The Future of Funding: Harnessing Harberger Taxes

Trillions in assets are locked in speculative holdings, creating artificial scarcity and stifling productive use. The current property system incentivizes hoarding over utilization.

• Inefficient Allocation: Assets held for appreciation, not utility.
• Barrier to Entry: High upfront costs exclude new participants.
• Stagnant Markets: Liquidity is trapped, not circulating.

Harberger Tax (COST) mandates owners self-assess value, pay a continuous tax on it, and be forced to sell at that price. This creates a permissionless, liquid market for any asset.

• Optimal Pricing: Market forces set true price via self-assessment.
• Forced Liquidity: Assets constantly available for purchase.
• Productive Yield: Tax revenue funds public goods, creating a positive-sum flywheel.

On-chain implementation via EIP-1620 (Fractional Ownership) enables Harberger mechanics for NFTs, virtual land, and IP. Projects like Radical Markets and Harberger Ads are live proofs-of-concept.

• Programmable Property: Assets become composable, revenue-generating primitives.
• Sybil Resistance: Economic stakes replace identity-based systems.
• DAO Treasury Fuel: Creates a sustainable, automated revenue stream for protocols.

Extends beyond physical analogs to digital scarcity domains: attention markets, creator monetization, and governance rights. Imagine paying a tax on your Twitter handle or Uniswap LP position.

• Dynamic Resource Allocation: Applies to bandwidth, storage, compute.
• Creator Royalties: Continuous, automated revenue vs. one-time sales.
• Anti-Entrenchment: Prevents governance capture in DAOs like Compound or Maker.

Traditional grant programs are slow, political, and suffer from misaligned incentives. Retroactive funding (e.g., Optimism's RPGF) is a step forward but remains a lagging indicator, failing to fund ongoing operational costs in real-time.\n- High Friction: Months-long grant cycles stifle innovation.\n- Centralized Gatekeeping: Small committees decide what gets built.\n- Operational Blindspot: No mechanism for sustaining live, essential services.

A Harberger tax system where projects self-assess their value and pay a continuous tax (e.g., 5% APY) on that valuation. Anyone can buy the project at its self-assessed price, forcing honest valuation. The collected taxes fund a commons.\n- Real-Time Alignment: Value is assessed and funded continuously.\n- Anti-Hoarding: Forces productive use of capital and attention.\n- Transparent Sourcing: Creates a permissionless, algorithmic revenue stream for public goods.

An evolution of Harberger where ownership is a bundle of rights. Creators can retain certain rights (e.g., governance) while auctioning economic rights, enabling sustainable funding without full project surrender. This is being explored by protocols like Hypercerts for impact funding.\n- Flexible Rights: Decouples funding from total control.\n- Creator Sustainability: Allows founders to "rent" capital without an exit.\n- Composability: Ownership shares become a new financial primitive for DeFi pools.

Naive implementations are vulnerable. A competitor could front-run a tax payment to seize a project, or a cartel could artificially depress valuations. This requires cryptoeconomic safeguards like graduated takeover periods and bonding curves.\n- Security Critical: Must be Sybil-resistant and MEV-resistant.\n- Game Theory: Design dictates honest revelation as the dominant strategy.\n- Integration Need: Requires tight coupling with oracles and sequencers.

Early experiments are live. Platforms like eth-analytics.eth operate under a Harberger model, where the domain and its revenue stream are auctioned. This creates a market for attention where the highest-value user acquires the platform's cash flows.\n- Proof of Concept: Demonstrates viability for digital assets.\n- Recursive Funding: Revenue funds further public goods.\n- Low Friction: Entire lifecycle is on-chain via ENS and smart contracts.

At scale, this becomes the fiscal engine for network states and DAO2DAO economies. Imagine a Layer 2 or appchain funding its core infrastructure through a Harberger tax on its block space or native assets, creating a self-sustaining economic flywheel.\n- Sovereign Finance: Replaces voluntary contributions with mandatory, fair rents.\n- Automatic Scaling: Public good funding scales with network value.\n- Ultimate Alignment: Links protocol success directly to commons reinvestment.

Harberger taxes require a continuous, tamper-proof price feed. A corrupted oracle can be used to steal assets via forced sales or cripple the system with inaccurate tax bills.

• Mitigation: Use decentralized oracle networks like Chainlink or Pyth with >50 independent nodes.
• Mitigation: Implement a multi-layered fallback system using TWAPs from on-chain DEXs like Uniswap V3.

High tax rates or volatile assets can trigger a cascade of forced sales, collapsing asset values and tax revenue in a positive feedback loop.

• Mitigation: Implement dynamic tax rates calibrated to asset volatility and protocol revenue targets.
• Mitigation: Create a protocol-owned liquidity pool (inspired by Olympus DAO) to act as a buyer of last resort and stabilize floors.

Self-assessed value must be escrowed for the claim period. On L2s like Arbitrum or Optimism, this creates cross-chain settlement risk and complex dispute resolution.

• Mitigation: Use canonical bridges with 7-day challenge periods (e.g., Optimism's Bedrock) for secure escrow.
• Mitigation: Design a minimal, on-chain dispute game using fraud proofs, similar to Optimistic Rollup mechanics, to adjudicate valuation challenges.

Colluding users can self-assess at artificially low values, reducing tax revenue and gaming the allocation mechanism. This mirrors MEV extraction in new forms.

• Mitigation: Implement proof-of-personhood or soulbound token requirements (e.g., Worldcoin, BrightID) to limit Sybil attacks.
• Mitigation: Introduce a Vickrey-style component where the tax is based on the second-highest self-assessed value among a cohort.

Continuous forced-sale exposure may trigger taxable "deemed disposition" events in jurisdictions like Canada, creating a compliance nightmare for users and protocol liability.

• Mitigation: Structure assets as non-transferable usage rights (licenses) rather than property titles to avoid capital gains triggers.
• Mitigation: Provide automated tax reporting tools (like CoinTracker) integrated at the protocol level to generate necessary documentation.

The public, time-bound sale process is a predictable MEV opportunity. Bots can snipe underpriced assets or manipulate sale timing, harming the departing owner.

• Mitigation: Use a sealed-bid, second-price auction (like CowSwap's batch auctions) for the claim period to obscure intent.
• Mitigation: Integrate with MEV-protected block builders (e.g., Flashbots SUAVE) or use commit-reveal schemes to neutralize frontrunning.