Prototyping a New Way of Handling Property
What’s the Deal With Allocative Efficiency?
The market as we know it does a good job of rewarding people for the investments they make in things they own. But it doesn’t do a very good job of making sure that the people who own things are also the people who subjectively value them the most. This kind of inefficiency is called “allocative inefficiency.” Until fairly recently, there weren’t too many bright ideas about how to improve the problems derived from allocative efficiency, so it largely escaped attention. But new work on Harberger Taxation and licensing, in the book Radical Markets and beyond, has led to exploding interest in the topic. Read more here and here.
In order to advance these ideas through experimentation, I am building Nonomos, which you can play with on Ethereum’s Rinkeby test network now. It lets you mint and interact with unique tokens that work like Harberger licenses.
How to Think About Harberger Licenses
Let’s say you have an asset, and you’d like to encourage its efficient allocation by creating a Harberger license to its possession. What kind of asset? Maybe a piece of intellectual property. Or maybe a parking spot in your driveway. Or maybe a piece of land in a blockchain-run city in the desert. It could be a range of things, though some assets are more suitable than others. (We’re all still figuring this stuff out.)
The bottom line is that a Harberger license is one where the licensee must:
- publicly self-report her subjective valuation of the license,
- pay a periodic fee calculated against that value, and
- transfer the license to anyone who pays her that self-reported value.
A smart contract* can help administer such a licensing arrangement. Correctly constructed, it would (1) permit licensees to dynamically adjust their valuation of their license on a public ledger, while automatically calculating and assessing the Harberger taxes / fees, and (2) permit would-be licensees to send cryptocurrency to current licensees, resulting in a binding transfer of the license.
This is what Nonomos does. It lets you mint a unique Harberger license token with parameters of your choosing. (Details below the fold.**)
Once you’ve minted it, you might announce that its owner has the right to use or possess your asset (i.e., your IP, parking spot, your plot of land, whatever), and let the market guide the license into the right hands.
The front page of Nonomos.com amounts to a simple demonstration of the system. The 16 videos, appearing on a grid, correspond to Token ID numbers 1–16 (nos. 1–4 in the first column, 5–8 in the second column, etc.). From the console interface, you can buy and otherwise interact with these tokens. The owner of Token ID 4, for example, has the unique ability to change video #4. (The Nonomos website queries the youtube video identifiers from the blockchain, so that when a token possessor changes a video, all visitors will see the new video.)
Experiment With Us
To get started, simply ensure that your browser is set up for Web3 injection/support via Metamask or your favorite client, and that you can connect to the Rinkeby testnet. Have a YouTube video ID ready as well — those are the alphanumeric strings at the end of each video URL (Example: https://www.youtube.com/watch?v=TDGq4aeevgY).
Have fun, and let me know what you think! I am eager to get some community feedback to refine the system and work towards a mainnet launch.
Edited by: Steven McKie
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*I use the term “smart contract” advisedly, and only as a conventional way of saying “chunk of code on a blockchain”. I am sympathetic to the growing shift away from such confusing, pseudo-legal terminology.
** Nitty gritty:
- Set the initial value of the token in ether.
- Set the fee beneficiary. (This is the Ethereum address that will collect any fees/taxes paid on this token.)
- Give the token a URI identifier (such as “PARKING” for a parking place).
- Finally, the video ID parameter simply accepts a string, modifiable at any time by the token owner, which could contain any information at all. (I.e., it doesn’t have to be a Youtube video id.)
- The “base tax” is the percentage of the present value of the token that will be assessed to the token owner on a rolling basis each year (e.g., “10” means fee assessment at a rate of 10% per year). However, when the token is first minted, no tax/fee will be assessed. It will start to kick in after time passes, or as the token is transferred more times, approaching but never exceeding the “yearly base tax” rate. This is based on the idea that artificial capital decays, and it gives a reward to minters, and “early adopters” of any particular license, in order to help push them into circulation. Specifically, the fee collected on a per-second basis is calculated as follows: (base tax / 1 — n), where n equals the number of times the token has been transferred.
- How does the smart contract collect the “taxes” or fees? As unpaid fees (or “back taxes”) accumulate, they count against the token owner’s equity in the token. Thus, anyone who wants to buy the token can do so by paying the owner her self-reported value, minus her unpaid fees. If unpaid fees are allowed to accumulate to more than 1 ether, the token value is reset to zero so that anyone can claim it.