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The Best Of Intentions: The Dev Tax Is Intended to Benefit Investors But Will Corrupt Us Instead
Despite the best of intentions, the developer service fee, AKA dev tax, will corrupt BCH. It represents a departure too far both from our core principles and from bitcoin as peer-to-peer electronic cash. In this article, I will first explain how the proposed service fee scheme would work, and then I will argue why it has no place in a decentralized digital cash system.
In the spring of 2020, after the halving, the supply of new bitcoins will be reduced to 6.25 BCH per block. If the proposal is adopted, the coinbase from each new block would be split into 8 pieces. Seven (7) of the eight (8) pieces (87.5% or 5.46875 BCH) would go to the miner who found the block, while one (1) piece (12.5% or 0.78125 BCH) would go to a newly-formed company domiciled in Hong Kong.
Under the proposal, it would be useful to think of new BCH coinbases as consisting of two parts: a coin that is competitively mined, and a token that is issued for zero cost to the Hong Kong corporation. Because the competitively-mined coin is 12.5% smaller than before the dev tax, the network's hash rate would fall by roughly the same percentage. As BCH represents approximately 3% of the SHA256 hash rate, total revenue for SHA256 miners would fall ~0.4%, all else held constant, as a result of this reduction in mineable revenue.
Under the proposal, BCH developers would change the consensus rules in software so that blocks that fail to issue the 0.78125 BCH to the Hong Kong corporation would be deemed invalid. As explained by BCH developer Mark Lundeberg [link] and confirmed by the self-proclaimed "pusher" of the dev tax [link], this is necessary to prevent chain splits due to BCH's 10-block finalization and its minority hash power (the alternative is that miners would coordinate the orphaning at the pool level leaving the protocol unchanged). This action would also prevent non-cooperating miners—that together might hold more hash power than the cooperating group—from avoiding the service fee.
The Hong Kong company would then raise capital by disposing of its newly issued tokens, for example, by selling them to investors. A market for these tokens is guaranteed if key exchanges cooperate by running software to enforce the issuance to the Hong Kong company (e.g., blocks that did not issue tokens would not be considered legitimate BCH by the exchange). The proceeds from these token sales would then be used to fund further work by these developers to grow this BCH enterprise. The purpose of the developers' efforts would be to improve BCH as a cryptocurrency, with the expectation of profit for the investors.
In nearly all of the discourse on the developer service fee, it is claimed that miners pay; however, this diagram reveals that the capital raised to pay developers actually originates from the investors who purchase the tokens issued to the Hong Kong company. The SHA256 miners as a group suffer only a small reduction in aggregate revenue, all else held constant. The name "developer service fee" is more accurate than "dev tax" in the sense that it reveals the implicit investment contract between the Hong Kong corporation and the investors who purchase the tokens: the fee is passed on to the developers who would provide the service of advancing the protocol to generate profit for those investors.
"By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block.”
The key word is "owned." The developer service fee proposal would change this so that the miner whose work created a new block would instead own 87.5% of the new coin. The remaining 12.5% would be owned by the Hong Kong authority. By accepting this proposal, this 12.5% would no longer be the miner's property to keep:
Bitcoin Unlimited's (BU's) mandate is to foster the development and growth of "Bitcoin: a peer-to-peer electronic cash system" as described in the white paper. It is my opinion that BU would not condone this radical departure that hard codes a third-party into the protocol.
Changing the word "cooperating" to "colluding" in the scheme's diagram and adding some kickbacks illustrates the antitrust problem. Regardless of how well the raised capital is managed, at a distance the scheme is indistinguishable from a scam that takes money from investors in exchange for tokens (issued to the HK corp at zero cost and legitimized by colluding exchanges) with the promise of moon lambos in the future thanks to the hard work of its "world-class dev team."
This is only made worse by the fact that the colluding miners, exchanges, and developers benefit regardless of whether the tokens appreciate in value or depreciate. As long as the tokens have some market value, the scheme can reliably and continually transfer capital from investors to the colluding group members. In other words, the group in control of the scheme has their skin in a different game than the investors.
Moving forward with this proposal without legal clarity on the antitrust and conspiracy risks (e.g., to avoid civil lawsuits) is foolish.
The "Howey Test" is a test created by the US Supreme Court for determining whether certain transactions qualify as "investment contracts." Transactions are securities if they are:
An investment of money,
In a common enterprise,
With an expectation of profit,
Through the efforts of the promoter.
Bitcoin satisfies all but the last. There is no "promoter" whose efforts are intended to generate profit for the investor. It is for this reason that bitcoin fails the Howey Test and is not considered a security by the SEC.
The proposed developer service fee and the new structure centered around the Hong Kong corporation changes this in an important way. The explicit purpose of the Hong Kong corporation is to pay developers whose efforts are intended to increase the value of the tokens. The Hong Kong company is in fact a promoter!
Moving forward with this proposal without regulatory clarity on whether the sale of the tokens issued to the Hong Kong company, or tokens issued directly to developers, would qualify as investment contracts is unwise.
It is important to recognize that the problem is not the Hong Kong Corporation, it is the issuance of tokens to the third-party encoded into the protocol. The problems remain if the free tokens are issued directly to developers.
Why shouldn't the Hong Kong promoter charge additional service fees to pay for marketers to grow BCH adoption? It would be more useful than further development work. Our network needs new users more than new code. In fact, with Avalanche and proof-of-stake, we could redirect nearly all of the coinbase rewards to the Hong Kong corporation without changing bitcoin's inflation schedule.
Do not take this idea seriously. The point is that once we start paying for one "super important thing" it will turn out that there are many other "super important things" that also need funding. It will not be possible to raise taxes sufficiently high to pay for them all. Deciding which of the super important things are the most important will become a politicized process dominated by opportunists jockeying for position at this new faucet of free money.
The bitcoin protocol is very simple and was mostly complete in 2009 (by Satoshi). It is 11 years later and we should be moving towards a stable protocol (without block size limits) and the role of the "protocol developer" should be waning. Many people are passionate about bitcoin and will continue to do the work that needs doing. And as bitcoin becomes more important to businesses—because we attract more users—these business will also have an incentive to contribute. But with service fees funding a wage assistance program for select developers, these select developers will block initiatives that come from the volunteer devs or companies, to avoid revealing the uselessness of the assistance program. In fact, the developers receiving assistance will create roadblocks that only they can solve in order to justify their continued feeding from the public trough.
Back in 2013 we used to say that fiscal policy was impossible with bitcoin and monetary policy was known decades in advance. Today, advocates for the developer service fee are too blinded by self-righteousness to see that they've lost the plot, or too greedy and entitled to care. It is bad enough that mining is centralized to the point where it might be feasible for a cartel of miners to impose a tax on block rewards. The fact that the community is seriously considering modifying the protocol to kill-off this cartel's competition is sickening. As Satoshi said, "the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block." The community must reject any change to the protocol that would make this no longer so.