Redefining NFT Launches — Time-Lock Vesting for NFTs
Contents
1. Background
1.1 The Current State of NFTs
1.2 The Problems with Current NFT Launch Design
→ 1.2.1 What is Whitelisting?
→ 1.2.2 Issues with the Current Whitelisting Designs
→ 1.2.3 Consequences of Flawed Whitelisting Design
1.3 Existing Solutions to the Problem
→ 1.3.1 Staking
→ 1.3.2 Problems with Existing Solutions
1.4 A Way Forward — Improvement in Design Decisions
2. Our Solutions — The “Carrot & Stick” Methodology
2.1 The “Stick”: NFT Time Locks
2.2 NFT Vesting Time Lock — Rewarding Whitelisters for Locking their NFTs
→ 2.2.1 Linear Vesting Time Lock
→ 2.2.2 Interval Based Vesting Time Lock
→ 2.2.3 Curved Vesting Time Lock
⤷ 2.2.3.1 Convex Vesting Time Lock
⤷ 2.2.3.2 Sigmoid Vesting Time Lock
⟶ 2.2.4 Discussion of Vesting Curves
2.3 The “Carrot”: Time-Locked Recognition
⟶ 2.3.1 Differing Levels of Recognition
⟶ 2.3.2 Representation of Recognition
⟶ 2.3.3 Non-Transferability of Recognition
⟶ 2.3.4 Implementation of Time Locked Recognition
3. Conclusion
Abstract
This article explores the current problematic state of NFT launch designs and offers time lock vesting as a solution. It also dives into how different vesting curves could impact vesting, and how the contracts could be implemented.
1. Background
1.1 The Current State of NFTs
The recent and abrupt end to the glorious crypto bull cycle that started in early 2020 has forced a sobering conclusion upon us all: many different aspects of the crypto industry at large were actually propped up (almost) wholly by speculation and hype without possessing any real-world hard value or utility.
Non-fungible tokens (NFTs), however, have proved themselves to have true utility. From tokenizing physical assets and rendering them ownable and tradable to NFT-ing membership “passes” into gated communities, the potential use-cases of NFTs are endless.
However, that is not to say that the NFT space is without its flaws. In fact, it is quite the opposite — there is still so much to fix within this space, as the current state of the NFT space renders it highly prone to exploitation. For one, in said extant state, whitelisters can earn quick profits through the flipping of NFTs (i.e. getting a whitelist for the project and then dumping it on the secondary market), diminishing the value of dishing out whitelist spots to these ostensibly “loyal and strong supporters” of the projects, as they may be, ironically, the first to dump the NFTs that they have received through the whitelist.
1.2 The Problems with Current NFT Launch Design
1.2.1 What is Whitelisting?
First, some context on whitelisting. An NFT whitelist is a database of users who are provided exclusive access to mint NFTs prior to the official launch date. This allows for them to avoid the high gas fees on the actual launch day, or circumvent the exorbitant prices on the secondary market.
The concept of whitelisting initially came about as a response to the now infamous gas wars, one that was greatly unfair to people who didn’t have the necessary gas war chest to compete. However, people soon discovered that getting whitelisted was in actuality a really lucrative process, leading to many grinding and exploiting said whitelist process of NFT projects.
Whitelisting is typically done through discord grinding, joining alpha groups (buying their NFT pass e.g. Plug Pass, JRNY pass), and/or entering whitelist raffles. It can also be done by joining raffles in PREMINT links. The goal of whitelisting is to incentivize people to be early supporters of a project, and to create a stable base-community.
Typically, projects with strong partnerships (celebrities, blue-chip projects, influencers), renowned and respected teams (well-known, successful projects, strong in web2 space), true utility (staking of NFTs, NFT token launch), and events will have plenty of users vying to be on the project’s whitelist.
1.2.2 Issues with the Current Whitelisting Designs
Whilst there are benefits to rewarding the early supporters of any given NFT project, often times, whitelisters are only there to make quick profits.
According to Chainalysis, whitelisters will make a profit from their NFTs 76% of the time, while the return on investment (ROI) rate for non-whitelisters stands at a measly 21% (via Bloomberg).
These are some key issues that we have identified with regard to the current whitelisting design:
- Fundamental misalignment of incentives: Long-term holders are incentivized to dump their NFTs as soon as they can sell them, as there are no further incentives for holding onto their NFTs. In addition, they also face the risk of getting dumped on themselves.
- It does not separate the true supporters from mercenary NFT flippers: It is currently challenging to separate true supporters from the numerous mercenary NFT flippers. There should be a better system to differentiate (and reward) true supporters from those who want to gain access to the whitelist to make a quick profit.
- No system to prevent pump and dumps: With no system set in place to prevent these supposed “early-supporters” from selling their NFTs, these whitelisters often sell their NFTs earned through the whitelisting process on the secondary market to turn a quick profit.
Due to these aforementioned issues with current whitelisting designs, whitelisters are not being incentivised enough to hold on to their respective NFTs, which in turn pushes them to dump said whitelisted NFTs.
1.2.3 Consequences of Flawed Whitelisting Design
The dumping of the whitelisted NFTs by the supposed “true believers” of the project will result in several issues that will, concomitantly, affect the demand for, and overall success of, the NFT project.
- High listing count and low floor price: As whitelisters dump their NFTs, the supply of NFTs in the secondary market increases, leading to a high listing count and low floor price. Typically, a low listing count (i.e. more hodlers of the NFTs) is a good sign for the project as it means people are still choosing to hold on to their NFTs.
- We can also see that projects with low listing counts tend to have a higher floor price. As of 15 July, and according to OpenSea, Moonbirds has a high floor price of around 26 ETH, but a low listing count of 1.3% as a result of positive perceptions with regard to the project.
- A negative image of the project: A massive selloff of the whitelisted NFTs also creates poor optics for the project, as it is never nice to witness the project’s “strongest supporters” let go of their stake in said project, This could possibly lead to cascading sell-offs.
- For example, the alleged dumping of The Saudis NFT by known whitelisters on mint eventuated in a steep decline in price from 0.9 Eth to 0.4 Eth in slightly over 10 days. Such a trend can, unfortunately, also be observed in many other NFT projects.
In the long-term, the above phenomenon will have severe and adverse consequences for the NFT project. This can be better elucidated through the Nash Equilibrium Theory.
Nash Equilibrium: A stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged.
This game theory concept determines the optimal solution in a non-cooperative game in which each player lacks any incentive to change his/her initial strategy. The actors in an NFT project can be split into long-term believers and profit seekers (i.e. early whitelisters).
As the early whitelister dumps, it results in a situation where the positive expected value (+EV) move of non-whitelisters is to dump as well. This would cause the value of the project’s NFTs to perpetually decrease. The Nash Equilibrium or the optimal outcome for projects tends towards a situation where even the long-term holders are inclined to dump.
It is hence extremely critical to address the issue of whitelist dumping.
1.3 Existing Solutions to the Problem
1.3.1 Staking
One of the most common mechanisms currently being used now to align the interest of stakeholders would be staking. Staking rewards people who stake their NFT into a contract with either their native tokens, or other special privileges.
For example, Moonbirds has a ‘soft staking’ mechanism where your NFTs will not be locked, but you lose your accrued reward points if you unstake. This is similar to that of a vote escrow model.
With an incentivized staking mechanism where you accrue non-token points to get access to higher-tiered rewards, you can incentivize long-term stakers by aligning incentives. To prevent or deter dumping, whitelisted wallets could be released based on a tiered system so that minters who minted at a cheaper price will be locked for slightly longer after the mint is over.
10KTF also offers an innovative approach to staking through gameplay, whereby the staking occurs through — as the name suggests — gameplay. By implementing NFT-rewards in the in-game missions, holders are able to complete the mission and earn said NFTs as a reward.
1.3.2 Problems with Existing Solutions
Whilst the above staking mechanisms do help to incentivize a certain level of loyalty through accrued rewards, they still do not prevent early whitelisters from dumping.
Additionally, with no extant formal standard(s) with regard to the staking of NFTs, the abovementioned ‘soft staking’ mechanisms might run into issues when projects want to list on different NFT marketplaces, as the team will have to work with said respective NFT marketplaces to ensure that these ‘soft staked’ NFTs are not listed for sale.
Therefore, implementing time-lock mechanisms might be a possible (better) solution for projects that want the certainty of the locked supply.
1.4 A Way Forward — Improvement in Design Decisions
At Spartan Labs, we believe that NFTs represent much more than just mere PFPs, or conduits for flippers to make a quick buck.
To aid in the long-term growth of the NFT space, it is critical that we think about how we can align NFT communities with the long-term interests of the project.
The following are some guiding pointers that we utilized while coming up with our solution:
- Alignment between the value accrual of the NFT project, and the value accrual to the NFTs: This will help to incentivize people to hold on to their NFTs in the long term. However, and oftentimes, the growth in the NFT project might not result in a corresponding growth in the value of holding an NFT, which causes people to dump their NFTs.
- Concept of Token Time Lock for NFTs: We also considered the implementation of the concept of Token Time Locks (that came to define the post-ICO-boom to NFTs) into our solution. This will help to prevent NFT flippers/whales from abusing the idea of pseudo-anonymity to crowd out an NFT market — something that will then empower them to flip. This way, we will be able to reward true alignment and long-term belief over hype, where communities would be incentivised to stick around for the “longer-term” of the project, pushing out mercenary behaviours. In this way, initial whitelists can then be used synergistically with time locks as a form of “Soulbound”, or indication of true belief.
- Vitalik’s “Soulbound” NFTs: We also believe that we can draw inspiration from Vitalik’s “Soulbound” discussion, as well as from tried and tested vesting processes, to align incentives between stakeholders. The recognition aspect of Soulbound becomes more imperative as NFTs develops use cases beyond just profile pictures to represent real world entities (such as fractionalized real estate).
2. Our Solutions — The “Carrot & Stick” Methodology
To create a community of true believers, we believe that a form of vesting or locking would properly align incentives.
As such, we are proposing a new smart contract standard that implements a form of vesting for whitelisted wallets, where NFTs minted from the whitelist will face a form of time-lock/cliff (similar to token vesting schedules). This will incentivize investors with a longer-term vision to be on the whitelist, and prevent whitelisted addresses from making quick flips.
Our solutions will revolve around a “Carrot and Stick” approach, wherein we will introduce a dual-system of reward (Time-Locked Recognition) and punishment (NFT Time Locks) to better align incentives between whitelisters and NFT projects.
2.1 The “Stick”: NFT Time Locks
Basic NFT Time Lock Contracts
On a basic level, we could have a Simple NFT time-locked smart contract, inspired by the original TokenTimeLock.sol from OpenZepplin.
In this case, the NFT is locked in the contract and will only be available to be withdrawn at the end of the locked period (say, 1 year).
As a basic contract, there might not be much utility as community members would only gain access to their NFTs after the locked period. Additionally, there is no true “carrot” to such contracts.
However, and the aforementioned flaws notwithstanding, said basic NFT time lock contracts still serve as a solid base for more advanced time lock patterns that we will be conceiving to tackle the design issues mentioned earlier.
2.2 NFT Vesting Time Lock — Rewarding Whitelisters for Locking their NFTs
Some of the previously mentioned design issues involve the alignment of incentives between the project and lockers. On one hand, projects do not want the whitelisters or early buyers to dump upon minting. On the other hand, there are no incentives for long-term supporters to continue holding the NFTs apart from superficial (vanity) reasons.
Therefore, we should look to the concept of vesting to reward whitelisters for locking their NFTs.
The two figures below represent how the vesting time lock mechanism could possibly align incentives between stakeholders:
NFTs without Vested Time Lock
NFTs with Vested Time Lock
For example, an NFT costs 1 ETH and the project offers its whitelisters who have shown much support a 50% discount (for simplicity’s sake).
After these whitelisters have minted their NFTs, said NFTs will go into the time lock contract, and 0.5 ETH (per minted NFT) will go to the developers (of the given NFT Project) upon the initial lock.
The whitelister then has to wait for the cliff period (the minimum amount of time the NFT has to be locked) to end.
In traditional finance, cliff vesting is a period in which shares cannot be awarded before a certain date
After the cliff period, the contract enters a vesting period, where the discount will start to accrue. The rate of discount accrual depends on the bonding curve set, as well as the duration of vesting.
The different types of vesting curves would affect the amount of discount the user receives after unlock.
For instance, if a user locks their NFT, and unlocks it after 1/2 of the maximum lock time. The amount of ETH received under different vesting curve is illustrated below:
- Under linear vesting, 0.5 ETH goes to developers, 0.5 ETH goes back to the user.
- Under curved vesting, 0.5 ETH goes to developers, and less than 0.5 ETH goes back to the user. There would be heavier weightage towards the end, exponential increase toward the Bob.
2.2.1 Linear Vesting Time Lock
This is a simple linear vesting-based contract where the discount is released linearly like a typical vesting scheme, with a cliff and vesting period.
This curve can be modelled with the following function:
where m represents the rate of increase of the discount.
This means that regardless of when the lockers take out their time lock, it is in direct proportion to the length of the NFT locked. This could be useful to projects who do not want to discriminate against the length of time vested by the lockers after the cliff period.
2.2.2 Interval Based Vesting Time Lock
The Interval based time lock allows periodic unlock of discounts at every fixed interval chosen by the projects.
The idea behind Interval based time lock is to allow projects who want to have a fixed vesting schedule where the discount periodically unlocks after the cliff schedule. While this approach may be unconventional, it can be useful for projects who want lockers to commit to a fixed interval of time for locking, similar to the curve voting escrow model where you have to choose a predefined locking period.
2.2.3 Curved Vesting Time Lock
The curve vesting allows projects to reward people who wait longer and penalize people who take out early. This could be useful for projects that want to reward longer-term behaviour. We could consider different approaches to curved vesting — Convex based & Sigmoid based curves.
Convex vesting curve would be better for projects that want a hard cap on when the locker achieves max discount or the possibility of a locker to achieve max discount. On the other hand, the Sigmoid vesting curve would be better when a project wants to incentivize lockers to lock indefinitely and does not want to set a fixed duration for the locking.
2.2.3.1 Convex Vesting Time Lock
Convex Vesting Curve allows the locker to accrue discounts at an increasing rate up until the max discount.
where m and n represent the rate of growth of the discount.
2.2.3.2 Sigmoid Vesting Time Lock
The sigmoid-shaped curve is similar to the convex curve which differs from the convex where there is an increment of discount at an increasing rate which rewards people who lock their NFT longer. It differs from the convex curve in the fact that it tends towards the maximum discount instead of having a hard stop on duration locked.
In terms of function implementation of a curve, there are different formulas we can use such as the:
- Sigmoid formula
However sigmoid function does not have a straightforward formula for 0 < discount < max discount, but we could scale the function accordingly.
where b and k affects the curvature of the model. max_discount affects the scale of the model and x_shift allows us to shift closer when x > 0 and y > 0.
After scaling: Model
2. Therefore we can consider an alternative function implementation using sin curve is:
which would give us a model with a similar shape. [Model]
3. Weibull “stretched exponential”
where b>2 and depending on the value of b, the symmetry can vary quite a bit, while a sets the scale for the x-axis. [Model]
There are many other possibilities to have a similar curve shape where the Discount of NFTs increases at an increasing rate and tends towards the max discount. The formula being implemented depends on the type of shape and scale that works best and the above-mentioned are just some suggestions
However the parameters of the function (time, discount) would have to be transformed according to the formula used and map the output back to the discount range.
Alternatively, we could also transform the function according to our discount curve.
- to scale vertically we would just multiply the function, i.e. y = 2*f(x)
- to scale horizontally we would substitute x by adding a constant to the x-value. i.e. y = f(x-1)
The sigmoid curve vesting could be useful for projects who do not want to set a fixed duration for a time locked, allowing lockers to lock indefinitely. This could also tie in with the next section on Time-Locked Permissions where projects can offer other non-monetary incentives for locking such as status which could be another reason lockers might lock for an undefined period of time.
2.2.4 Discussion of Vesting Curves
We have explored interval-based, linear, convex and sigmoid vesting curves. Projects may find one of the curves more suited for their use case:
- Interval Based: For projects that want to have a fixed vesting schedule where the discount periodically unlocks after the cliff schedule.
- Linear Vesting: For projects that do not want to discriminate against the length of time vested by the lockers after the cliff period and want a constant increment of vesting.
- Curved Vesting: For projects that want to reward longer-term lockers and penalize shorter-term lockers. This could be useful for projects that want to reward longer-term behaviour.
- Convex vesting curve: For projects that want a hard cap on when the locker achieves max discount or the possibility of a locker to achieve max discount.
- Sigmoid vesting curve: For projects that want to incentivize lockers to lock indefinitely and does not want to set a fixed duration for the locking.
Inspirations from Successful Projects in Defi
While the use of vesting curves in NFT locking is uncommon, projects could turn to successful decentralised finance projects for inspiration on how to apply time lock on NFTs and the type of curve to use.
For example, Platypus Finance has a locking mechanism similar to a convex curve. It’s the opposite though, where larger locks are penalized to shift voting power towards the smaller players. Read more in their docs here.
VeJoe from Trader Joe has a linear vesting curve with boosts over the first 2 weeks to induce recurring deposits every two weeks. Dive into it here in Trader Joe’s docs.
For more ideas on vesting curves design check out this reference sheet by Andrey Sitnik and Ivan Solovev.
Limitations of only having Time-Lock Mechanism
However, time lock vesting as a mechanism is insufficient for aligning incentives as whitelisters are still able to dump once their time lock end. Therefore we would have to introduce another way to incentivise whitelisters to remain locked as time goes on.
2.3 The “Carrot”: Time-Locked Recognition
Is there a way we can further differentiate between true supporters from mercenary NFT flippers?
Currently, some projects offer incentives for staked NFTs. While this may help to momentarily uncover the true supporters of the project and help contribute to a lower listing count, such locks are often short-term in nature and do not help to differentiate the supporters from the flippers in the long-run.
2.3.1 Differing Levels of Recognition
When we explore the incentives of locking up an NFT beyond the monetary realm, it opens a whole plethora of possibilities.
As a community, we could differentiate on different levels of locking and recognize supporters accordingly (from highest to lowest) :
- Level 0 — Whitelisted locking from the initial drop
- Level 1 — Staked locking beyond the initial drop
- Level 2 — Unlocked beyond the initial drop
- Level 3 — Unlocked and have been sold X times
- Level 4 — Unlocked, have been sold X times and time since last exchanged in the market
- Level 5 — And beyond, more properties
The project can then offer different reward tiers for these lockers which prioritizes the best rewards (special NFT drops, more tokens etc.) for supporters with the highest level of belief (Level 0). For example, the project owner can reward holders who hold >30 days and can get a reward. This reward could be a discount off the second drop, a special token-gated reward claim, etc.
Furthermore, the on-chain & off-chain recognition could be used by other projects to either incentivize or reward these people through airdrops on launch as such communal spirit might be something that other projects are looking for as well. Such recognition could be an important status symbol for supporters which might go beyond the monetary value of the held NFTs. Ultimately such recognition is important to incentivize long-term thinking and behaviour within the community.
2.3.2 Representation of Recognition
When a holder locks up their NFT, instead of simply NOT HAVING the NFT, the contract could be augmented to be bound to a wrapped NFT or a “Soulbound” NFT.
For a wrapped NFT for example, the bona fide NFT could be retrieved by exchanging the wrapped NFT to allow community members to have a reference to the utility of these tokens. “Soulbound” NFTs could be a representation of how long users have locked their NFTs for before unlocking the bona fide NFT.
In order to create further social reasons to lock, projects could use the concept hall of fame as a leaderboard for addresses that have locked for the longest time as being the truest believer.
For example when the NFT is locked within TimeLock.sol, the locker may still wish to “show” that they indeed own such a locked NFT. However, it would be weird to reference locked NFTs from a developers’ standpoint. Therefore “Soulbound” tokens could be a representation of how long users locked NFT and they could be admitted to the hall of fame. On unlock, a non-transferrable wrapped token needs to be “burnt” to unlock NFT, and the locker would no longer have “hall of fame” status.
2.3.3 Non-Transferability of Recognition
In order to differentiate the lockers, projects might want to include non-transferability of “status” tokens in order to verify that an account address is a true supporter. This might be important as it would reduce the gamification of “status” and allow the project to reward true supporters.
There would still be people that game non-transferable “status” tokens by farming these tokens and selling the account, but such action would be disincentivised.
2.3.4 Implementation of Time Locked Recognition
In terms of implementation, projects could combine on-chain and off-chain methods.
On the smart contract side, there should be a function to check how long the NFT has been locked for.
Projects could then track the length of time locked by each address and reward them with the corresponding recognition such as hall of fame or airdropping non-transferable “status” tokens based on time locked.
There could also be a function that vests such non-transferable “status” tokens to the users.
3. Conclusion
In this article, we went over the problems surrounding current NFT launch designs and proposed a time lock as an uncommon alternative solution.
However, time lock solutions do not have to be implemented in silos. In fact, there are so many synergies between time lock solutions and staking, as well as on-the-market NFTs.
Projects could continue to use staking mechanisms for token / NFT drops to create hype and a strong community at the start, while at the same time providing different privileges to stakers to incentivise long-term holding.
Instead of merely using Time Lock or other on-chain means to track the level of NFT holder’s loyalty, projects could also consider off-chain, on-the-market NFTs. Reference “time since last changed hands” can help projects determine the level of loyalty that an owner of NFT has towards the project and reward holders according to their loyalty level. Having a reward mechanism that scales with time would provide yet another incentive for locking.
Co-Authored by Jun Hao and 0xAlphaChicken, and with the help of the Spartan Labs team.
