1. The Problem – Mekaverse Case Study
was arguably the most hyped NFT project in 2021. The collection had a limited supply of 8,888 NFTs, and had over 200,000 Twitter followers and Discord members. One of the issues the team struggled with was how to distribute spots for the mint fairly.
For example, if a hyped mint is made open to the public, this leads to unique problems. Firstly, the Ethereum network (currently under proof of work) can only handle around 30 transactions per second. Hyped mints can congest the network resulting in minters paying thousands of dollars just to mint an NFT. This is undesirable because it favours large players (“whales”) with deep pockets who can mint a large number of the NFTs in the collection and manipulate floor prices. Additionally, many users will spend money on gas fees to interact with the smart contract, only to have the mint sell out before their transaction goes through, resulting in them losing money through failed transactions.
The Mekaverse team decided to combat this problem by raffling off whitelist spots through a “fair” distribution scheme. To get an idea of the desirability of one of these spots, the cost to mint a Mekaverse NFT was 0.2 ETH (approximately $1000 USD at the time) and a minted NFT was fetching anywhere between $25,000-50,000 USD pre-reveal. The Mekaverse NFT pictured above, for example, sold for 60 ETH (approx. $300K USD) in October 2021.
The problem with this type of distribution mechanism may best be articulated through a tweet
by @beaniemaxi on Twitter, who states that one of his friends in China was able to use a bot farm to earn a disproportionate number of whitelist spots for the mint, and make a profit of $2 Million flipping the NFTs.
Whale/bot accumulation of NFTs and subsequent flipping are not only legal, but also desirable in many cases because they generate large secondary volume. However, anyone who has been in the NFT space for long enough understands that there are really a few metrics that matter for the project long-term: 1) the NFT community itself; 2) the number of unique holders of the NFT (also an indicator of community); and 3) consistent volume (secondary market sales). Whales who have a large number of the NFTs in a collection can artificially keep prices high and leave secondary market buyers who purchase at the exorbitant prices “holding the bag”. Whales can also dump on the market at will.
In the case of Mekaverse, the floor price for the collection, which at one point was 8 ETH ($40K USD at the time) currently sits at 0.28 ETH (approximately $500 USD). I believe the implementation of soul-bound NFTs is ideal for hyped mints like Mekaverse to avoid whale manipulation and ensure a fairer distribution of tokens during mint, leading to an improved outlook for the project in the long-run.
2. Soulbound NFTs – A Solution to the Problem of Identity
In a blog post
from earlier this year, Vitalik Buterin states that “A soulbound item, once picked up cannot be transferred or sold to another”. In the context of NFTs, I think another way to define soulbound tokens are “NFTs that are tied to an address or another token”.
I envision soulbound tokens to be implemented through a single trusted entity that KYC’s users and administers a single soulbound “identity” token among the many addresses a user might have. For example, a large marketplace like Opensea or wallet like Metamask could have an “Opensea/Metamask Bound Token” that is distributed to a user’s primary account following identity verification. This soulbound token would be tied to a single Ethereum address and be non-transferrable. These entities are arguably also well-positioned to identity instances of fraud, such as through a user’s IP address.
NFT projects could subsequently combine soulbound tokens for identity verification with other criteria, such as their most active discord users, to ensure that whitelist spots go to unique users that are truly interested in being members of their community. The smart contract would have to be programmed to allow NFT minting only to those with a soulbound token (for example, 1 NFT per soulbound token). This mechanism would result in more unique users who are able to mint the NFT and alleviate problems associated with bot-farming/whale accumulation as noted in the Mekaverse example above. Ultimately, this would ensure a fairer token distribution at mint, increasing the chances that a project survives thereafter. It would further remove the need for users to have to give identifying information to many NFT projects for KYC purposes – the drawbacks, of course, are the privacy implications for users and how entities use/store their data.
Soulbound token implementation has already began in the NFT space, but not in the context of identity as articulated above but in the context of rewarding long-term NFT holders.