Not all fees are rents
A fee is a reward for a service. We constantly pay fees. In the last week, I’ve paid for tips at a restaurant, Netflix and Spotify subscriptions, Ethereum gas fees, crypto exchange fees, and dozens more. I even paid some invisible fees, like letting Google expose me to ads in exchange for search results.
I’m willing to pay these fees because the value I get from the service is worth at least as much to me as the fee.
A transaction occurs when:
Value to user >= Service provider cost + Fee
For most internet services, the Service provider cost for the marginal user trends to zero1. The user gets value from the service while the cost to provide the service decreases. This is why internet companies with strong economic moats have such incredible margins.
Fees are not the same as economic rents, though they are often conflated when discussing crypto.
“In the internet era, the rent-seeking applications captured all the value. The protocols they were built on top of captured almost none2.”
Pantera describes web2 (current internet) as rent-seeking (and implies web3 will remove rents). However, this statement can be misleading3: web2 applications captured all the value primarily through fees.
What is rent-seeking?
Rent-seeking is an individual’s or entity’s use of company, organizational or individual resources to obtain economic gain without reciprocating any benefits to society through wealth creation.4
Rent-seeking is the practice of acquiring economic gain without creating value for users or society. In contrast, a fee can only be charged if the user values the service enough to pay it.
Some examples of rent-seeking:
A company lobbies the government for loan subsidies, grants or tariff protection in order to be given wealth for value already created. No new value creation; wealth redistributed from taxpayer to company.
A feudal lord installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee to lower the chain. No new value creation; wealth redistributed from passerbys to the lord.
Licenses that limit access to lucrative occupations, such as Taxi licensing. Licenses constrain the overall supply of taxi services (without ensuring quality) and prevent competition. No new value creation; wealth redistributed from passengers to taxi business proprietors.
Rent-seeking can lead to unjustified fees, but fees themselves are not rents. How can you tell if it’s rent-seeking? No new value is created yet wealth is redistributed to the organization.
The most common form of rent-seeking in crypto is adding an unneeded native token. The token exists solely for the project creators to form capital and profit from appreciation of the token. Their project would be more valuable to users if instead of their native token, a more adopted digital asset like Bitcoin or Ethereum was used. No new value creation; wealth redistributed from network participants to token issuers.
Fees, not rent-seeking
A common mistake in crypto is to cry “rent-seeking” whenever one observes a fee.
Here are some fees that are not rents:
Transaction fees that secure a protocol like Bitcoin or Ethereum
Founders reward that funds a foundation like Zcash
Transaction fees that incentivize network participation like 0x
Transaction fees in non-fungible token (NFT) collecting games
In each example above, one can construct a strong argument that the value creation justifies the fee. Without transaction fees, proof-of-work chains would not be secure and without security, the tokens are worthless. Without the founders reward, the Zcash team wouldn’t be able to employ some of the strongest computer scientists in the space to make cutting-edge contributions to privacy. Without transaction fees denominated in the native token, 0x wouldn’t be able to achieve optimal distribution of ZRX to incentivize fair governance of the protocol. And without transaction fees in NFT collecting games, users wouldn’t have a convenient way to find a counterparty to trade with.
Users don’t have to accept fees. Protocols competing with ETH have elected to incentivize security of the network through inflation rather than charge users transaction fees. ZCL forked from ZEC to remove the founders reward. Many ZRX relayers have decided to not charge fees denominated in ZRX. And there are entire companies being built around removing fees from and increasing liquidity for NFT transfers. Given the relative ease of copying, we should expect constant downward pressure on fees.
The concept of “rent-seeking” is widely misused both in favor of and against token networks. Rent-seeking only occurs when wealth is redistributed yet no new value is created. Both web2 companies like Facebook and Google and many token networks are creating value, and thus their fees are not (primarily) rent-seeking.
As a community, we should stop using the phrase “rent-seeking,” as it is confusing discourse and distracting from the real prize: value creation.
This is covered best by Ben Thompson in his series on Aggregation Theory. ↩
https://medium.com/@PanteraCapital/vcs-missing-97-of-the-trade-blockchain-letter-november-2017-e02abd27c47f ↩
Web2 apps can be considered rent seeking if you believe their pricing power comes from aggressive lobbying. Joey Krug explains in this tweet. He has also said things like “If you look at the tokens, they fall into two categories. Rent-seeking tokens, where you can remove the token and the network will be better off, and non-rent seeking tokens, where you remove the token and it doesn’t work. The latter have the strongest chance of generating longer value.” Adding an unnecessary token for the purposes of an ICO is rent-seeking, and not a fee. https://www.coindesk.com/100-million-pantera-capital-ico-hedge-fund/ ↩
https://www.investopedia.com/terms/r/rentseeking.asp ↩