Continuous auction of NFTs to monetize public goods

NFTs are often misunderstood as works of art, the digital equivalent of paintings. The simplest form of NFT is pure provenance equipment.

What does it mean?

Another mental model for NFTs is to understand them as a numerical encoding of an object’s provenance. NFTs encode objects (usually in the form of cryptographic hashes), their creators (their wallet addresses), and the owner’s timestamped history (transactions written into a public blockchain). This provenance encoding can be summarized as provenance, and we can begin to understand NFTs as devices that capture provenance.

The most common criticism of NFTs – the idea that any individual can “right-click and save” a perfect digital copy of an NFT – stems from the misunderstanding of NFTs as works of art. Unlike paintings, you can’t own images; so NFT buyers are fools buying things they can’t own, it goes something like this.

Indeed, anyone can copy an image (artwork) with a simple right-click. They can even mint a new NFT pointing to the same image. However, what they cannot copy and therefore possess is a digital encoding of the source of the image, which is attribution from its rightful creator. That’s what you actually have when you own the NFT, not the object it points to.

NFTs are pure provenance devices because they don’t tie artwork and provenance like traditional art.

To the shallow observer, simple, pure provenance may seem silly and meaningless. This is why many people try to add utility to NFTs, justifying their value through their utility. However, this view (like the “right-click-save” critique at the start) is a skeuomorphic lens that attempts to assess the limitations of new media only from analogies borrowed from the past. Non-Skeuomorphic Lenses, recognizing that NFTs are a new kind of provenance gear, is to ask the question: “What are some things worth adding attribution that wasn’t possible before?”

One possible answer is objects that are already freely shared in the public domain.

NFTs can capture the provenance of public goods

Consider the famous Doge meme’s NFT sale. The auction page for the original June 2021 auction shows the following:

The original image that started it all. This photo of the Shiba Inu “Kabosu” was taken on February 13, 2010 by its owner, Atsuko Sato. After sharing the photo to her personal blog along with other famous image series titled “Walking with Kabosu-chan”, the photos went on to start the Doge meme and have been around the web ever since – no more than This photo is more iconic.

Atsuko Sato minted the NFT himself and sold it for $4 million.

Let’s marvel at what’s happening here as it highlights the absolute magic that NFTs bring. There is an image in the public domain that is used countless times a day. The use of images has not changed in any way. People are still free to do whatever they want with it. There are no added intellectual property (IP) restrictions or license fees. Atsuko Sato isn’t selling a stake in Future Ventures, which has revenue potential around the image. All she does is sell the attribution of images that are already in the public domain.

Some may be thinking, “How the hell is there a buyer?” Warren Buffett may pop up and warn that this NFT is an unproductive asset with no cash flow, making it a speculative investment. However, this completely misses the point. The reason there are buyers is because of fans of the image – people who love the image and use it every day. For those people, it’s pretty cool to have the image they love and the provenance of the image that Atsuko Sato herself (and only she can) cast. It doesn’t have to be an investment. Prices don’t have to go up. For that person, it is an item of value.

Public goods are objects that are non-excludable (free to use, often actually free) and non-rival (doesn’t run out when used) – an example of a public good is free public broadcasts like NPR. While memes (images) aren’t usually called public goods, they are.

This realization lends even more meaning to the magic witnessed above: Selling provenance (NFT) enables the creator of a public good to monetize her creation without compromising access or utility.

Public goods are systematically underfunded and underproduced (including in the cryptoeconomy).

Systemic underfunding of public goods is one of the most common problems in market economics. It exists because of a coordination problem: while the benefits of public goods are shared by everyone, the cost of funding and creating public goods is privatized to a small group with little possibility of capturing any value created.

The most notable example of underfunded public goods in the cryptoeconomy is protocol research and development in mature (sufficiently decentralized) public blockchains such as Ethereum. Hear the funding story of Prysm, the most widely used Ethereum proof-of-stake (PoS) client. This is a volunteer group event funded by a $500,000 grant from the Ethereum Foundation (EF) in 2018. That’s barely enough to cover the labor costs and actually get the benefit of the enormous value created; crazy, considering the transition from PoW to PoS is the most anticipated protocol milestone for the entire Ethereum community.

One might argue that the Ethereum Foundation should simply fund more, actively playing a “government” funding role in the network. However, according to EF’s April 2022 report, EF only holds 0.3% of the total ETH supply. In this sense, EF’s ability to fund public goods across the Ethereum ecosystem is more limited than traditional governments or L1s. The lack of a central entity with the resources and incentives to fund public goods across the ecosystem is a good thing for decentralization, but a bad thing for competing public goods production.

The future in which we cannot resolve this coordination failure could be very bleak: a dystopian world where we are forever looping through new public blockchains, simply because the old (mature) decentralized networks cannot compete with the new centralized ones Create new public goods (including improving the protocol itself). This will be a significant drag on the crypto-economy as we continue to lose the network effects and efficiencies of the established decentralized web.

Broadly speaking, I don’t think the reason cryptocurrencies are actually progressing faster is highly related to this coordination failure (how much has been achieved in previous market cycles other than repackaging existing discoveries into new tokens) actual progress?).

Fortunately, NFTs—especially those with continuous auctions—provide a solution to this problem.

Continuous auctions of NFTs are an ideal structure for monetizing public goods.

Using NFTs to fund and monetize the creation of public goods is no longer a completely foreign idea. Just last week, MAPS, a nonprofit that funds psychedelic research, auctioned off an NFT collection called “Mind Maps” through Christie’s to fund their ongoing research. In the crypto space, a group called Stateful Works created and sold a collection of NFTs last year to commemorate the development of EIP-1559, a protocol change to Ethereum, with proceeds going to its lead researchers and developers work done. These two examples highlight the financing and monetization of public goods, respectively. Brave the hatred against selling NFTs!

However, we still have some questions. First, both are one-time point-in-time sales. MAPS may need more funding in the future, and the folks at EIP-1559 may look back and feel a short-lived change from a premature post-mortem NFT sale before people really realize the full impact of their work.

Of course, both groups could solve this problem by issuing more NFTs in the future. However, the ability to arbitrarily issue more NFTs highlights a bigger problem with these sales structures: Given that the issuance is arbitrary, the provenance value of these NFTs is agnostic. The lack of a structured commitment to a clear release schedule makes these sales more like donation drives or memorabilia sales than public attribution sales. As a result, they don’t get much value.

The solution to the above series of problems is to continuously auction NFTs around the issuance rate at a determined rate with strong social commitment. Continuous fixed-rate auctions provide buyers with clarity on the provenance weight of each NFT, while also providing sellers with an ongoing source of funding and monetization.

This all sounds great, but does it really work?

Nouns, the first NFT project to experiment with a sequential auction mechanism, hints at this possibility. Nouns is known for leading CC0 experiments (Creative Commons Zero; “No Rights Reserved” license). It open-sources everything, including all forms of intellectual property, artwork, smart contract codebases, auction site codebases, and more. The only object sold each day is an NFT. The proceeds of the sale are deposited into a collective treasury, and NFT holders vote on how to use the treasury. This is the setup. In other words, everything that coined a noun and (mostly) everything it funded is freely available as a public good, and the only thing that sells the public good produced to fund and monetize it is provenance (NFT).

The project has been live for a year and has raised 32,000 ETH to date. Despite the recent downward trend in NFT prices, both the primary market (daily auctions) and the secondary market (NFT sales on marketplaces such as OpenSea) have performed strongly. It has also spawned ambitious public goods such as Prop House, a novel funding mechanism that auctions ETH for the best bid proposals. It’s too early to tell, but Nouns does have the potential to expand the production of public goods by selling collective provenance.

The discussion of this post is to hopefully encourage others to expand on the potential seen and apply sequential auction mechanisms to fund and monetize a wider range of public goods, not just NFT artwork and NFT infrastructure. Why shouldn’t it be applied to Ethereum protocol development or any new DeFi protocol development that aspires to be free immutable public infrastructure (i.e. superstructure)? The accelerating positive and future of cryptocurrencies leveraging their own new primitives to address major coordination failures prevalent in traditional market economies will be an exciting one.

Posted by:CoinYuppie,Reprinted with attribution to:
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