Partial digital ownership with Limited Editions Market-based Subscriptions
This article is the fourth in a series on digital ownership. The first article presented the weaknesses of current metadata standards on Solana. The second article introduced Token2022 as an important tool for better metadata. In the third article, we presented a PoC implementation of a metadata standard that introduces a useful feature for more expressive metadata, solving the previously mentioned issues.
In this article, we’ll address the issues of the current Non-Fungible Tokens (NFT) trends, where they’re generally sold to raise funds despite having nothing to show but simple pictures and a Discord. We will then present Limited Edition Market-based Subscriptions (LEMS), a new primitive for digital ownership that addresses the issues of the current NFT meta and could empower a new wave of digital creators. We then introduce SolarSaloon, a live application using this mechanism.
What’s wrong with NFTs?
Scams, predatory dynamics, speculation with no fundamental value, rugs, bricked collections, thefts, etc… The list goes on of the bad things associated with NFTs. But the root of these issues is not NFTs themselves: NFTs are only digital tokens, virtual objects that represent something else, and do no harm alone, but because they’re so abstract, they have the potential to be anything!
Or at least that’s what people selling them pretend… In reality, NFTs as fundraisers are a bad model because the team selling them can widely over-promise and will generally under-deliver. So far, NFTs have been nothing more than Initial Coin Offering (ICO) 2.0 and will leave us in the same state, with bad actors draining all the money out of the ecosystem while true builders will struggle through the bear market.
Aligning incentives
When considering NFT projects, we can identify 3 possibly overlapping groups of participants.
- Creators want funding to pay for the work they produce. Funding needs to start early to pay for early developments. But since nobody wants to pay for something that does not provide value (the product does not exist yet), creators need speculators to provide the initial funding.
- Speculators want to make profits by buying low and selling high. Investing in early projects guarantees a cheap entry but there is a big risk that the team does not deliver, rendering the investment worthless. The key to increasing the value of the investment is to increase the value the product provides to paying users.
- Users simply want a good product at the lowest possible price.
The core issue of the current NFT meta is that incentives of participants are not correctly aligned. Let’s take a look at how each group can maximize their value:
- Creators get almost all their funding right after the mint and the rest from royalties on trading volumes. They should focus on hyping the mint and creating hype spikes to create volume, instead of focusing on creating value for users.
- Speculators should buy as early as possible to get the best price. Sophisticated speculators will use sniper bots while average users will buy their bags later. Speculators can generally get out of a project rapidly, since creators have little incentive to push through and speculators got the best entries already, meaning they won’t contribute much to funding the project beyond the mint.
- Users want to get the maximum value from their mint and will just hold and hope to get the value generated by creators streamed to them. They hold because they expect the provided value to increase and hope that the current price is an underestimation
We can see that the system is rigged toward bag-holding users while speculators take most of the easy profits, and creators get over-inflated funding compared to what they actually delivered, leading to some teams quitting their projects.
In most cases, this will fail. Creators should focus on providing value for users as soon as possible to increase revenues they can use to build more. Users should be paying the right price; most of this money should go to creators. Speculators should step up when they perceive the product to be undervalued and fund the building for the duration they expect it will reach its full potential.
One way to solve this problem is to implement a mechanism called a Harberger Tax, a tax paid by owners based on the self-assessed value of the assets they hold. Thanks to this, users have incentives to pay the fair price of the asset, creators get paid continuously for the value they provide and speculators can still benefit from shorter-term price movements, especially if they add value. The main drawback is that this can only work for assets compatible with “partial ownership”, where you can lose your asset if you do not value it correctly.
LEMS through a lens
There are many ways to implement a Harberger tax on-chain. The biggest obstacle to implementing it is generally UX, as you need a way that is simple enough for unsophisticated users to enjoy, but complex enough to maximize its applicability.
The implementation we will be focusing on has been called “Limited Edition Market-based Subscriptions” (LEMS), a.k.a. Rent NFTs. They are an open-source primitive for exclusive on-chain subscriptions to a unique service developed by Koch Labs. The program is still under development but is already open for contributors.
The specificity of LEMS is that they are “market-based”, meaning that they have a native market attached to them, preventing third parties from taking their fees on the way (e.g. sniper bots, marketplaces, escrows, etc...). This market is needed to enforce “partial ownership”: when a user buys a subscription, he must also define a selling price that will determine the taxes to pay. Taxes are paid continuously and streamed directly to the creator.
Let’s look at an example: Alice bought a subscription from Bob to a weekly drawing about a theme that Alice decided. Let’s suppose that Alice bought that subscription for 10 SOL and set a selling price at 10 SOL as well. Bob fixed a tax rate when creating the subscription such that Alice now pays 1 SOL per week when the selling price is 10 SOL. If Charles steps in because he thinks Bob’s drawings are worth a lot more than 1 SOL per week, he can buy for 10 SOL and set a selling price of 20 SOL, now paying 2 SOL per week. Bob just got his funding doubled and will now take input from Charles instead of Alice. There can be a period of grace, where Charles does not pay yet to give time for Bob to finish his drawing for Alice.
SolarSaloon, an application of LEMS
LEMS and partial ownership are great mechanisms when it comes to valuing time because a person only has so little of it, and allocating it efficiently can have a large positive impact on so many levels. From selling your work as a freelance, a content creator, an artist, or just your presence in a chat room, LEMS make sure that you interact with the people who really care about what you provide.
If you think this is an interesting mechanism, we invite you to try our implementation of it on SolarSaloon. Sign in to the app to create your saloon with your desired number of subscriptions and start publishing exclusive content using Markdown. Currently only available on devnet and full of bugs and issues, the app is evolving quickly and things can break but it should still give you a feeling of how LEMS work in real life.
Conclusion
The goal of the article was to first identify the issues of what NFTs have been so far, and where they fall short. We then presented LEMS as an implementation of the Harberger Tax that can be generalized to many use cases and has been already used to create SolarSaloon, a platform for exclusive digital spaces paid at a fair price.
This article concludes a series on digital ownership on Solana. We hope you learned some things and are eager to take part in bringing forward mechanisms that will make crypto an actually better place than the traditional system.
