Proposal: NFT Fund Creation
Summary
PieDAO has been discussing the idea of a $PFP pie in various forms for many months, but various issues with how the pie would be constructed have prevented us from formally organizing the product. This proposal is the result of a recent effort by the $PFP team (@Adrian.A, @BlockEnthusiast, @dantop, @Gabo, @hamball, @naan, @RichAndCreamy) to move the product forward in a realistic and timely manner.
Motivation
The NFT space is large and broadening quickly. As a DAO, we started exploring this investment space with our pie, $PLAY which has a focus on metaverse gaming. Earlier iterations of $PLAY included small amounts of PFP coins such as $PUNK and $MASK, which were eventually removed during processes to narrow the scope of the product. However, we believe that the initial inclusion of these assets was an early indication of interest in a now-large PFP / NFT art space that is emerging as its own sector, with markedly different dynamics than gaming projects.
Specification/Scope
In the first proposal to build a $PFP pie, the mechanism that was suggested to fund the underlying assets was a pie made up of shares from NFTX floor-priced vaults. However, it became clear that this approach was not currently possible due to issues with liquidity, which would prohibitively limit both the maximum size of the pie and the diversity/quality of assets it could contain. While this kind of approach may be possible in the future as organizations like FloorDAO release their products to supplement liquidity, the team has decided to propose an alternative model to the $PFP pie.
Proposed Model
In the model the team is now proposing, the pie would take the form of a closed investment fund, with the DAO organizing an initial funding round where participants could deposit ETH into a smart contract during a specified period and receive tokens in proportion to their contribution.
Assuming a successful fund raise, a $NFT fund administration and curation group would then use the ETH collected to purchase NFTs meeting a clearly defined set of criteria developed with input from the DAO.
NFTs would be purchased at ‘floor’ prices from collections with sufficient supply and liquidity to allow the tokens to be easily valued, purchased, and liquidated. With the evolution of the space toward multifaceted utility that extends beyond use of an NFT as a profile picture, the team anticipates expanding beyond PFP projects and including other high-value NFTs with long-term potential.
If a minimum amount of ETH is not reached during the initial fundraise, contributors would receive a refund.
After a predetermined amount of time, the NFTs purchased by this fund would be liquidated, and any holders of the $NFT token would be distributed a proportional share of the ETH that resulted from the sales.
Depending on implementation cost and complexity, we may also choose to open the fund at regular intervals before the liquidation period to allow new capital contributions and/or token redemptions. These would occur at a valuation determined through a methodology developed by the team and published at the time of the initial fundraise (rather than calculated through an oracle or similar automated technology).
The team believe this approach will result in a product that is:
- Safe
- Understandable
- Easily traded and accessible
- Comparatively inexpensive to build vs. oracle-based alternatives
- Quick to launch, meeting demand from new users flooding the NFT space
As a bonus, a new product type will be added to PieDAO’s technical portfolio, which can be used in a wide range of scenarios that involve assets that are non-fungible, illiquid, and/or difficult to value.
Risks & Potential Mitigation
| Risk | Potential Mitigation | |
|---|---|---|
| Curators / Project Team | Use of human curators introduces risk of poor investment decisions or malicious actions | Multisig authentication for fund wallet; veto / comment period for investment decisions |
| Market Risk | NFT market is highly volatile; many projects go to zero value in bear market conditions | Well-defined asset allocation strategy that includes blue-chip / established collections |
| Collection-Specific Risk | Risk of rugs, IP violations, malicious or poorly-written contracts | 3rd party and/or PieDAO audits of contracts for projects included in index; require doxxed founders and/or legitimate companies operating collection |
| Legal | Model is a departure from PieDAO’s other products and may have different liability implications for PieDAO and project team | Legal opinion / advice on fund structure |
Team
| Role | Team Member(s) | |
|---|---|---|
| Project Lead | Hamball | |
| Project Management | Internal communication / marketing, documentation, PieDAO governance & processes | Naan, Rich |
| Finance | Develop financial screening criteria (e.g. liquidity, market cap, trading velocity) | |
| Periodically refresh / maintain analysis | TBD | |
| NFT Diligence | Identify and evaluate potential NFT collections vs. fund investment thesis; engage with communities & leaders of projects contained within the index; surface potential issues or actions to be taken (e.g. project-specific drops, staking, etc.) | TBD |
| Marketing | Execute marketing strategy (e.g. identify and engage with target investors and communities, develop content, manage socials) | TBD |
| Consultants / Advisors | DeFi subject matter expert | Block |
| Liaison w/ Development Team | Conduit between project and PieDAO dev team | Adrian |
| Development Team | TBD / PieDAO core dev team |
Additional Responses to Community Questions
Since several questions were asked during the polling period about issues the team is still exploring, the following Q&A is included to provide directional answers and information:
What is the set of acceptance criteria proposed at this moment in time and is there a revision policy being considered to keep them up-to-date?
These are in progress and will be fleshed out before the next vote. Examples of what might be included:
- Chain (e.g. Ethereum)
- Liquidity / Trading volume (e.g. sales per week)
- Security (e.g. project ownership and governance, audited contracts)
- Asset decentralization (e.g. coded into contract → IPFS → hosted on AWS)
- Qualitative (value proposition / utility, team strength, roadmap, execution history, partnerships)
A revision policy will be built into the governance process for the fund.
What is the minimum size of the fund?
The minimum size of the fund has not yet been determined but will depend on a) the revenue model chosen and the ability of the fund to cover its costs and reward contributors, and b) the minimum capital required to purchase a collection of NFTs that meets the market need we’re aiming to satisfy: Exposure to a diverse range of ‘blue chip’ NFTs (many of which currently trade at 10-80 ETH).
In case of a refund who will cover the gas?
While the team has not discussed this in depth, we are considering requiring a small additional contribution (e.g. 0.01 - 0.02 ETH) for each minting transaction, which could be used to fund initial operating expenses and reward organic referrals. If we don’t hit the minimum to launch the product, these funds could be used to facilitate the refund.
What is the appropriate lifecycle for the fund?
The NFT space moves quickly. We imagine the fund’s lifecycle will be a year or less, but this is subject to further research.
Was any thought given to the internal governance of the Curators?
Processes for selecting and removing curators and other team members, making and executing purchasing decisions, and adjusting the investment criteria or other aspects of the fund are being evaluated and will be built into a comprehensive governance approach.
How are we measuring the market opportunity?
The total market cap of the NFT space may be as much as $35B in 2022 and could grow to $80B+ by 2025. There are currently few paths to gain financial exposure for those who are not deeply familiar with the NFT space. As the market evolves and products like Coinbase’s NFT marketplace are launched, we anticipate more interest in NFTs from buyers who prefer a lower-risk, easier-to-manage experience than purchasing individual NFTs. While the size of this market is difficult to estimate, we believe it will be significant.
How’s the competition? How do we plan to do better?
Several competitors have recently announced or launched products to address this market need, but none appears to have a meaningful share of the overall NFT market. Some, including the Bitwise NFT Index fund, are only available to accredited investors. On the DeFi side, products like NFTX, Fractional.art, and synths offer fractional exposure to high-value NFTs, but most products rely on complex and sometimes unpredictable/untested protocols.
In addition to being among the first movers, we are building a fund that is decentralized, transparent, community-built, and therefore more attractive to the Web3 world, yet safe and straightforward enough to remain attractive to the TradFi community.
Next Steps/Closing Notes
While the team recognizes that this model has changed significantly from the original proposal, we believe that it is important to get a product released to capture the growing interest in the PFP sector from investors who would like to diversify their options. We expect that the DAO will have questions, but we believe that this method of construction is the best possible in the short term. Since this method has a built-in end date, it allows for reevaluation in the future as the technology to power other solutions is developed.
If this proposal is approved, next steps would be to:
- Define the technology and UX to be used, and establish a product development roadmap and timeline
- Establish revenue mechanisms and incentives for the DAO, technology contributors, marketing/BD, and the administration and curation team
- Obtain legal input on the model to ensure acceptable liability for PieDAO and the administration/curation group
- Create the criteria for selection of NFTs, valuation methodology, and other guidelines and policies according to which the administration team will operate
References
PFP Index Discussion in Discord
- Yes
- No
- More Info Needed
0 voters
