The latest research from Paradigm and Hasu: Design guidelines for efficient launch mechanisms for NFTs

Time:2022-02-26 Source: 1292 views NFT Copy share

Blockchain has revolutionized the way open source software is funded, but not all new models work well from the start. In fact, the 2016-2018 initial coin offerings (ICOs) mostly turned out to be very bad cases where project founders could cash in on the wealth they raised before any product was delivered. The crypto community has learned a lot since then, and current projects come up with a working product before issuing tokens, incentivizing usage, and decentralizing governance.

It turns out that non-fungible tokens (NFTs) are another product that clearly fits the crypto product market well, but they are going through their own growing pains. The life cycle of every NFT begins with the initiation of the NFT (sometimes called minting/mint or airdrop/drop). Specific to NFT launch, the first is to create a new series of NFTs, sell it and distribute it to buyers, who then decide to hold it or trade it on the secondary market.

As with any first-time offering, NFT launches face a pricing challenge: how to price an item that has never been priced before. But unlike most other merchandising, NFTs are more difficult to occur in highly adversarial environments, where a number of idiosyncrasies (public chains) have turned inexperienced users away. Therefore, developers must design efficient and robust mechanisms for development work.

This article starts with an analysis of real-world launch examples (all of which have hurt their own users) to determine what metrics a good NFT launch should meet. We next break down the startup idea into individual steps and explore the design space for each step. Finally, we provide a launch mechanism that we consider to be well-designed for the community to use and improve over time.

Instances of harming users
Over time, we started to notice that certain design patterns in NFT launches would consistently give users poor results.



Cheating

When a new series of NFTs is launched, users can interact with their smart contracts to create NFTs with random sets of properties. These attributes tend to have varying rarities, making some combinations rarer and more valuable than others. For example, only 9 out of 10,000 CryptoPunks have the ultra-rare "alien" property, and the cheapest one is now listed on the market at 35,000 ETH.

Different people participate in the minting of new NFTs for a variety of reasons, and many enjoy the excitement of buying blind boxes and drawing hidden rarities. In this sense, NFT minting is just a continuation of the popular gacha (blind box) mechanic in the analog world (eg, booster packs for trading card games) and the digital world (eg, gear boxes in video games).

People who participate in gacha games tend to make an important assumption: they draw from a random distribution of items and have an actual (albeit small) chance of getting a very rare variety. Unfortunately, past NFT minting projects have often failed to satisfy this assumption and create true randomness. In practice, highly skilled and motivated groups are able to use cheating mechanisms to snipe the rarest categories of collectibles and take them away from honest participants.

We will share two cases where NFT minting projects were exploited through this model. Both exploit incidents relied on the same two-step process:

The exploiter extracts the metadata of the collection so that the relative frequencies of all features are displayed in a single rarity score table. Using this score table, they can quickly identify the highest value NFTs in the collection.
The exploiters then break the randomness of the minting contract and only mint the rare NFTs of the highest value they want.
Loot derivatives and on-chain raw data exploitation

Recently, a project called Loot took the NFT world by storm. The project is deceptively simple, but contains 8,000 loot bags consisting of breastplates, footplates, gauntlets, helmets, necks, rings, waists, and weapons of varying rarity.

All properties of each item slot are stored directly in the contract, the minter receives a pseudo-random Bag, and the Bag ID is used as the hash value. While these outfits are permanent as long as Ethereum exists, the metadata stored on-chain also exposes Loot's pseudo-randomness to cheaters. They quickly grabbed the metadata for all 8,000 Bags by simulating the randomization function locally, capturing the entire series of images (and the rarity of the derivatives). Armed with this information, they just need to exploit the last remaining weakness of the contract: being able to cast exactly the IDs they want, and only sniping at the rarest equipment bags.

However, despite the simplicity of this exploit, there is reason to believe that no one can actually exploit the NFT minted by the original Loot:

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