Limited Edition Tokens

There’s no shortage of excitement around non-fungible tokens (NFTs). Their ownership is akin to owning a popular cryptocurrency like bitcoin, a cryptographically secured form of digital scarcity. The difference? Owning an NFT means owning a universally unique digital item; no 2 are the same. NFTs are still nascent and there are questions of centralization regarding primary issuance, upgradeability, licensing, resale and utility.

This post explores a class of NFTs that hasn’t received enough attention, “Limited Edition Tokens” (LETs). The real world precedents for limited edition goods are vast and technology has evolved their role over time. Use cases range from merchandise and artistic work to event and lottery tickets. Using a hypothetical brand, I’ll explore a better way to utilize the peer to peer networks tokens are created on.

Copycat Economics

Since our ability to create art, the practice of replication and technologies evolving it have advanced. Creating copies disseminates culture. Historically, copying had significant capital costs. The first scribes were commissioned to copy the bible. With the invention of the printing press, costs came down but remained significant. Books were printed in limited quantities called editions. Access to the means of production governed which books, editions and denominations were printed.

Supply Control Freaks

Branded goods are exclusive and rivalrous, meaning consumption reduces supply. Controlling scarcity can be used as a power tool to dictate price, especially with luxury items. Before mass media marketing, limiting supply carried risks of not reaching a wide enough audience. A cultural awareness tipping point or what we might call in tech “mass adoption” is necessary for limited editions of items to sell out. However, produce too much with insufficient demand and prices may fall below cost. Perceived value plunges when consumers feel a good is everywhere and everyone one. Even when no goods are being sold, excessive use of intellectual property can cause perceived value to fall. This is called brand dilution.

With respect to digital goods, the capital cost of copying information is insignificant. Software businesses are information technology and due to their costs have different scaling economics than a company like Ford Motors. There are no reasons and previously no methods to create true rivalry on the internet that wasn’t centralized, until blockchain. The advent of blockchain technology introduces secure ownership of scarce goods across the entire internet. The question on everyone’s mind is: how do we design the economics? Inspiration for limited edition tokens, LETs, can be drawn from real world limited editions that have evolved over time.

An Evolving Role

If you have a strong background in history and economics, feel free to jump to the end of this section and please provide feedback 😉

Money

Early tools were perhaps the first limited editions (LEs). From a system of barter, exchanging arrowheads with food, came early forms of money. Salt and shells retained some characteristics of LEs. Different salts from different quarries and different types of shells represented certain denominations. However, the lines of value blurred when people started discovering more durable forms of currency. Artwork, while always presented, started to define itself in unique or limited quantity goods.

Identity

Prior to printmaking, artwork was scribed like books. Clothing and jewelry was made by hand. This produced strong tribal connections to many unique artworks like masks defining identity and hierarchy. Limited quantities of clothing and jewelry signified membership and rights access. Early artworks like these were not frequently bartered with because of their cultural significance and tribal utility. Farming, specialization and early societies changed the culture of tribes and the meaning of clothing and jewelry. They were now commodity goods to be bought and sold. Excess capital from the sale and tax of commodity goods made commissions of unique paintings and sculpture possible.

Abundance

Printmaking emerged and further changed the dynamics of limited edition goods. The oldest master prints date back to China and Egypt during the Byzantine period and were invented for printing patterns on cloth. The aforementioned printing press spread rapidly across Europe. With supply of specialty fabrics and print materials outstripping demand within small societies, Mercantilism became a means of growing national economies. From time to time methods like printmaking are briefly brought back into vogue by artists like Andy Warhol and Banksy.

Zero Costs

Modern creative works traded internationally like music, movies and software still leverage the concept of a limited edition. Kayne West made headlines recently pioneering the “medium play” (MP) format, with a number of selected tracks in between a traditional long play, LP, and a single extended play, EP. Even with reproduction costs of zero, limited editions of software like the upcoming game, Devil May Cry “ultra limited edition” are attempting prices of $8,000 USD. The Wu-Tang Clan also experimented with an extreme case: a single copy of an album, effectively turning it into a work of fine art that sold for $2 million USD. What’s attractive about limited editions are their fixed upfront costs and straightforward control over supply. The downside? When you don’t have a proxy for determining demand, pricing goods can be extremely challenging.

Determining Price

Pricing challenges are most apparent in creative industries like art, entertainment and video games where prices are largely determined by the customers willingness to pay. Beyonce may be able to sell albums for $100 and concert tickets for $1000, but that’s not how competitors are pricing their goods and not what existing consumer behaviors will allow. Over time she would alienate those in her fan base without means to purchase her goods. She must price herself according to the market to appear fair. And what if fans are willing to pay more? How will Beyonce capture that value? Tony Sheng provided one answer in his post on the adoption of crypto games.

Resale Markets

People buy and sell goods they previously purchased for a profit or loss every day. These markets exist for a number of industries where value priced rivalrous goods have real or artificial scarcity. While traditional retailers are tanking, online resale startups are receiving boatloads of venture capital and set to be the next billion dollar retail giants. These platforms coincide with another trend taking the fashion world by storm, steetwear. The clothing is often released in limited editions or mashups with major brands and artists, creating hype, lineups and resale opportunities. Kayne West played in the space, but oversupply may threaten upcoming releases of Yeezys his famous shoe for Adidas. Streetwear is simultaneously epitomizing, critiquing and redefining brand value.

Summary

When costs trend to zero and basic needs are met, people spend money on luxury items, experiences and art. These goods are often released in limited quantities and priced according to perceived value and willingness to pay.

Perceived value of rivalrous goods can be loosely defined by:

Value = (Utility * Quality * Brand) / Supply

Where overall brand value is typically:

Brand = (Quality * Time) / Saturation

i.e. value for an exclusive brand is the consistency of producing quality goods over time. Saturation reduces the perceived value of future goods; this factor decays based on the lifetime of previously sold goods. In short, people want what they can’t have and they tend to want the shiny new stuff, if they can afford it.

Willingness to pay is determined by the market. Competitor prices can serve as a proxy for marginally innovative goods, but fails for radically different goods and those that are defining the market. Demographics like location, home ownership and income level can help as inputs. Resale markets can also help to determine price as seen in event ticketing and with the first NFT experiments like Cryptokitties, unique and tradeable cats on the Ethereum blockchain.

NFT — State of the Art

The art world can be… complicated.Central Issues

The tech and ideas around NFTs are still nascent and not tapping the true potential of peer to peer. From Cryptokitties to early limited edition tokens of games like Ethermon and Gods Unchained, a central brand is issuing and controlling the perceived value of all tokens. The tokens themselves are censorship resistant; but an issuer could arbitrarily introduce capital controls like increasing supply, changing utility or even freezing assets. This would have dramatic effects on the value for users that own these tokens and the users would be powerless to stop them. Also damning is a first draft of a licensing effort that strips owners of what is essentially the digital art and their own possession.

Appropriation

If I buy a poster, can I hang it upside down in my room, take a picture and sell it online? The European Union is producing some disturbing legislation to address copyright and appropriation on the internet (EFF response).

Ownership

If I buy the same poster am I entitled to the picture remaining the same? Banksy forced the question recently and it has relevance to digital ownership. If I own a piece of software, am I allowed to hack it? If I don’t like my tokens can I destroy them forever with no recovery even for the issuers?

Appropriation and ownership are constantly evolving. When building blockchain product, developers need to leverage what is uniquely valuable about the technology and make this value relevant to end users. How can we redefine ownership, attribution and appropriation with features like immutability, transparency and permissionless development? What makes limited edition tokens on peer to peer networks special?

Peer to Peer Potential

Imagine a user owned, peer to peer streetwear brand. This brand can sell hybrid digital/physical, limited editions of hats, sneakers and hoodies with a corresponding token. LETs can be used to “flex” online. Game studios and social media platforms can permissionlessly add them to their apps as avatars or exclusive filters. The real merchandise can easily be handled through drop-shipping and popup retail partnerships. Once the LETs are issued users cryptographically own a universal identity of a physical item on a censorship resistant blockchain. They are free to trade and form markets like the aforementioned Cryptokitties. Selling a physical item would mean transferring it’s digital identity as well, useful for authenticating and tracking resale.

I will explore the cultural relevance of a hypothetical streetwear brand designed by users for users called Cardinal. This Decentralized Autonomous Brand (DAB) sells Limited Edition Tokens (LETs) that represent their physical clothing counterparts. The mission of Cardinal is simple: an organic peer to peer membership that collectively handles issuance, ownership, upgradeability, licensing, resale and utility of their brand.

This touches on a number of technical topics still hotly debated like decentralized autonomous organizations (DAOs), identity and voting. Today there are no successful examples in the wild or workable solutions to some attack vectors. Technology advancements and research in mechanism design are expanding this utility of cryptonetworks. The blockchain community continues to broaden the scope of solutions for issues like privacy, identity and various attack vectors.

Reminder: this is a thought experiment on how a business might tokenize and decentralize some aspects of their business.

Issuance

Cardinal is selling limited editions of streetwear items using LETs. These are issued on the Ethereum blockchain using a variant of ERC-721 or ERC-1155. Each LET provides access to set up the “Beast Wallet” and join the Cardinal “Crew”. Pseudo-anonymity is allowed, e.g. email address can be used.

Who decides what gets made, when they get released and how many for each edition? For the first edition, founding members from the subreddit r/streetwear responded to a call for membership. Remember the printing press example? Cardinal believe that users should collectively own the means of production. Everyone will have a chance to participate and decide which artwork, editions and denominations get released.

Cardinal handles this using a Decentralized Autonomous Organization (DAO) like Aragon. The exact details of each vote, identity and what’s at stake are abstracted in the following sections. At least the Cardinal Crew are not doing an ICO right? I will explore a technical state of the art and new issuance mechanisms in subsequent posts.

Ownership

Imagine using existing LETs as membership access tokens and defining mechanisms that govern what the Cardinal brand produces. Part of the decision mechanism includes an option to stake some other currency in order to pre-capitalize production. This staked capital helps de-risk the next edition and allow those who staked to receive compensation if the edition they staked is a raging success. We’ve essentially forward securitized collective works of art and fractionalized revenue sharing. Killer.

To ensure deep pockets don’t hijack the process, the Crew applies Liberal Radicalism and ensures they are adequately supporting niche creativity at the margin. Liberal Radicalism applies a variant of Quadratic Voting to collective contributions in order to dull the influence of large capital players and amplify smaller participants. For a summary of LR check out Alex Tabarok’s post.

Upgradeability

Cardinal is alive and well. Many “Ethereans” are dressing their Cryptokitties and Ethermons in hip clothing designed by the community thanks to the LETs and ability to combine tokens using Crypto Composables, ERC-998. Celebrities also started wearing physical Cardinal merch on Sunset Blvd and Abott Kinney to be niche and hip.

Now the Cardinal Crew is being approached by big name companies that want to issue branded mashups with their logos. Not only that, they want to advertise on the existing streetwear editions by changing artwork that people have already purchased… There’s a lot of money on the line, what’s the Crew to do? The Crew can decide on which brands make sense to partner with using Quadratic Voting, a simple and fair process that governs a lot of their collective decision making. There can also be a one time vote to upgrade the smart contracts, making it impossible to switch artwork or metadata after a primary sale. Boom! No turning back!

Cardinal is blowing up! It’s so popular the original volunteers who run the Interplanetary File System (IPFS) nodes hosting the digital artwork are racking up huge server costs. The Crew steps in and votes to dedicate a portion of primary sale revenues to a fund supporting node operators. The nodes keep the artwork online and loading fast on all major apps. These operators are staked in DAI, a stablecoin by MakerDAO, and slashed according to their response time and ability to handle traffic.

Cardinal has partnered with major brands, closed modifications that could lead to dilution of their brand and collectively protecting the future interests of the token holders.

Licensing

Remuneration is a big deal for artists. Those who put in the time and effort to make artwork should get paid if someone profits in the form of a derivative creative work. Automated licensing protocols for Cardinal can define the amount an artist will get paid net of costs and fees that members agreed to for that edition.

After the initial sale, if someone wants to use the artwork in a derivative work, the Crew will need to decide how many licenses they want circulating and what the use is. Too many licences means saturation and brand dilution for the Crew. They mint a finite supply of licences with super fine terms to strictly govern the use of their brand across the internet and IRL with proceeds accruing to the original artists.

Models like pay per use can help smaller creatives remix great Cardinal artwork. Quadratic functions can ensure bigger players with more capital will need to contribute more. Simon de la Rouviere has a great post on Radical Markets in the Arts I highly recommend reading.

Resale

Remember those pesky resale markets? Beyonce was leaving a lot of money on the table because she couldn’t sell her tickets and merchandise directly to those willing to pay top dollar, without excluding the rest of her fans. Cardinal and crypto goods are no exception.

The challenge? Consider pricing a new Cardinal artist. The Crew has no idea how well the artwork will be received. What’s the pricing strategy? The Crew could look at past editions, but this particular artist’s edition is total departure from past work. Why not let the market decide? By including a tax on a fixed number of resale transactions, Cardinal can sell the primary market at an accessible and fair price, while capturing a portion of the resale appreciation and share this with the original artist.

Cardinal starts selling a hoodie at $69 USD to make sure everyone gets a fair chance of purchasing, this includes the physical hoodie of course. Customers are constantly trading their digital and physical goods with each other, and why not? If you own it, you should be able to trade and potentially profit from it. With limited supply there’s a hot resale market for Cardinal. The Crew has made sure to have digital exclusives like membership and voting tied to each LET so resale buyers will also want tokens to match the clothes.

The Crew decided to price with accessibility in mind, but it doesn’t mean they don’t like making money for the collective. Some limitations around price discovery of physical transactions are mitigated by trusted online resale platforms in the interim. Of course some black market transactions will happen, but technology and incentives are evolving to address this.

Utility

Besides dressing up a Cryptokitty or staring at the artwork in your Beast Wallet, what utility value do the digital LETs actually have? Why would people want them? The Crew thought long and hard about this and while revenue sharing was an attractive option and in the spirit of a user owned brand, right now the regulatory waters are too rocky. Don’t worry though, they got you covered.

Cardinal sets aside an exclusive fund for… exclusives. LET holders can enter for chances to win directly from the Beast Wallet. As the pool of LETs grows due to sales so does the size of the exclusives fund, but also the chances to win exclusives. Over time, repeat players will dilute the winning chances of new LET holders. The Crew limits the ability to enter an exclusive draw to only 3 times per LET. This ensures that the LET is relevant on the resale market for a while, prior to all the exclusive offers being used up. There’s an added incentive to buy future editions to get fresh chances to win exclusives.

Bonus — Signalling

Everyone knows the best thing about owning something exclusive is showing it off. The Crew at Cardinal are hype beasts so they know the game. They set aside funds to run a fast Serverless API that allows companies and brands to seamlessly query the LETs issued on the Blockchain for free and with zero integration cost. Permissionless innovation.

Beast Wallet users can choose to allow certain platforms and companies to have access to their inventory. Since users own the LETs, users own the data. Social Media platforms like Twitter and Instagram can offer discounts on promoted tweets and exclusive filters to the holders of specific LETs. Brands can also get in the game and leverage better transparency with the Cardinal ecosystem than they receive with social media platforms. The Beast Wallet has become a hype distribution channel for all Cardinal merchandise, brand interactions and LET exclusives. More tricks to come from the Crew 😉

Cardinal — Summary

It’s been a long year for Cardinal. The open membership Crew was founded, issued 6 editions of exclusive streetwear supporting 5 artists and had one exclusive brand mashup with Adidas. Early editions like the “Bufficorn” were extremely limited edition and the Beast Wallet’s first exclusive filters dropped on Instagram, leading to hot resale markets. The resale revenues were captured by online resale platforms like Poshmark and The RealReal. The small tax Cardinal levied on the first few resale transactions was put into the infrastructure fund, exclusives and a small portion was donated to a charity supporting fair wages for clothing factory workers.

Limited Edition Tokens — The Road Ahead

I will explore the available technology and business strategies for tokenizing brands and creating peer to peer products subsequent posts, specifically: adoption, issuance, royalty and resale mechanisms for NFTs and LETs. My mission is to make the state of the art, challenges and horizon of peer to peer technologies accessible to non-developers, entrepreneurs and product designers. I am passionate about building solutions for everyday business and consumer sectors, leading to wider adoption of true peer to peer solutions. If you are a product designer or entrepreneur building peer to peer products, I would love to chat.

There’s a lot of building going on in crypto and blockchain right now. Every day the tech is advancing, getting faster, more private and secure. However, it can feel pretty isolated. With most tools built by engineers for engineers, high switching costs for the average user and little mainstream benefits of peer to peer, we’re running the risk of staying nascent for too long.

People want to feel like they’re a part of something, not feel stupid when they don’t understand. The average user will need switching costs to come down and their appetite for the benefits of peer to peer apps to become insatiable. We need to push our community to design peer to peer apps that onboard people in new, fun and creative ways.

There are projects in the space dedicated to solving these challenges. Alex Van de Sande works on identity initiatives allowing users to be productive on a network before making a their first transaction [ERC-1077–1078]. MyCrypto’s team is working on amazing wallet UX (Taylor Monahan). Swag by Cryptogoods (Todd Goldberg) brings your NFTs and LETs to life. Gitcoin is making peer to peer software bounty economies frictionless (Kevin Owocki). Their newly launched project Kudos, which uses LETs from independent artists, they’re also making peer to peer social signalling super fun👏

Rallying Cry

Before you make another Cryptokitties clone, AI/data marketplace or crypto financial product. Ask yourself: Do you understand your audience? Have you deeply explored the benefits of this technology? Is there anything more you can do to help users crave the core benefits of transacting on a peer to peer network? Can you make the experience more enjoyable? The answers will allow you to break away from the pack.

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Limited Edition Tokens was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.