedy of the commons where the base layer's sustainability is jeopardized.
MEV is the primary subsidy. The proposer-builder separation (PBS) model on Ethereum allows block builders to extract value from user transactions. This extracted value, not protocol fees, is what primarily funds validator rewards and secures the chain today.
The cost is protocol fragility. When MEV revenue fluctuates, chain security becomes volatile. This forces L2s like Arbitrum and Optimism to implement complex, centralized sequencer models to guarantee liveness, reintroducing the trust assumptions decentralization aims to eliminate.
Evidence: The L2 Sequencer Dilemma. During periods of low MEV, the cost to run an L2 sequencer can exceed its revenue. This creates a centralization pressure where only well-funded entities can afford the operational loss, undermining the network's credibly neutral properties.
ECONOMIC SUSTAINABILITY MATRIX
Public Goods Funding: Voluntary vs. Required
A first-principles comparison of funding mechanisms for protocol infrastructure, analyzing the trade-offs between coordination, predictability, and censorship resistance.
| Feature / Metric | Voluntary (e.g., Gitcoin Grants, Public Nouns) | Required (e.g., Protocol Treasury, L1 Fee Switch) | Retroactive (e.g., Optimism RPGF, Arbitrum STIP) |
|---|---|---|---|
Funding Predictability (Annual) | Volatile; depends on donor sentiment & market cycles | Deterministic; tied to protocol revenue or inflation | Retroactive; rewards past work, zero forward guarantee |
Coordination & Sybil Resistance | Relies on quadratic funding & complex identity proofs (Proof of Humanity, Gitcoin Passport) | Governance-controlled; subject to voter apathy & whale dominance | Jury-based panels; vulnerable to collusion and subjective judgment |
Developer Incentive Alignment | Weak; funding is speculative and project-based | Strong; direct link between protocol success and treasury size | High for proven teams; creates a 'hindsight' market for builders |
Censorship Resistance | High; permissionless application and donation | Low; governed by a potentially captureable DAO or foundation | Medium; panel-based, but process and criteria are transparent |
Average Allocation Overhead | 15-30% (oracle costs, matching pool management) | 5-15% (governance overhead, multisig operations) | 10-20% (reviewer compensation, administrative ops) |
Primary Failure Mode | Tragedy of the commons; underfunding critical infra | Governance capture; funds directed to insider projects | Popularity contests; rewards marketing over deep tech |
Key Protocol Examples | Gitcoin, Clr.fund, Public Nouns | Uniswap DAO Treasury, Aave Treasury, Lido DAO | Optimism RetroPGF, Arbitrum STIP, Ethereum Protocol Guild |
deep-dive
THE HIDDEN COST
The Three Failure Modes of Opt-In Economics
Voluntary taxation models fail due to predictable economic behaviors that undermine their core value proposition.
Free-rider problem dominates. Users rationally avoid paying for a public good when they can access it for free. This collapses the funding mechanism, as seen in early Gitcoin Grants rounds where a tiny fraction of beneficiaries actually donated.
Adverse selection cripples quality. Only users who extract the most value from a subsidized service (e.g., high-frequency arbitrage bots) will opt-in to pay, creating a perverse incentive structure that drives away ordinary users and distorts protocol utility.
Coordination failure is inevitable. Achieving critical mass in a voluntary system requires near-universal participation, which fails without credible coercion. This is why Optimism's RetroPGF relies on a centralized committee, not user votes, to allocate funds effectively.
case-study
THE HIDDEN COST OF VOLUNTARY TAXATION
Case Studies in Systemic Underfunding
Protocols relying on voluntary, non-slashable fees for core security are creating ticking time bombs of underfunded public goods.
01
The L2 Sequencer Fee Trap
Layer 2s like Arbitrum and Optimism rely on sequencer profits to fund their security councils and public goods. This creates a direct conflict of interest between MEV extraction and protocol security.
- Revenue Volatility: Sequencer fees collapse during bear markets, starving security budgets.
- Misaligned Incentives: No mechanism forces sequencers to fund the DAO; it's a voluntary tax.
- Centralization Pressure: The need for reliable revenue pushes L2s towards a single, trusted sequencer operator.
>90%
Fee Drop in Bears
$0
Guaranteed Security Budget
02
The Cross-Chain Bridge Insurance Gap
Bridges like Across and LayerZero use external, optional insurance backstops instead of cryptoeconomic slashing. This offloads systemic risk onto a small pool of voluntary liquidity providers.
- Adverse Selection: LPs withdraw capital at the first sign of risk, creating a bank run scenario.
- Unpriced Risk: Insurance is priced for profit, not to fully collateralize the protocol's TVL.
- Moral Hazard: Relay/validator security is not directly staked, reducing the cost of failure.
<1%
TVL Insured
Seconds
To Withdraw Capital
03
The MEV Auction Mirage
Proposer-Builder Separation (PBS) and MEV auctions (e.g., Ethereum's PBS, Cosmos' Skip Protocol) aim to democratize MEV. However, they often fail to capture sufficient value for the protocol treasury, leaving public goods underfunded.
- Value Leakage: MEV profits flow to builders and proposers, not the base layer.
- Auction Inefficiency: Voluntary contributions are a tiny fraction of total extracted value.
- Protocol-Specific: Solutions like CowSwap's
COWtoken or UniswapX's fillers don't fund the underlying chain's security.
$1B+
Annual MEV
<5%
Captured by Protocol
04
The DAO Treasury Time Bomb
DAOs like Uniswap and Compound hold massive treasuries in their own volatile governance tokens. Funding public goods via token sales creates selling pressure and governance dilution, making it politically toxic to spend.
- Illiquid Wealth: Multi-billion dollar treasuries cannot be spent without crashing the token.
- Political Gridlock: Proposals to fund security or R&D are voted down to protect token price.
- Reflexive Risk: Underfunding core development increases protocol risk, which further depresses the treasury's value.
$10B+
Illiquid Treasury
Months
Governance Deadlock
counter-argument
THE IDEOLOGICAL TRAP
Steelman: "But Coercion is Anti-Crypto!"
The voluntary taxation model is not coercion; it is a superior coordination mechanism that solves the free-rider problem inherent in pure public goods funding.
Voluntary taxation is not coercion. It is a coordination mechanism that solves the free-rider problem inherent in pure public goods funding. The 'coercion' critique confuses protocol-level rules with state-level force.
Crypto's core innovation is credible neutrality. Protocols like Uniswap or Ethereum are not anarchic; they enforce rules. A protocol-enforced fee is a rule, not a tax, creating a sustainable flywheel for the ecosystem it governs.
Compare voluntary vs. mandatory models. A voluntary donation model, like Gitcoin Grants, relies on altruism and matching funds, leading to chronic underfunding. A protocol-enforced model, like a network fee on L2 sequencers, creates a predictable, aligned revenue stream.
Evidence: Optimism's RetroPGF has distributed ~$40M over three rounds, a fraction of the ecosystem's generated value. A small, automated fee on Arbitrum Nova transactions funds its Data Availability costs without user friction, proving the model's efficiency.
takeaways
THE HIDDEN COST OF VOLUNTARY TAXATION
TL;DR: The Path Forward Isn't Charity
Reliance on altruistic validators for protocol security is a systemic risk that subsidizes free-riders and caps economic throughput.
01
The MEV Burn Fallacy
EIP-1559's fee burn creates a deflationary yield for ETH holders, not a security budget. This conflates monetary policy with validator incentives, creating a free-rider problem where stakers benefit from L2 activity they don't secure.
- Net Negative Issuance ≠Security Budget
- L2s contribute ~$100M/yr in burned fees with zero direct security spend
$0
L2 Sec. Spend
>90%
Altruistic Rev.
02
The Rollup Free-Rider Problem
Optimistic and ZK Rollups like Arbitrum, Optimism, and zkSync outsource all data availability and consensus to Ethereum L1, paying only base layer gas fees. Their multi-billion dollar TVL is secured by a validator set they do not directly incentivize.
- $10B+ TVL secured via voluntary taxation
- Creates a tragedy of the commons for L1 security
$10B+
TVL Subsidized
100%
DA Outsourced
03
Solution: Enshrined Payment-for-Security
Protocols must transition to explicit, mandatory security fees. This isn't a tax; it's a service fee for the inalienable property rights and liveness guarantees provided by the base layer's validator set.
- Mandatory L1 Security Fee per transaction
- Directs fee yield to stakers, not token burn
- Aligns economic activity with security spend
10x
Sec. Budget Inc.
Eliminated
Free-Riding
04
The EigenLayer Precedent & Its Limits
EigenLayer's restaking model allows ETH stakers to opt-in to secure additional services (AVSs), creating a market for security. However, it remains a voluntary, opt-in system that doesn't solve the base layer's free-rider problem.
- $15B+ TVL in restaked ETH
- Proves demand for yield-for-security markets
- Does not mandate L2 payments
$15B+
Restaked ETH
Opt-In
Model
05
The Cross-Chain Security Vacuum
Interoperability protocols like LayerZero, Axelar, and Wormhole operate critical messaging layers securing $100B+ in cross-chain value. Their security models often rely on their own validator sets or excessive multisigs, fragmenting security budgets and creating new attack vectors.
- Fragmented security across dozens of chains
- No shared economic base to fund it
- Re-invents the wheel for every new chain
$100B+
Value at Risk
Fragmented
Sec. Budget
06
Blueprint: Shared Security as a Protocol Primitive
The end state is a base layer that sells security as a verifiable commodity. Think Celestia for modular DA, but for economic security. L2s and app-chains purchase slashing guarantees from a unified, high-value staking pool, turning security from a cost center into a core product.
- Security becomes a traded commodity
- Unifies liquidity and cryptoeconomic security
- Enables sustainable hyper-scalability
Unified
Liquidity
Commoditized
Security
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