Why not Harberger tax?

Our reasons behind why we think the Harberger tax model is not ideal for the rent of domains on ENS.

The current method to obtain ENS domains involves an auction that many users have discovered to be a confusing process. In order to improve the overall UX a new system needs to be put in place to obtain domains and rent them for a desired amount of time. It was always part of the roadmap to move away from the current model, but finding something which works and is considered to be fair by users can be rather tricky.

In a domain name system it is important that there is a cost associated with obtaining a name. This is due to the fact that cost is one of the first steps of deterring squatters, it is a simple method to disincentivize a user from registering every possible domain on day one. However, this brings on issues such as determining what the fair price for a given domain is.

One of the models we have been asked about on several occasions are Harberger taxes, and whether we believe these are a viable rent model for ENS names. This has been discussed on various platforms, such as in twitter threads and on our discussion board on rent. In this post, we will highlight why we believe that Harberger taxes are not viable, and what we strive to achieve with our new rent model.

First, we will define what Harberger taxes are and how they work. For a more in-depth explanation, we suggest Simon de la Rouviere’s post “What is Harberger Tax & Where Does The Blockchain Fit In?”. To paraphrase, Harberger taxes are a rent system where the renter values an item and pays a tax on the self-assessed value. At any point in time, a person can come and buy said item at the amount a renter has valued it.

Harberger taxes bring the benefit of ensuring accurate pricing of an asset while ensuring a low overhead for the authorities. Effectively, they let a market completely determine the fair value of a given asset — e.g., property. Additionally, Harberger taxes make property more liquid, addressing the monopoly on ownership. This allocative efficiency provided by Harberger taxes means that real estate for example is less likely to remain unoccupied, a significant social cost on a community.

There are certain applications where Harberger taxes are interesting, such as with advertising. The ability to be able to immediately outbid advertisers to take their ad spaces allows for faster circulation in an advertising market.

On the contrary, in the context of items tied closer to identities, like domain names, Harberger taxes have multiple downsides. To elaborate, we must detail how domain names are different to something like an apartment.

First, the assumption is made that a domain is more valuable to the rightful owner than to someone who could maliciously benefit from said domain. If we take the example of mycrypto.eth, the value a scammer can derive far outweighs the overall value the MyCrypto team makes out of said domain. This is because through a short-term campaign, a malicious actor could enrich themselves at the expense of legitimate users by buying mycrypto.eth.

An attack like this is not very hard to imagine. Let’s say a wallet like MyCrypto gives users the ability to register subdomains, an attacker can then obtain the domain and change all those subdomains to point to his address meaning that if any user gets paid the funds will end up in the attacker’s account.

Secondly, with identities, Harberger taxes are a tax on stability and remove the reliability that a user is supposed to be able to expect from their identity. Imagine, for example, if someone could buy your email address and start receiving all your mail — not desirable. It would lead to an exodus of users to an email service that does not allow for this behaviour.

In order to encourage widespread adoption, we must find a rent model which is understandable for every user and has as few trade-offs as possible. The current goal is to have a monthly rent system similar to how the rent of normal domain names currently works.

That being said, however, the one benefit Harberger could have brought is the possibility that it could solve the pricing issue for us. As users determine their own rent, this is something we now have to try and figure out as part of ENS’s research: what is a fair price for domain names?