Continuous Auction Of NFTs Used To Monetize Public Goods
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July 5th, 2022

NFTs in their simplest form are pure provenance devices.

What do I mean by that?

NFTs are commonly misunderstood as art objects, the digital equivalent of paintings. An alternate mental model of NFTs is to understand them as digital encodings of their object’s origin. A NFT encodes an object (usually in the form of a cryptographic hash), its creator (their wallet address), and the timestamped history of owners (transactions etched into the public blockchain). This encoding of origin can be summed up as provenance, and we can begin to understand NFTs as devices that capture provenance.

The most common critique of NFTs—the idea that any individual can “right click and save” a perfect digital copy of an NFT—stems from misunderstanding NFTs as art objects. Unlike a painting, you cannot own an image; thus NFT buyers are simple fools buying something that cannot be possessed, the argument goes.

It’s true that anyone can copy an image (the art object) with a simple right-click. They can even mint a new NFT that points to the same image. However, what they cannot copy, and thus can be owned, is the digital encoding of the image’s origin, its provenance stemming from its rightful creator. That is what you actually own when you own an NFT, not the object it points to.

NFTs are pure provenance devices in the sense that they do not bundle the art object and the provenance together as is the case in traditional art.

Simple, pure provenance might seem dumb and pointless to the casual observer. That’s why many are tempted to add utility to NFTs, to argue their value through their utility. However, this view (like the “right-click save” critique to begin with) is a skeuomorphic lens, trying to assess the limitations of a new medium from analogies borrowed only from the past. The non-skeuomorphic lens, recognizing NFTs are provenance devices of a new kind, is to ask the question: “What are the things worth adding provenance to, where it was not possible to do so before?”

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

NFTs can capture the provenance of public goods.

Consider the NFT sale of the famous Doge meme. The auction page from the original sale back in June 2021 says the following:

The original image that started it all. This photo of the Shiba Inu “Kabosu” was taken by her owner Atsuko Sato on February 13th, 2010. After sharing it to her personal blog alongside the series of other famous images under the title “Taking a walk with Kabosu-chan,” these photos went on to kickstart the Doge meme and have circulated the web ever since — none more iconic than this picture.

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

Let’s marvel at what happened here since it highlights the absolute magic made possible through NFTs. There is an image out in the public domain that is used countless times everyday. Nothing about the usage of the image has changed. People are still free to do whatever they want with it. There’s no intellectual property (IP) restrictions or licensing fees added on. Atsuko Sato wasn’t selling equity in a future venture with revenue potential around this image. All that she did was sell the provenance of an image that was already out in the public domain.

Some might wonder, “How on earth is there a buyer?” Warren Buffet might pop up and caution that this NFT is a non-productive asset with no cash flow making it a speculative investment. However, that would be totally missing the point. The reason there’s a buyer is because there are fans of the image. People that love the image and use it every day. And for those people, owning the provenance of the image that they love and that Atsuko Sato herself (and only she could have) minted is a very very cool thing. It doesn’t have to be an investment. Price doesn’t have to go up. It is a valuable object to own for that person.

A public good is an object that is non-excludable (used freely, often actually free) and non-rivalrous (used without depletion)—an example of a public good is free public radio like NPR. While memes (images) are not often talked about as public goods, they definitionally are.

This recognition gives more meaning to the magic witnessed above: Selling of provenance (an NFT) enabled a creator of public goods to monetize her creation without compromising access or utility.

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

The systematic underfunding of public goods is one of the most commonly identified problems in market economics. It exists due to a coordination problem: While the benefit of public goods is shared by everyone, the cost of funding and creating them is privatized to a small group with little to no potential to capture any of the value that is created.

In the crypto economy, the most notable example of an underfunded public good is protocol research and development in mature (sufficiently decentralized) public blockchains such as Ethereum. Listen to this funding story of Prysm, the most widely used Ethereum Proof of Stake (PoS) client. It was a volunteer group effort funded by a $500k grant from the Ethereum Foundation (EF) in 2018. That was barely enough funding to cover the costs of labor, with effectively no access to the upside of the massive value created; crazy, considering that the transition from PoW to PoS is the most eagerly awaited protocol milestone for the Ethereum community as a whole.

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

A future where we don’t solve this coordination failure is potentially very bleak: A dystopian world where we forever cycle through new public blockchains simply because the old (mature) decentralized networks cannot compete with new centralized networks in creating new public goods (including improvements of the protocol itself). This would create a major drag on the crypto economy, as we constantly forfeit the network effects and efficiencies that come with established decentralized networks.

Broadly speaking, I would argue that the reason the rate of real progress isn’t faster in crypto is highly tied to this coordination failure (how much real progress was made outside of repackaging existing discoveries into new tokens in the previous market cycle?).

Fortunately, NFTs—and specifically, continuously auctioned NFTs—provide a solution to this problem.

Continuous auction of NFTs is the ideal structure to monetize public goods.

Using NFTs to fund and monetize the creation of public goods isn’t a completely foreign idea anymore. Just last week, MAPS, a non-profit organization that funds psychedelic research, finished their auction of a NFT collection called “Cartography of the Mind” through Christie’s to fund their ongoing research. In the crypto realm, a group called Stateful Works last year created and sold a NFT collection commemorating the development of EIP-1559, a protocol change to Ethereum, with the proceeds going to its primary researchers and developers for the work they’ve done. These two examples respectively highlight the funding and monetization of public goods. Valiant efforts against the hate of selling NFTs!

We still have some problems, though. First off, both were one-off point-in-time sales. MAPS will likely need more funding in the future and the EIP-1559 folks might look back and feel short changed by their premature-in-hindsight NFT sale before people truly appreciated the full impact of their work.

Of course, both groups can remedy this concern by just issuing more NFTs at a future date. However, that ability to arbitrarily issue more NFTs highlights a bigger problem with the structure of these sales: The provenance value of these NFTs are unknowable given the issuance is arbitrary. This lack of structural commitment to a defined issuance schedule makes these sales feel more like a donation drive or a memorabilia sale than a sale of provenance of public work. As a result, they fail to capture much value.

The solution to the set of problems above is to continuously auction off NFTs at a defined rate with strong social commitment around the issuance rate. A continuous, fixed rate auction provides clarity around the provenance weight of each NFT for the buyer, while also providing an ongoing source of funding and monetization for the seller.

This all sounds great but can it actually work?

Nouns, the first NFT project to experiment with the continuous auction mechanism, hints at this possibility. Nouns is most widely known as a leading CC0 experiment (Creative Commons Zero; “no rights reserved” license). It open sources everything, including all forms of intellectual property, the artwork, the smart contract codebase, auction website codebase, etc. The only object sold is an NFT each day. The proceeds of the sale are put into a collective treasury and the NFT holders vote on how the treasury is spent. That’s the setup. In other words, everything that went into the creation of Nouns and (mostly) everything that it funds is given out for free as a public good, while the only object sold to fund and monetize the public goods produced is provenance (the NFTs).

This project has been live for a year and has raised 32,000 ETH to date. Both the primary market (daily auction) and the secondary market (NFT sales on marketplaces such as OpenSea) have been robust despite the downward trend in NFT prices lately. It has also produced ambitious public goods such as Prop House, a novel funding mechanism where ETH is auctioned off for the best bidding proposals. It’s too early to say, but there’s definitely a real possibility that Nouns scales public goods production through its sale of collective provenance.

My hope in writing this essay is to encourage others to expand on the potential seen here and apply the continuous auction mechanism to fund and monetize a much broader array of public goods beyond just NFT artwork and NFT infrastructure. Why should it not be applied to Ethereum protocol development or the development of any new DeFi protocol that aspires to be free immutable public infrastructure (i.e. hyperstructures)? An accelerating positive-sum future where crypto leverages its own new primitives to solve a significant coordination failure prevalent in traditional market economies would be an exciting future to build towards.

Thanks to Seneca, Matt, and Pal for their help sharpening this essay.

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