Why 'Taxation is Theft' is a Recipe for Failed Network States

Taxation is infrastructure theft. A network state's core value is its public goods—security, data availability, dispute resolution. Refusing to fund these via protocol fees creates a tragedy of the commons, where users extract value without contributing to its maintenance.

Protocols are not governments. Unlike nations with coercive power, on-chain entities rely on voluntary economic alignment. The 'taxation is theft' model forces reliance on inflationary token emissions or venture capital, which are unsustainable subsidies.

Ethereum's fee market and Solana's priority fees demonstrate that users pay for resource consumption. Successful states like Optimism's RetroPGF or EigenLayer's restaking create explicit, opt-in economic loops to fund public goods, avoiding the free-rider problem that dooms purely extractive networks.

The 'Opt-Out' Fallacy undermines public goods funding. Network states require shared infrastructure like RPC endpoints and block explorers. A pure opt-in model, as championed by libertarian purists, creates a tragedy of the commons where critical services remain underfunded and unreliable.

Protocols are not countries. Comparing a DAO treasury to state taxation ignores the consensual participation inherent to crypto. Users choose chains like Arbitrum or Solana; citizens are born into jurisdictions. Mandatory fees for essential chain services are a usage fee, not an ideological violation.

Evidence: Look at Bitcoin and Ethereum. Their security models—proof-of-work and proof-of-stake—are effectively mandatory, non-optional taxes on participants. This 'forced' expenditure is the bedrock of their trillion-dollar value, proving that non-consensual, collective investment is necessary for survival.

Zero-fee maximalism is a suicide pact. The 'taxation is theft' ideology ignores the real-world cost of security and development. Every validator, RPC endpoint, and indexer requires capital. Without a sustainable on-chain revenue model, a network's core services degrade, creating a negative feedback loop.

Protocols become extractive rent-seekers. When the base layer provides no funding, public goods like core development and protocol R&D become dependent on foundation grants or speculative token emissions. This creates misaligned incentives where the most valuable contributors are the first to leave.

Ethereum's PBS and EIP-1559 are the counter-model. The proposer-builder separation and fee-burn mechanism create a native, credibly neutral revenue stream. This funds protocol development without relying on a central treasury, proving that a sustainable economic engine is a prerequisite for longevity.

Evidence: Compare L1 longevity. Chains with clear value capture (Ethereum, Solana) sustain multi-year development cycles. Chains that launched as 'feeless' (EOS, early Tron) consistently degrade their security budgets and developer ecosystems, ceding market share.

Public goods require funding. A network state needs security, dispute resolution, and infrastructure like Layer 2 bridges (e.g., Across, Stargate). These are not optional. The crypto-anarchist model of pure voluntary donations fails, as proven by the chronic underfunding of Gitcoin grant rounds for core protocol development.

Sovereignty demands collective action. A state that cannot fund a common defense is a target. This is not hypothetical; see the 51% attacks on Ethereum Classic or the constant MEV extraction on Solana and Avalanche. A zero-tax jurisdiction becomes a sybil-attack playground, where attackers outspend the community.

Evidence: The most stable DAOs, like Uniswap and Compound, have formalized treasury management and funding mechanisms. Their governance tokens are, in effect, a tax base that pays for audits, grants, and protocol upgrades. Network states without this are software, not societies.