An in-depth analysis of Nouns DAO governance

Author: Luca Prosperi

Source: Dirt Road

The Nouns Project is the beauty of simplicity. And, as often happens with cutting-edge experiments, it has gone far beyond that. Starting from August 8, 2021, the Nouns protocol will generate and auction one Noun every 24 hours, starting from Noun 1-Noun 0 is prepared for founders, or Nounders. It should do this forever. Noun No. 397 was auctioned today by the Nouns Protocol.

Where exactly are Nouns sacred?

In short, Nouns are simply generative art, representing stylized 32x32 pixel images of people, places, and things in the form of non-fungible ERC-721 tokens. For example, Noun 1 in the picture below.

Noun 1

How to generate Nouns?

Nouns are composed of predefined features containing 5 features: Background - 2 features, Body - 30, Jewelry - 137, Head - 234, Glasses - 21. Assuming no more features or traits are added (and I'm sure they will), there are a total of 1923,480 combinations available, or about 5,270 years of runway, all with equal probability of occurrence. The generation algorithm starts by using the Noun Seed based on the block in which the auction was previously settled. It's a nuance, but an important one. After the auction is complete, the community must trigger a settlement, and while the winning bidder clearly has an incentive to do so, anyone could theoretically trigger a settlement. This gives the community the power to influence what characteristics the next Noun will have, which we'll dig into later. You can experiment with the spawning mechanism on the Nouns Playground.

auction process

Every Noun, except for every tenth that goes to Nounder for free, is auctioned off to the highest bidder. Simply put, the highest bidder will receive permissionless Noun at settlement and deposit 100% of the ETH settlement price into the treasury. According to Dune, the average winning bid per Noun is 67.12 ETH, or $110,000 at current prices. This means a total of 26,513 ETH (or $43.4 million) was transferred to the treasury. As ERC-721 tokens, these Nouns can be sold on the secondary market. On Opensea, 81 of the ~400 Nouns generated changed hands at an average price of 82 ETH and an average profit of 15 ETH.

Nouns DAO Governance

The mission of the Nouns DAO is to manage the current balance of the Nouns treasury through a simple and powerful governance infrastructure:

• A mandate and ultimate guardian: Financial resources should be used to strengthen and expand Nounders' footprint, Nounders retains final veto against passed non-compliance proposals
• One Noun One Vote: Each Noun gives the owner one vote of governance
• Simple majority: For each proposal, the vote with the highest number of supported Nouns wins - depending on the quorum
• Double quorum: submission of proposals to governance must reach a minimum threshold (currently 1 Noun), and proposals passed through execution must reach another threshold (currently 5% outstanding Noun)

So far, the community has submitted 125 proposals to the DAO for voting, showing a variety of operational improvements, governance parameterization, expansion project funding, and allocation of available financial resources.

Certainly, the Nouns project is an amazing success story for a hedge fund that started out with a financing strategy to distribute unique artwork in a niche but well-funded community. But we know that great things weren't about money in the first place, and never were. The reason we care about Nouns is because Nouns are pioneering and experimenting: diluting rigid open source governance. Let's unravel the meaning behind it.

diluted governance

The existence of highly centralized and unquestioned centers of power breeds corruption. It is now clear that most crypto projects start with a governance token offering, which is impractical, impossible to meaningfully restructure, makes it impossible to explore the universal maximum, and irritates both insiders and outsiders people become bad actors. Dilution governance can alleviate this phenomenon.

It's not hard to see how the one-noun-one-vote system has been diluted. Buying the first Noun to be auctioned (the first Noun was not auctioned, but was given directly to Nounders) will get 50% of the voting power. Buying the 11th is 8.3%, and the 101st is 1.0%. In other words, to control the majority of votes, we need to have 7 Nounders when the 11th is auctioned (after the 0th and 10th Nouns go to Nounders), the current cost is $770,000, or at 101st There were 52 Nouns at the time of listing, and the cost was 5.7 million US dollars. The cost of obtaining a majority of votes also increases significantly as the time goes on.

Another way to look at this is to calculate the difficulty/cost of challenging Nounders' voting power - ignoring their veto power. When the 11th Noun is auctioned, we need to have 3 Nouns, which is about $330,000; when the 101st Noun is listed, we need to have 12 Nouns, which is about $1.4 million. Still a reasonable amount.

The cost of control (and collusion) increases exponentially over time. For me, this is a great thing. Of course, it's not perfect that the founding team retains veto power over the effective execution of the proposal, but it's much better than other existing schemes. The increasing difficulty also applies to the ability to successfully execute proposals. While every wallet with at least one Noun (today) can create a proposal, any successfully voted proposal requires a quorum of 5% to be executed. This avoids exploiting voter apathy to gain overwhelming importance. After approval by a quorum and a valid vote, the proposal will be implemented within 48 hours.

Considering the dilution effect of newly issued NFTs, we expect Noun's auction price to gradually decrease over time. However, it is not. The settlement price hovered around 100ETH for a while, and has actually been trending positively for the past 200 days. It now appears that the positive force of Noun growth outweighs the force of dilution. Given that marginal diluted cost mathematically declines over time, valuations will likely reach an equilibrium and a steady rate of return at some point - what that steady rate of return will be is hard to tell, but my guess is , which will somehow correlate (and slightly outperform) Ethereum’s staking returns. Provided, of course, that no value-destroying event occurs inside the treasury.

rigid governance

Simple, measurable, and stable goals simplify governance a lot. The Nouns DAO maintains a very clear mandate for the use of its treasury. The data below comes from the Nouns DAO website.

Rigid governance produces a surprisingly homogeneous set of outcomes. Of the 125 proposals submitted, the vast majority (96) were implemented and only 1 proposal was rejected - as a test, the total amount of funds distributed was 132,000 ETH. Most proposals had a clear one-sided vote, which may indicate the following:

• Very cohesive community around a simple task
• Powerful soft (forum) and hard (arbitration) filtering mechanisms to avoid unpromising proposals
• Still a small and immature community - about 200 Nouners + Nounders
• Active propensity to spend due to growing coffers - it's easy to be proactive in times of abundance

What's happening is likely a combination of all of the above, and the dilution of votes and individual angles may indeed be contributing to the technology. If it is difficult to control the relative majority of Nouns DAO, it is almost impossible to maintain anonymity: Nouns are not as easy to reshuffle as fungible tokens, they are not used for staking or mixing as often as CEX contracts, and over time The development gets the identity associated with the owner. These characteristics substantially increase the (personal) cost of deviation. It will be interesting to see how these dynamics evolve as the number of Nouners increases, and the (potentially) governance mission expands. Personally, I would like the rigid governance to remain and its development to happen organically, away from the parent DAO.

open source governance

The Nouns project has opted for copyright protection under CC0, in other words, opted not to have any copyright and database protection. Everyone can build on what Nouns DAO has done because they believe that, on average, these contributions will increase the value of Nouns and the DAO treasury. As we've said before, DAOs are ready to invest money to facilitate this, and it's no surprise that most teams willing to build on the Nouns platform start by asking for budget contributions.

In other words, the governance of the Nouns DAO is evolving into some kind of (community-controlled) optimistic delegation process, where the DAO pre-allocates a large amount of ETH in the hope that the money will be well spent and the returns will increase for the Nouns .

FOMO Nouns are one of the earliest and most interesting applications of this concept. We have discussed before how the generation process of each Noun is triggered based on the settlement block of the previous one, allowing the community to have some influence on the characteristics of the next Noun. As a block-specific process, it takes uncanny coordination (plus speed and luck) to predict what a Noun will look like at block start, vote, and trigger. To systematize this process, the creation of FOMO Nouns was proposed in Proposal #8. Participants can vote 👍 or 👎 to determine a Noun that is predicted to be minted. If the (like/dislike adjustment) vote exceeds a certain threshold, the contract will attempt to trigger a settlement. Initially 50 ETH was requested for the development of the project, including a budget for contract donations for block inclusion. While the project has no immediate monetary positives, backers believe the deployment will help create more attractive Nouns, increase bid value, and foster further participation.

There is no limit to forking. Derived from Nouns, Lil Nouns has become the most classic hard fork, producing outputs that are strongly related to Nouns, but are operationally and (partially) economically independent. A quick glance at the website shows how the Lil team chose to minimize the differences between the two projects.

This project is building an independent treasury consisting of ETH and Nouns as part of the Nouns' Small Grant program voted by the Nouns DAO governance. It is also the arena for the Mothership. Nouns Center lists a collection of projects inspired by Nouns. This is also a project funded by Nouns.

We do not (currently) have a framework for measuring the impact of grants from the DAO treasury on the value of projects. Some form of Nouns regression should be developed. But we can observe through the best proxy, namely the price of the next Noun, this strategy has worked so far. Constructive forces are outpacing dilutive ones. How long this will last, however, is hard to tell. At some point, the balance of power will shift, and that's when governance will be tested. The open-source nature of this project will further complicate this issue.

We had previously identified some characteristics that stimulated participants to deviate and go bad in the (simplified) organization:

(i) expropriation capacity or size of private interest, (ii) community sharing or size, (iii) uncertainty or perceived risk of encountering bad proposals, (iv) urgency or urgency of suffering due to bad actors Likelihood (v) Risk aversion. Nouns DAO improves governance in many ways compared to its predecessors: small and cohesive community - less sharing and uncertainty, relatively small appropriations compared to the value of votes/Nouns - less Expropriation capability, dilution of control over time - even less expropriation capability, and a clear growth mindset - less risk aversion.

The growth of the community, and the wider ecosystem inspired by Nouns, will eventually threaten the balance of power and reduce the margin of safety. DAOs need to implement governance changes before it is too late.