Original Author: Noun 40

Original title: Continuous Auction Of NFTs Used To Monetize Public Goods

NFTs are often misunderstood as works of art, the digital equivalent of paintings. NFTs in their simplest form are pure provenance devices.

What does it mean?

Another mental model of NFTs is to understand them as digital encodings of an object's provenance. An NFT encodes an object (usually in the form of a cryptographic hash), its creator (their wallet address), and the timestamped history of the owner (transactions written into the public blockchain). This encoding of origin can be generalized 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 misinterpreting NFTs as works of art. Unlike a painting, you can't own an image; thus, NFT buyers are fools for buying something they can't own, so the argument goes.

Indeed, anyone can duplicate images (artwork) with a simple right-click. They could even mint a new NFT pointing to the same image. However, what they cannot copy and therefore possess is a digital encoding of the image's origin, its provenance from its legitimate creator. That's what you actually own when you own the NFT, not what it points to.

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

To shallow observers, simple, pure provenance may seem silly and meaningless. This is why many people try to add utility to NFTs, demonstrating their value through their utility. However, this view (like the "right-click to save" critique at the outset) is a skeuomorphic lens, an attempt to assess the limitations of new media only from analogies borrowed from the past. The non-skeuomorphic lens, recognizing that NFTs are a new kind of provenance device, is to ask the question: "What are some things worth attribution that weren't possible before?"

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NFTs can capture the origin of public goods

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

The original image that started it all. This photo of a Shiba Inu "Kabosu" was taken by his owner Atsuko Sato on February 13, 2010. After sharing this photo on 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 circulated the web since then -- nothing like This photo is even more iconic.

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

Let's marvel at what's going on here as it highlights the sheer magic that NFTs bring. There is an image in the public domain that is used countless times every day. Image usage 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 licensing fees. Atsuko Sato is not selling an equity stake in a future venture that has revenue potential around the image. All she does is sell the provenance of images that are already in the public domain.

Some might wonder, "How on earth would there be a buyer?" Warren Buffett might pop in and warn that such an NFT is a non-productive asset with no cash flow, making it a speculative investment. However, this misses the point entirely. 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 a very cool thing to have the image they love and the provenance of the image cast by Atsuko Sato herself (and only she can). It doesn't have to be an investment. Prices don't have to go up. For that person, it's a valuable item.

Public goods are objects that are non-exclusive (free to use, often actually free) and non-rivalrous (use does not run out) - an example of a public good is free public radio like NPR. While memes (images) aren't often called public goods, they are.

This realization gives 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 due to a coordination problem: while the benefits of the public good are shared by everyone, the costs of funding and creating the public good are privatized to a small group with little possibility of capturing any of the value created.

The most notable example of underfunding public goods in the cryptoeconomy is protocol research and development in mature (fully decentralized) public blockchains such as Ethereum. Hear the funding story of Prysm, the most widely used Proof-of-Stake (PoS) client on Ethereum. This is a volunteer group effort funded by a $500,000 grant from the Ethereum Foundation (EF) in 2018. That's barely enough to cover labor costs and not actually reap the benefits of the enormous value created; insane, considering the transition from PoW to PoS is the most awaited protocol milestone for the entire Ethereum community.

One might argue that the Ethereum Foundation should simply fund more, actively playing the role of "government" funding in the network. However, according to EF's April 2022 report, EF only holds 0.3% of the total supply of ETH. In this sense, EF's ability to fund public goods across the Ethereum ecosystem is more limited than traditional governments or L1. The lack of a central entity with the resources and incentives to fund ecosystem-wide public goods is a good thing for decentralization, but a bad thing for competitive public good production.

The future where we can't fix this coordination failure could be very bleak: a dystopian world where we're forever looping in new public blockchains simply because the old (mature) decentralized networks can't 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 established decentralized networks.

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

Fortunately, NFTs—specifically, continuous auction NFTs—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 non-profit organization that funds psychedelic research, auctioned off an NFT collectible called "Maps of the Mind" through Christie's to fund their ongoing research. In the crypto space, a group called Stateful Works created and sold an NFT collection 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. Stand up to the hate selling NFTs!

However, we still have some issues. 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 briefly changed by premature after-the-fact NFT sales before people really realize the full impact of their work.

Of course, both groups can solve this problem by issuing more NFTs in the future. However, the ability to issue more NFTs at will highlights a larger problem with these sales structures: Given that 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 events or memorabilia sales than sales of public work provenance. As a result, they don't get much value.

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This all sounds great, but can it really work?

Nouns, the first NFT project to experiment with a continuous auction mechanism, hints at this possibility. Nouns is best known as the leading CC0 experiment (Creative Commons Zero; "No Rights Reserved" license). It open-sources everything, including all forms of intellectual property, artwork, smart contract code base, auction site code base, etc. The only object sold each day is one NFT. Proceeds from the sale are deposited into a collective treasury, and NFT holders vote on how to use the treasury. That's the setup. In other words, everything that coined the noun and (mostly) everything it finances is freely available as public goods, while the only public goods that are sold to finance and monetize production are provenance (NFT).

The project has been live for a year and has raised 32,000 ETH so far. Despite the recent downtrend in NFT prices, both the primary market (daily auctions) and the secondary market (NFT sales on marketplaces like OpenSea) have been strong. It also spawns ambitious public goods such as Prop House, a novel financing mechanism that auctions off ETH for the best bid proposals. It's too early to tell, but there is a real potential for Nouns to expand the production of public goods by selling collective provenance.

The purpose of this post is to encourage others to expand on the potential they see and apply the continuous auction mechanism to fund and monetize a wider range of public goods than just NFT artwork and NFT infrastructure. Why shouldn't it be applied to Ethereum protocol development or any new DeFi protocol that aspires to be a free immutable public infrastructure (i.e. superstructure)? The accelerated positive and future of cryptocurrencies leveraging their own new primitives to address the major coordination failures prevalent in traditional market economies will be an exciting future.