Tax credit infrastructure - proposal feedback
Hi Everyone,
Sharing Afloat's proposal draft. We'd really appreciate your feedback.
Summary: Afloat enables the fractional buying and selling of tax credits that historically have been inefficient, opaque and centralized. It has already processed tax credits ranging in orders from $2K -$70k USD.
It was built on a private Ethereum clone but due to Polkadot technology and identity management, it’s applying for a grant to migrate.
Afloat founder: Louise Reed
"Tax credits promote individual rather than governmental choice of how money will be spent to accomplish public policy objectives (Weidenbaum 1974). As opposed to most governmental subsidies, a tax credit is given directly to the citizen after the desired behavior is accomplished. Tax credits may serve as incentives in areas where direct expenditure by the government would be difficult (Hyatt 1977). Tax credits are perceived as a "costless form of subsidy" because the government merely refrains from collecting taxes from eligible individuals rather than redistributing funds."[1]
Tax credits, as a socioeconomic tool, are very similar to concepts found in the Substrate, Polkadot, Kusama (dotsama) ecosystem, where the tokenomics are decided by participants through a governance process designed to maximize the benefit for the network. For example, the network will
- "mint or burn DOTs in order to reward the nodes that run the consensus protocol, to fund the treasury, to control the inflation rate, etc."[2],
- "[ensure] DOTs also play a role in slashing protocols designed to disincentivize attacks or adversarial behaviors,"
- "let DOT holders express their opinion in governance decisions", and
- "decide which projects are allocated a parachain slot".
Afloat stakeholders and the Dotsama ecosystem embrace similar socioeconomic tools and align well in spirit and in practice.
A common tax credit is for land preservation. The inhabitants of a geographic area recognize that their shared quality of life may be positively impacted if more land was preserved rather than developed. If the owner of land property in that area agrees to preserve land, they may be eligible to receive a tax credit in an amount associated to the value of the land property.
A tax credit only reduces the tax liability for the holder of the tax credit, and they expire at various durations. A common scenario is for a taxpayer to earn tax credits well beyond their tax liability over the effective lifespan of a credit. To maintain the original intended benefit of the tax credit, they are allowed to be sold to other tax payers in that have a corresponding compatible tax liability.
Afloat is an application for connectivity and liquidity. Tax payers may originate credits using the platform, and a special type of NFT is minted with any files encrypted and attached . They may request appraisal and verification of their paperwork, forms, or other evidentiary paperwork. Afloat has a number of known tax credit experts (e.g. accountants, CPAs, attorneys), and upon accepting the appraisal request, are given access to the encrypted materials. The appraiser may provide a judgement and/or a value attached to the credit.
Here is the detailed proposal.
Open Sourced components
- Substrate pallet(s) for a "gated marketplace for graded assets"
- Substrate pallet(s) for "NFT Candle auctions" to support expiration-configured pricing
- Support for encrypted files attached to NFTs
[1] https://www.jstor.org/stable/2488893
[2] https://research.web3.foundation/en/latest/polkadot/overview/2-token-economics.html
Comments (2)
Hello! Thank you for sharing this proposal, looks interesting. I am wondering where this application will be deployed? Its your plan to deploy this on top of a a smart contract parachain? to have your own chain? any other plan? Depending on this, the treasury might be able to provide funding for the migration or not. Also, if the application already lives on-chain but on Ethereum: how do you plan the migration to Polkadot ecosystem? If this is planned to live in a smart contracts chain then it is understood, but if not, let us know how you plan to organise the migration. Furthermore, what is "fruniques pallets"? is this unique pallet, meaning the certificates will be hold as NFTs? Is M1 entirely an event ops and mgmt to onboard people? could you share some numbers regarding the usage of your application while in Ethereum? Thanks!
I am wondering where this application will be deployed? Its your plan to deploy this on top of a a smart contract parachain? to have your own chain? any other plan? Depending on this, the treasury might be able to provide funding for the migration or not.
In the short term, our initial step will be run it on a standalone chain as a pallet. This provides the most latitude and flexibility. The initial phase(s) is primarily focused on function, usability, and ensuring the core asset type design is secure and composable. It also includes existing user and asset migration. We will have a one-time process per user to teleport their account and assets. Most likely, we will not teleport any orders or redemptions currently in process. They would close out on the old platform, and users would create new ones after they migrate.
We did not include any scope or fund request in the proposal related to the migration work. The scope of the treasury proposal is really focused on building the open source components. These will be available for the community, and Afloat will be an implementation of them. Making the pallets and tooling as general purpose as possible should help with reusability, for us and other projects.
Once operational, we will start the Polkadot integration. Most of our current users, in comparison to most Defi projects, are high dollar volume yet relatively low count of orders. Without a need for high frequency (every block), we don't see it as a good fit for a parachain. A parathread may be a good fit. XCM may also be a good fit, but I haven't explored how to use that yet. Maybe an option is to deploy a smart contract to a parachain and teleport assets there (or Statemint?). Centrifuge has infrastructure for somewhat similar IRL assets. We would look to collaborate with similar projects and adopt or help build an integration pattern that is the most composable for the asset type.
The benefit for our users initially, besides the security, would be compatibility for liquidity. Tax Credits trade with a heavy discount to face value, and Polkadot participants will likely want to hold them during that lifespan even if they aren't the final redeemer. If a 5-year expiration credit is priced at $0.60-to-the-dollar by its impatient originator, it could be purchased via a more patient market maker to perhaps be sold at $0.90 in year 3 or 4, just as an example.
Also, if the application already lives on-chain but on Ethereum: how do you plan the migration to Polkadot ecosystem? If this is planned to live in a smart contracts chain then it is understood, but if not, let us know how you plan to organise the migration. Furthermore, what is "fruniques pallets"? is this unique pallet, meaning the certificates will be hold as NFTs?
Fruniques is our name for FRactional UNIQUES. It'll be compatible with the Uniques pallet (and maybe RMRK as well?). It allows the user to spawn a new NFT from an existing NFT, repeatedly, while specifying an associated amount. The integrity of the total quantity must remain intact, along with metadata, but each of these NFTs can be priced, transferred, and redeemed individually.
An earlier implementation of this used a fungible token to represent the parts of the tax credit, but we've found that fractional NFTs fit the mental model a bit better and also fits more ergonomically in existing tools. A user is buying a "thing", see that thing in their wallet, where they may hold 7 of them. Holding various quantities of 7 different fungible tokens seemed to increase the complexity more than necessary. This is a design element we frequently brainstorm on though. In a future release, it may be useful to have fruniques support both use cases.
Is M1 entirely an event ops and mgmt to onboard people? could you share some numbers regarding the usage of your application while in Ethereum?
The primary focus of M1 is making sure we get the general purpose components right. Then we implement those for Afloat and migrate users and assets.
We have a total of 108 active users. Many of these are CPAs (public accountants) and represent a network of taxpayers (credit buyers and sellers). We purposefully haven't had any marketing campaigns, and have been cautious with growth so far. We had a large batch of users enroll in December 2021 (end of tax year) and material increase (4x) year over year."
I had no idea tax credits could be bought or sold. Here’s a personal/more concrete example as to why I can relate, that may be helpful to others: I recently purchased an old home (early 1900s) that is in a registered historical district and is eligible for a historic revitalization tax credit. Old homes can be less expensive to purchase, but are expensive to maintain. For example, I had to have a chimney lined with stainless steel to prevent the brick from crumbling further and falling into the house. Although I had to pay for the repair work, I was effectively reimbursed 20 percent through the tax credit. The two-fold benefit is that (1) I paid less for the necessary repairs and (2) 100 years from now folks will be able to enjoy what will then be 200 year old architecture. Where I live tax credits are not transferable, but this is interesting nonetheless. If I understand correctly, one of the positive side effects of having a tax credit market, is that those who might not otherwise be inclined to participate have an incentive to do so and that benefit could flow to the common good. So the business model for Afloat is to create and operate the market leveraging Polkadot technology and raising awareness of what can be accomplished with the Polkadot ecosystem. Speaking as a random community member, this sounds like a yes vote for me… Is there an existing web-based interface that current customers use, that communicates with Ethereum “backend” infrastructure? Is this mostly a matter of swapping out the existing Ethereum “backend” with a Kilt based counterpart or more involved than that?
That is an interesting tax credit example. Makes sense, and I always enjoy learning about and touring historical homes. I recently purchased a fairly large wild tract of land in the western USA, and the state has a tax credit program for preserving Sage Grouse (an endangered bird). They are actually quite valuable, because when a oil/gas drilling company is operating an area that becomes settled by Sage Grouse, they either have to relocate OR purchase tax credits to offset the damage being done. It ensures the 'other' location is being preserved well. There really isn't a marketplace for them though- it's mostly word of mouth. It seems like a solid use case for blockchain, making credits more liquid and dialing in the transfer steps. Seems like a win/win, so I bet that as they become easier to execute, gov would create more of them because it definitely is a strong incentive.