Incentivization.
All voluntary exchange hinges on this on every principle. Adam Smith conceptualized this as his “invisible hand”, where individuals are driven by self-interest to facilitate (and perpetuate) simple bartering of goods or services between eachother. Ie., you have bread and I have corn, we want each others goods so we produce and swap out of our own self-interest. To the economist each person’s “utility” is higher, making both parties better off via trade. As such systems of commerce flourish around this principle, and the more complex the nature of commerce the more possibilities there are around incentives.
It’s no longer a simple incentive of I want yours, so I produce mine for exchange. The maturing digital economy is necessitating greater uses cases for incentives. It’s now like, how can we create entire functioning ecosystems by getting individuals to adhere to certain behaviors through fungible ERC-20 tokens? More on this later, but for now we can just use incentives to do things like solve NFT drop problems.
A Problem in Action: NFT Drops
Without going into too much detail, NFTs are characteristically scarce pieces of digital art that have caused quite a commotion the last several months with millions being transacted everyday as shown below.
Due to their wide popularity these digital assets are usually being snapped up the second that they are released to the public for initial sale. And as expected, these “drops” are often caught up in a traditional scarcity problem, where First Come First Served (FCFS) rules. Add an infrastructure layer to this problem where anyone (with the funds) can set high transaction fees to jump ahead in the queue and suddenly there are bidding wars, costly failed transactions that amount to waste, and spikes in network congestion.
To be more clear, users will set high transaction fees in hopes of getting an NFT, and sometimes end up with nothing while bearing the lost fee.
This is a highly undesirable result for all actors involved in the process — affecting creators, consumers, and the network alike. If the reader is still confused about the problem, reframe it this way:
You have a typical grocery story checkout-line that works the same way every other line does, it’s first come first served. The cashier checks out each person until the line dissolves, and new lines form over time as we go X periods into the future.
Now let’s reimagine the process in the context of our NFT drop problem (good types and other differences ignored):
The store sets a time for checkout and announces a limited number of checkouts during that time period. In some sense this already happens, but the flexibility of labor enables sufficient coverage for demand in most cases. Disabling that with a set # of checkouts suddenly has everyone rushing to the store, buying up their goods, potentially bidding their way up the queue, and in some cases not making it in time to get their groceries for the day. The bidding behavior is a natural economic reaction, but what a lousy outcome generally speaking.
So it would be nice if NFTs were like our everyday grocery store cashier, but the reality is that these are scarce goods in much more limited supply. There will always be some kind of “unfair” distribution with scarce economic goods, but new incentive models paired with blockchain technology are helping reduce the inequality gap involved in this process.
History & Change
I got my first NFT drop back in March of this year, 2021. It was the highly anticipated, pre-announced Aavegotchi NFT drop that sold out 10,000 card deck-like “portals” in under 5 minutes. Payment tiers were introduced as follows in attempt to mitigate the issue:
-0–5: 100 GHST each
-6–15: 200 GHST each
-16–25: 300 GHST each
In the end demand prevailed and I was very lucky (and anxious) to mint several in the 9,900/10,000 range of possible portals, at a very high transaction cost. As a result many others weren’t as fortunate as I was, and people on forums were rightfully upset in how things went down. In my mind, this was one of the earliest popular drops that went the way that thousands of others have gone by since with dismal results. Those that have lately experienced this rewarded those with recorded, failed transactions with POAPS and other consolatory goods, so kudos to the imaginative and empathetic projects out there like Stoner Cats and TimePieces who’ve done this for their communities. Yet, this is a mere bandage for a dilemma that isn’t easy to solve.
NFT creators have wised up with time fortunately. Many have gone through with process improvement standards, like limiting minting to one NFT per transaction, whitelisting unique wallet addresses through social media groups, auctioning, and other mechanisms. Yet, many of these are still exploitable and subject to gamification. What is stopping me from creating different wallets to mint multiple NFTs at once? What stops the whitelisting of multiple wallets from fake discord accounts?
Fortunately there are some verification tools out there like BrightID, which are useful once verified through their connection parties. In turn, digital fingerprints and similar tools like this for verifying uniqueness could help NFT creators and projects get rid of some of the undesirable effects of their pre-announced drops.
Still, a scarcity issue remains just because of the unalterable fact that NFTs are limited in supply. From a creator perspective you want to get as much price discovery value as you can out of your initial sale. This is just logical, and extending this outwards, an optimal solution becomes one where you don’t leave losers feeling discouraged about your project and do this simultaneously.
Fortunately, such a solution exists. And in my opinion, it is one of the best options out there for distributing NFTs currently.
Presenting GBM Auctions
GBM.Auction is, “a proprietary auctioning system where bidders make money when they are outbidded”. The concept further is pretty simple. A pre-defined length for an auction is set and bidders simply make money from others that outbid them. So say I put in $100, and my incentive payout rate is 10%. If someone does the next highest minimum bid I get back $100 +$10 in incentives. This encourages auction activity, rewards losers and winners alike, and can be customized to extract percentages of each bid to a DAO, or a creator as needed. This makes extracting royalties out of every bid possible while rewarding winners and losers alike. A short video below for the inquisitive.
Even more powerful is the DAO establishing capabilities this furthers. For the unitiated, a DAO stands for Decentralized Autonomous Organization, in other words community-based governance on applications. Imagine an app like venmo had their own special governance token (ie. digital cryptocurrency) they issued to you to vote and propose changes to their platform. That is what a DAO is designed to do, on a blockchain.
So anyways, take your Picture for Proof (PFP) NFTs concept as a pitch for a DAO, fund this entity through a bonding curve — A curve that allows users to deposit USD-like assets for aforementioned governance tokens — , and then set an auction date to take percentages back of all bids to fund a DAO for all holders easily.
Keep in mind you should have some larger project idea in mind for utility status of the tokens, you don’t want to be running into securities issues laws. This can be done by imagining an ecosystem for your token to facilitate. Lots of examples across cryptocurrency exist, go out there and turn your unique one into a reality.
Looking Forward
The future of NFTs is ambiguous to begin with. Surely at some point the hype and frenzy will die down, but serious projects that cultivate strong communities stand to deliver promising social and financial value. Distribution mechanisms will continue to be worked on in order to make NFTs accessible to more users while providing creators the incentives and rewards of delivering on good NFTs and/or projects. GBM auctions will get utilized more and more on sidechains like Polygon where the heavy transactional focus is tolerable from a fee perspective. Time will tell how NFT drops really evolve into a more or less standardized process, but for now we have several innovations to champion and iteratively improve upon going forward.
