This note explores various distribution models for Non-Fungible Tokens (NFTs) and their implications on project success, efficiency, and equity. NFTs offer creators anovel means to build a community and fund projects, turning buyers into vested partners. The initial sale, however, poses several challenges, including pricing strategies and the balance between revenues and efficiency, fairness, and sustained participation.
Introduction
Non-Fungible Tokens (NFTs) give creators a unique way of bootstrapping a new community of users, while funding their project at the same time. The users who buy the NFTs of a collection become ‘partners’, not just consumers, because the success of the project means that the value of their NFTs will rise as well. They therefore have an incentive to contribute to the project and attract new members, thus creating network effects.
The most difficult period for an NFT project is at the beginning, when the creators need to decide how to structure the initial sale and how to set the price level. If the price is too high, the demand might be too weak, so the NFTs will not sell, and the project might fail altogether. Even if all NFTs are sold, there is a possibility that the users think that they have paid too much relative to the perceived value, hence they might dump the NFTs in secondary sales and abandon the project. If the price is lower than the perceived value, it will reward early adopters who will then contribute to the project and generate network effects. However, if the price is too low, the competition among bidders to secure an NFT might lead to a gas war, where a big part of the buyers’ payments flow to the miners/validators of the blockchain, instead of the project creators. Creators can also charge different prices to the users, for example using an auction, so they face a trade-off between efficiency, which is achieved when revenues are maximised, and equity, which means that the buyers are treated fairly.
In this note, we explore the most significant NFT distribution models that have been used and evaluate them in terms of the above considerations.
Standard Mints
A standard mint is the most popular distribution model. The creators specify a fixed supply of NFTs, a fixed initial price and a time at which the minting will start. This is the simplest possible price mechanism and therefore easy for potential buyers to understand. The main disadvantage of this model is that it is very difficult to know in advance what the ideal initial NFT sale price is.
