An in-depth analysis of Nouns DAO governance

The Nouns project is simple beauty. And, as often happens with cutting-edge experiments, it has gone far beyond that. Starting August 8, 2021, the Nouns protocol will generate and auction a Noun every 24 hours, starting with Noun 1 – Noun 0 for founders, or Nounders. It should do so forever. Today, Nouns Protocol auctioned Noun 397.

Where are Nouns sacred?

Simply put, Nouns is simply generative art, representing stylized 32×32 pixel pictures of people, places and things in the form of non-fungible ERC-721 tokens. For example, Noun 1 in the figure below.

An in-depth analysis of Nouns DAO governance

Noun 1

How to generate Nouns?

Nouns are composed of predefined features containing 5 features: Background – 2 features, Body – 30, Jewelry – 137, Head – 234, Glasses – 21. Assuming no more traits or traits are added (and I’m sure they will), there are a total of 1923,480 available combinations, or about 5,270 runways, all with equal probability. The generation algorithm begins by using the Noun Seed, which is based on the block in which the auction was previously settled. It’s a nuance, but an important one. Once the auction is complete, the community must trigger settlement, and while the winning bidder clearly has an incentive to do so, it is theoretically possible for anyone to trigger settlement. This gives the community the power to influence what features the next Noun will have, which we’ll dive into later. You can experiment with spawning mechanics on the Nouns Playground.

Auction process

Every Noun, except every tenth that goes free to Nounder, is auctioned off to the highest bidder. Simply put, the highest bidder will receive a permissionless Noun at settlement and deposit 100% of the ETH settlement price into the treasury. According to Dune, the average winning bid per Noun is 67.12 ETH, or $110,000 at current prices. This means that a total of 26,513 ETH (or $43.4 million) was transferred to the treasury. As ERC-721 tokens, these Nouns can be sold on the secondary market. At Opensea, 81 of the ~400 Nouns generated changed hands, with an average price of 82 ETH and an average profit of 15 ETH.

Nouns DAO Governance

The mission of the Nouns DAO is to manage the current balance of the Nouns treasury through a simple yet robust governance infrastructure:

  • One mandate and ultimate guardian: Financial resources to be used to strengthen and expand Nouns’ footprint, Nounders retains final veto against passed non-compliance proposals
  • One Noun, One Vote: Each Noun gives the owner one vote for governance
  •  Simple Majority: For each proposal, the vote with the largest number of Nouns in support wins – depends on the quorum
  •  Dual Quorum: Proposals submitted to governance must meet a minimum threshold (currently 1 Noun), and proposals to be executed must meet another threshold (currently 5% of outstanding Nouns)

To date, the community has submitted 125 proposals to the DAO for voting, showing a variety of operational improvements, governance parameterization, scaling project grants, and allocation of available financial resources. 

Certainly, Project Nouns is an amazing success story for a hedge fund that started out through a financing strategy to distribute unique art in a niche but well-funded community. But we know that great things weren’t about money in the first place, and never will be. We care about Nouns because Nouns is pioneering and experimenting: diluting rigid open source governance. Let’s unpack the implications.

Diluted governance

The existence of highly centralized and unquestionable centers of power breeds corruption. It is now clear that most crypto projects start with governance token offerings, which are impractical and impossible to meaningfully reorganize, which makes it impossible to explore universal maxima and incentivizes both insiders and outsiders People become bad actors. Dilution governance can alleviate this phenomenon.

An in-depth analysis of Nouns DAO governance

It’s not hard to see how the one-noun-one-vote system is diluted. Buying the first Noun to be auctioned (the first Noun was not auctioned, but given directly to the Nounders) will get 50% of the voting power. Buying the 11th is 8.3% and the 101st is 1.0%. In other words, to control the majority vote, we need to have 7 Nouns when the 11th is auctioned (after the 0th and 10th Nouns were given to Nounders), the current cost is $770,000, or at the 101st Each Noun was listed with 52 Nouns at a cost of $5.7 million. The cost of obtaining a majority of votes increases substantially as time goes on.

Another way to look at this is to calculate the difficulty/cost of challenging the Nounders’ voting power – ignoring their veto power. When the 11th Noun is auctioned, we need to have 3 Nouns, which is about $330,000; when the 101st is listed, we need to own 12 Nouns, which is about $1.4 million. Still a reasonable amount.

An in-depth analysis of Nouns DAO governance

The cost of control (and collusion) grows exponentially over time. For me, this is a great thing. Of course, the founding team’s veto power over the effective execution of the proposal isn’t perfect, but it’s much better than other options out there. The increasing difficulty also applies to the ability to successfully execute a proposal. While every wallet with at least one Noun (today) can create a proposal, any successfully voted proposal requires a 5% quorum to be executed. This avoids exploiting voter apathy to gain overwhelming importance. After quorum approval and valid votes, proposals will be implemented within 48 hours.

Considering the dilution effect of newly issued NFTs, we expect the auction price of Noun to gradually decrease over time. However, it is not. The settlement price has been hovering around 100ETH for a while and has actually been trending positively for the past 200 days. It now appears that the positive force of Noun’s growth outweighs the force of dilution. Given that marginal diluted costs mathematically decline over time, valuations will likely reach an equilibrium and stable rate of return at some point – what this stable rate of return will be is hard to tell, but my guess is , which will somehow correlate with (and slightly outperform) Ethereum’s staking yield. Of course, in the absence of a value-destroying event happening inside the treasury.

An in-depth analysis of Nouns DAO governance

rigid governance

Simple, measurable, and stable goals simplify a lot of governance. The Nouns DAO maintains a very clear mandate for the use of its treasury. The data below comes from the Nouns DAO website.

An in-depth analysis of Nouns DAO governance

Rigid governance has produced an astonishing array of homogenized results. Of the 125 proposals submitted, the vast majority (96) were executed and only 1 proposal was rejected – as a test, the total amount of funds allocated was 132,000 ETH. Most proposals have a clear one-sided vote, which may indicate the following:

  • Very cohesive community around a simple task
  • Robust soft (forum) and hard (arbitration) filtering mechanisms to avoid unpromising proposals
  • Still a small and immature community – about 200 Nouner+Nounder
  • Active propensity to spend due to growing treasury – it’s easy to be proactive when you’re wealthy

What’s going on is probably a combination of all of the above, and the dilution and angle of voting may have really boosted the technology. If it is difficult to control the relative majority of the Nouns DAO, it is nearly impossible to maintain anonymity: Nouns are not as easily reshuffled as homogeneous tokens, they are not used for staking or mixing as often as CEX contracts, and over time Developments get an identity associated with the owner. These characteristics greatly increase the (personal) cost of deviation. It will be interesting to see how these dynamics evolve as the number of Nouners increases, and the (potentially) governance mission expands. Personally, I would like the rigid governance to remain and for its development to happen organically, away from the parent DAO. 

Open Source Governance

The Nouns project has opted for copyright protection under CC0, in other words opted out of any copyright and database protection. Everyone can build on what the Nouns DAO has done because they believe that, on average, these contributions will increase the value of the Nouns and DAO treasuries. As we’ve said before, the DAO is ready to put money in to facilitate this, and it’s no surprise that most teams willing to build on the Nouns platform start by asking for budget contributions.

In other words, the governance of the Nouns DAO is evolving into some kind of (community-controlled) optimistic delegation process, where the DAO pre-allocates a large amount of ETH in the hope that the money will be spent well, and for Nouns, the returns will increase .

FOMO Nouns is one of the earliest and most interesting applications of this concept. We have previously discussed how the generation process of each Noun is triggered based on the previous settlement block, allowing the community to have some influence on the characteristics of the next Noun. As a block-specific process, incredible coordination (plus speed and luck) is required to predict what a Noun will look like at block start, vote, and trigger. To systematize this process, the creation of FOMO Nouns was proposed in Proposal #8. Participants can vote ? or ? to determine a predicted minted Noun. If the (like/dislike adjustment) vote exceeds a certain threshold, the contract will try to trigger settlement. 50 ETH was initially requested for the development of the project, including the budget donated to the contract to get block inclusion. While the project has no immediate monetary positives, proponents believe the deployment will help create more attractive Nouns, increase bid value, and foster further participation.

Forks have no limits. Lil Nouns is derived from Nouns and becomes the most classic hard fork, producing outputs that are strongly related to Nouns but operationally and (partly) economically independent. A quick look at the website shows how the Lil team chose to minimize the differences between the two projects.

An in-depth analysis of Nouns DAO governance

The project is building an independent treasury consisting of ETH and Nouns as part of the Nouns’ Small Grant program voted on by the Nouns DAO governance. It is also the arena of the mothership. The Nouns Center lists a collection of projects inspired by Nouns. This is also a project funded by Nouns.

An in-depth analysis of Nouns DAO governance

We do not (currently) have a framework to measure the impact of grants from the DAO treasury on project value. Some form of Nouns return should be developed. But we can look at the best proxy, the price of the next Noun, and this strategy has worked so far. Constructive power is outweighing dilutive power. How long this will last, however, is hard to say. At some point, the balance of power will change, and that’s when governance will be put to the test. The open-source nature of this project will further complicate handling of this issue.

We have previously found some characteristics that stimulate participants to deviate and go bad in (simplified) organizations:

(i) expropriation capacity or size of private benefit, (ii) community sharing or size, (iii) uncertainty or perceived risk of encountering bad proposals, (iv) urgency of suffering from bad actors or Likelihood (v) Risk aversion. Compared to previous generations, Nouns DAO improves governance in many ways: small and cohesive community – less sharing and uncertainty, relatively small grants compared to the value of votes/Nouns – less Expropriation power, dilution of control over time – even less expropriation power, and a clear growth mindset – less risk aversion.

The growth of the community, and the wider ecosystem inspired by Nouns, will ultimately threaten the balance of power and reduce the margin of safety. DAOs need to implement governance changes before it’s too late.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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