IOSG Ventures: What can’t be broken, why we need better NFT protocol standards
Author: Chloe
Original source: IOSG Ventures
Author: Chloe
From the series of chain reactions caused by the Terra mine explosion in May to the Federal Reserve’s interest rate hike at the end of July, the encryption industry fell into a temporary silence after being hit continuously. In the secondary market, the price of BTC fell back to about 20,000 US dollars, which was basically the same as the high point of the 17-year bull market. The primary market has also calmed down, the number of projects and valuations have dropped significantly, and the frequency of fund sales has also slowed down. Even the encrypted community on Telegram has always been very lively. Members have changed from sending hundreds of messages a minute to discuss the market to daily bragging and posting pictures of beautiful women. In this bear market, everyone has become "Buddhist".
The NFT market is no exception, and the floor price of blue-chip NFTs has dropped significantly. Meanwhile, OpenSea's transaction volume in August was less than $500 million, a one-year low. Despite this, in the face of the sluggish market conditions, Paradigm and A16Z, the two benchmarks of encryption funds, have not become "Buddhas", and have recently published articles on issues such as NFT pricing and copyright. On August 31, A16Z published "The Can't Be Evil NFT Licenses", which defined the six major copyright categories of NFT. Paradigm published VRGDAs and GOO on August 24 and September 6 respectively, discussing the innovative auction mechanism and community value of NFT. This article will focus on introducing these three new standards and mechanisms built around NFT for readers.
Paradigm—VRGDAs
image descriptionImage source: https://dune.com/PierreYves_Gendron/opensea---metrics
concept:VRGDA is a new auction mechanism for NFTs, suitable for non-linear release of illiquid assets
logic:NFT issuers can use VRGDA to customize the auction schedule of NFTs other than one-time release or linear release. And through the dynamic adjustment of the price to fit the schedule
significance:
VRGDAs, the full English name is Variable Rate Gradual Dutch Auctions, which is a new NFT auction mechanism proposed by Paradigm. Before discussing VRGDA, let's take a look at the concept of GDA. The Chinese of GDA is Progressive Dutch Auction. As the name suggests, its working principle is to decompose an auction into a series of Dutch Auctions (Note: Dutch Auction is a commonly used auction mechanism. The auction will start with a high asking price, and then gradually reduce the price until buyers are willing to accept). Because it is not dependent on market liquidity for sale, GDA is especially suitable for illiquid assets.
VRGDA is a derivative of GDA, which allows NFT issuers to set an auction schedule, such as selling 100 NFTs per day, or selling ten NFTs less than the previous day, etc. The life cycle of NFT is very similar to the Gartner Hype Cycle (technology maturity curve). The price of NFT was very low when there was not much noise in the early days. After gaining community and popularity, the price skyrocketed, and then the price fell wildly because of the craze. Most NFT projects will return to zero, while very few consensus NFTs can survive and gradually stabilize at a market equilibrium price.
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So how does VRGDA extend the cycle of NFT through the auction mechanism? Paradigm gives such a function:
Where P0 is the NFT target price; k is the decay factor of the NFT price when the expected sales volume is not reached, and f(t) is the timetable, n NFTs are expected to be sold at time t. By substituting different f(t), we can get different sales mechanisms. Paradigm only discusses three situations in the article, but in theory any form of schedule can be implemented. If the issuer chooses to release NFTs linearly at a constant rate, say 10 per day, this is simply GDA. VRGDA is required if the issuer expects to adjust the number of issues over time. For example, the issuer wants to issue an unlimited supply of NFTs, and expects to generate more heat at the beginning of the issuance, so it plans to release more NFTs in the early stage. As time goes by, the number of released NFTs decreases, then you can choose to open square function substitution. If the issuer wants to release NFT more aggressively in the early stage, and does not want the infinite inflation of NFT, then the logarithmic function can be chosen to achieve it.
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Image source: https://www.paradigm.xyz/2022/08/vrgdaWhen you have the expected timetable, the second step is to fit the expected timetable through the dynamic adjustment of prices. The most basic theory of demand in economics is applied here: when the price of a commodity rises, the demand decreases; when the price of the commodity falls, the demand increases. Therefore, we can adjust the price of NFT by adjusting k. If the sales volume is higher than expected, then raise the price of NFT to control excess demand; if the sales volume is lower than expected, then lower the price of NFT to stimulate demand. Fit the expected schedule by intervening in the price.
Paradigm—GOO
What are the benefits of adopting VRGDA? The most direct is that creators, not miners, can make more profits.If the issuer can adjust the total amount of NFT issued every day, there will be no gas war caused by one-time issuance, and a large part of consumer surplus will go into the pockets of miners. Secondly, this issuance method can also make the life cycle of NFT more gentle, avoiding price surges and falls. At the same time, the life cycle of NFT is extended to a certain extent.
concept:GOO is an optimization method for the ownership of the NFT community that issues tokens
logic:Realize the mandatory lock-up of assets through the high inflation of tokens, and bind the two groups of NFT holders and token holders by binding the relationship between NFT and token issuance
significance:
It is of great significance for the project to keep the two groups of NFT holders and token holders overlapping as much as possible, but it is not very sustainable to achieve it through high inflationGOO, the full name is Gradual Ownership Optimization, which means progressive ownership optimization, and is suitable for communities that issue NFT and token at the same time. The main problem GOO is targeting is that the NFT issuance and token issuance of many projects are independent and have no binding relationship, so as time goes by, token holders and NFT holders will be separated. For example, in the ENS community, the groups holding ENS domain names and the groups holding ENS tokens do not overlap.The way GOO solves the problem is to bind the additional issuance of tokens with NFT. simply put,
Users need to hold a certain proportion of NFT and token at the same time in order to maximize their own interests.
The issuance of Token is highly inflationary. As time goes by, more and more tokens will be issued per unit time. At the same time, the allocation of Tokens is related to two conditions: 1. Must hold NFT, 2. The number of Tokens held, the more tokens held, the more tokens will be issued accordingly.
The issuance of additional tokens based on NFT can also be understood as the ability of NFT to generate tokens. If the user only has tokens but no NFT in his hand, it is equivalent to having only eggs but no chickens, and the user does not have the ability to generate tokens. Then, as the issuance of tokens increases, the value of tokens held by users will be diluted. Therefore, it is a very unwise decision to only hold tokens and not NFTs, and users will be more motivated to hold both assets at the same time. Then the more complicated question is when users hold NFT, what proportion of GOO can they hold to maximize their utility?
As mentioned above, the more tokens you hold, the more additional tokens you will get. But in order to avoid the situation where there is only one NFT in an account (in order to obtain the right to issue additional tokens), and a large number of tokens (in order to obtain as many additional tokens as possible). Paradigm will make regulations based on the rate of NFT additional token issuance. The function of NFT producing token is:
Among them, m is the multiplier of token generated by NFT, and g(t) is the number of tokens held at time t. Therefore, the efficiency of NFT generating tokens is related to two factors, one is the multiplier of NFT itself (initial endowment), and the other is the amount of tokens held (later adjustment). A square root function is used here, which means that the marginal efficiency of tokens generated by NFT is decreasing for each additional unit of token held. Therefore, when the NFT and token in the hands of the holder have reached the optimal ratio, the utility of continuing to increase token holdings is lower than constructing a new NFT and token portfolio.Then a new question arises. If there is an incentive to hold multiple NFTs, does the user need to constantly and dynamically adjust the ratio of tokens to achieve the best balance? the answer is negative. Under Paradigm's mechanism, once the token and NFT multiplier reach the optimal ratio, there is no need to adjust it. And under the optimal ratio, holding one NFT with a multiplier of 10 and holding two NFTs with a multiplier of 5 will get the same token. It means that there is no unfair situation between those who only hold one NFT and those who hold multiple NFTs, because the rate of token issuance is only related to the NFT multiplier, not the number of NFTs held. The detailed mathematical formula derivation is not explained here, and interested readers can refer to the original text of Paradigm.The meaning of GOO, in a nutshell, is first and foremost
A16Z—Can't Be Evil NFT Licenses
The mandatory lock-up of assets is realized through the high inflation of tokens. Secondly, bind NFT holders and token holders by binding the relationship between NFT and token issuance to avoid problems caused by inconsistent interests of the two communities.For example, holding NFT means agreeing with the cultural attributes brought by this NFT, and holding token is more for investment considerations. However, the distribution of governance rights in the community is generally based on the number of tokens held. These token holders may have no identity for the community itself and will not be interested in participating in governance. Therefore, it is very necessary to keep the two groups of NFT and token holders consistent, but the author believes that it is not sustainable to achieve mandatory lock-up through high inflation.
concept:Can't be Evil NFT Licenses is the NFT commercial copyright guidelines issued by A16Z
logic:The license divides six types of NFT commercial copyrights and defines five permissions. Which kind of license the NFT issuer adopts means that the corresponding party owns or gives up certain rights
significance:
The guidelines promulgated by A16Z provide a set of standards for the blank and chaotic copyright market of NFT, but we are still far away from the goal of "no evil" and a perfect licensing system, which requires the joint efforts of the entire industryThese licenses clearly stipulate the rights of buyers regarding their NFT artworks, which are mainly designed in three aspects:
1. Whether these rights are exclusive (the creator waives all authorization rights, and only the buyer has the right to decide how to use the NFT); 2. Whether it includes commercial rights (opening the buyer to the right to use it for commercial purposes); 3. Whether the buyer’s second change is allowed, Behaviors such as secondary creation (modification or secondary creation of NFT and use). Other rights include whether the buyer has the right to copy, display and disseminate, and the right to delete hate speech, etc.
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Image source: https://a16zcrypto.com/introducing-nft-licenses/
Why Always About NFT？
Based on the six NFT licenses, it is very clear which rights the creator has transferred to the buyer and which rights are retained. This set of rules can help the NFT community to better protect intellectual property rights and help build a more just, effective, and creative NFT ecosystem. It is worth noting that the A16Z set of guidelines has not been directly accepted by the community after its launch, and there have been many voices of opposition in the market.For example, one of the rights related to hate speech has caused heated discussions. Because how to define the nature of "defamation, harassment, fraud, vulgarity, cruelty" and so on is entirely the creator's subjective judgment, and the absence of objective standards may lead to disputes, especially the "cancel culture" that is common in Europe and the United States. Nevertheless, regardless of whether the specific regulations are reasonable, the attitude and enthusiasm of the Web3.0 community discussion and research are very gratifying. A16Z also mentioned in the article that the above rights only involve the simplest and most basic rights, which may not apply to every project or resolve all copyright disputes. The author thinks this is a good starting point, and encourages more practitioners to contribute to industry standardization.Today's NFT has derived a lot of gameplay, and many NFT-fi projects continue to emerge. In our previous article "
"Introduced in detail. However, NFT-fi has a basic premise - the underlying value of NFT is widely recognized. Based on this, a series of games such as NFT mortgage lending, derivatives, and fragmentation are meaningful. So where does the underlying value come from? The author believes that NFT has two basic attributes-content attribute and financial attribute. These two attributes reflect the two underlying values of NFT-cultural value and practical value.
However,The first is cultural value. NFT can be used as a carrier of cultural products such as text, pictures, audio, and video. But in reality, NFT is still accepted by the public at such a high price. "NFT is not just a JPEG, why is it so expensive?" Similar doubts abound. In fact, this question itself implies a value judgment: cultural products should be cheap, because the services and content of the Web2.0 platform are free. And this kind of thinking is a consumption habit cultivated by the business model of the attention economy for many years. Whether it is pictures, articles, music, or videos, consumers have become accustomed to cheap cultural products. Therefore, a JPEG can be sold at a very high price in the eyes of the public, which has become a very outrageous thing.However,The value and price of a commodity are two attributes, and the price is the monetary representation of value, but this mapping is not always correct.
The low pricing of cultural products leads consumers to mistakenly believe that cultural products have no value. Therefore, NFT as a cultural carrier has no value. Once consumers are cultivated with this concept, it will be extremely difficult for creators to monetize. The author wrote in the previous article "The Chronicle of Pop Music-How does the creator economy make the greatest works?" " also expounded such a point of view:The end result of monopoly is not the monopoly of technology, but the absolute say in the economic model. The attention economy deprives creators of their pricing power and cultivates consumers' wrong consumption concepts and habits. In order to change this status quo, Web3.0 is first of all a cultural movement, allowing the cultural value of NFT to be widely recognized and priced correctly.However, consumption concepts are formed over a long period of time, and changes in consumption concepts cannot be achieved overnight. Under the background that the cultural value of NFT is not recognized, the second attribute of NFT-financial attribute is particularly important.
If an NFT has practical value, then consumers will naturally pay for the NFT.For example, NFT is used as tickets, memberships, identities, game props, investment targets, etc., and the use cases of NFT continue to innovate. If NFT is widely used in various fields, and its practical value is continuously verified and promoted, consumers' awareness of NFT will not stay at the JPEG level.
In this bear market, we hope to see more and more discussions about the underlying value of NFT emerge. Let NFT really play its role, not just stay at the speculative level.
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