The world of NFTs has recently exploded from a relatively-niche technology used by a handful of crypto enthusiasts, to being a term that even the least-tech-savvy among us have heard in conversation. The tech and culture surrounding NFTs are both rapidly evolving, giving rise to innovation while also meeting new challenges never before experienced.
The rapid growth in popularity of NFTs and Ethereum in general have given rise to several problems with the current NFT distribution model: network congestion (gas costs), front-running and artificial scarcity. These three factors hinder adoption and growth, and are primary obstacles in many NFT projects.
Ethereum users will be well aware that gas costs continue to rise, with transactions costing over 100x more ETH to execute than only a few years ago. This is because more people are trying to use a network that has limited capacity. Gas prices often spike around large on-chain events such as popular NFT drops, as users attempt to outbid each-other in a race to snatch up the limited supply of tokens. A system is required that can shift the burden of this demand off the mainnet, so that everyone can have an affordable network.
The Ethereum network has become infested with front-running bots. These bots watch your transactions as you submit them, and if they see an advantageous trade they quicky outbid you and beat you at whatever you were trying to achieve. In the case of NFT drops, a front-runner can see your bid before its accepted and buy the token from under your nose. If it’s a popular drop, the bot’s owner knows they can sell the token immediately and easily recoup their costs. A system is required that prevents front-runners from intercepting user transactions.
Many NFTs have a hard cap on how many tokens will be produced. This is important, because value requires scarcity — if there is an endless supply of an NFT, then there is no point in holding one since they’ll never increase in value. The issue is that the soul of blockchain is decentralisation — free markets are core to the technology that powers every Ethereum transaction, so I believe that arbitrarily putting a limit on NFT supply runs contrary to the ideals of crypto. It is therefore necessary to design a mechanism that allows NFTs to remain scarce, while allowing market forces to find a natural equilibrium.
The solution — POW NFT
These three issues are all solved with the introduction of a Proof-of-Work mining process. The mining process may take place off-chain, only requiring miners to submit their “proof” as a transaction when they are successful.
POW NFT is the first project to achieve this — tokens may only be minted through the mining process, and they become increasingly more difficult to mine. Combined with a generational demand curve for minting costs, this allows market forces to find a natural equilibrium for the level of scarcity, and the combined work+cost to mint a new token sets a floor price for existing tokens.
POW NFTs are designed to be increasingly difficult to acquire, without exclusively advantaging token holders, whales or people with fancy mining rigs.
The token fees are not paid to the contract creator, they are distributed to the token holders of previous generations. Since the market is creating the scarcity (and therefore value) of POW NFTs, token holders should be the beneficiary of the value they helped create.
POW NFT tokens are generative depictions of Atoms, rendered based on the token’s hash (a product of the mining process). This hash will determine a number of factors including the element, the ionic charge, the colour palette, the position and motion of each electron and many more subtle features. The element selection algorithm is inspired by natural scarcity laws, meaning some elements are more common than others.
A post-launch update to the project also added a unique, generative audio track to each Atom which is generated based off the Atom’s hash.
POW NFT mining essentially means running a calculation with slightly different data over and over. If the result of that calculation (the hash) is not below a target number, the mining software changes the data a little and tries again. If it is, it has been successful and you can mint your Atom.
The POW NFT hashing algorithm uses three pieces of data:
- The previous token’s hash
- The address of the miner
- A nonce
Because the difficulty target gets smaller with time, the average mining time will continually grow. Since a transaction is only submitted when a valid hash has been found, there’s no need to pay extremely high gas fees, as its unlikely anyone has found a valid hash at the same time as you. It also separates user activity in time, which prevents concurrent buyers having a multiplicative effect on the gas price.
Because the hash includes the address of the miner, the transaction can’t be front-run. A nonce that provides a valid hash for one address will be useless for the next, front-running bots can only sit and watch. This hash is actually re-hashed with the current time when a token is minted to create the token’s final hash. This prevents a miner with a lot of hardware pre-mining a bunch of tokens and submitting them all at once.
Because a token must be mined based on the hash of the previous token, this effectively creates a “token-chain” (similar to a blockchain).
The difficulty curve combined, with the generational demand curve price-structure mean that later tokens are more difficult to acquire. Rather than dictating the number of NFTs that will be issued, the market will decide when its no longer worth the effort of mining more, and instead will just bid higher for existing tokens.
POW and the Future of NFTs
The inclusion of POW mining solves many of the issues currently facing NFTs, so I believe that future projects should adopt it as a part of their platform where possible. In order for crypto to flourish, equitable and decentralised solutions must be utilised. NFT mining may take several forms, and don’t need to replicate all features of POW NFT. Some examples are:
Rather than an ever-increasing level of mining difficulty, a difficulty cooldown could be employed. When a token is minted, the difficulty resets to a maximum level, and then becomes easier with time until another token is minted. The cooldown rate could also slow as token supply grew. This would ensure a slow, paced out token distribution that can still achieve natural scarcity.
Difficulty-price curve uncoupling
POW NFT increases mint-cost and difficulty every time the number of tokens doubles, both requirements must be met in order to mint tokens. However, a model that allows leeway in the difficulty for a higher minting cost, or vice-versa may be advantageous, and allow a more nuanced equilibrium to be met.
A mineable NFT smart contract could also employ several independent difficulty targets to mine different-tiered or otherwise-unique tokens. This would allow each to mind its own natural scarcity level.
Interval-based difficulty adjustments
Bitcoin and Ethereum both automatically adjust their difficulty depending on how quickly blocks are being mined. A similar system could be employed for NFT mining, however certain allowances must be made to account for Ethereum transaction time.
Difficulty as scarcity
Although perhaps counter intuitive, the addition of mining makes NFTs more desirable, rather than less. Creating a barrier to entry that is passable by only those who are determined ensures that tokens have a value beyond just being pumped by passing whales.
It is key to make the mining process accessible, because the fundamental randomness of mining means anyone able to run mining software still has a chance at success. This is why POW NFT has a miner built into the website, and a similar approach is recommended for any project using NFT mining. Otherwise the minting process will become the exclusive domain of a technically-savvy in-group, which defeats the purpose entirely of a market driven approach unless your goal is to protect this in-group.