Facilitator: Kitti Borissza, Adoption & Community, TZ Connect
Jantine Derksen, Co-director, TZ Connect
Dani Jozsef, Blockchain expert, TZ Connect
📜 Course Description
Building on the ground knowledge from the previous week, this session will focus on the technical aspects of what a ‘distributed application’ is, and how it is designed and built. Tailored to a non-technical audience, our focus will be to get a sense of what a ‘Web3’ project can realistically aim for given the current level of technology. • We are going to touch on the following topics ◦ What are distributed applications (’DApps’) ◦ A few more words about smart contracts and how they are designed ◦ What it means to have a public interface ◦ A brief overview of already available tools to build upon
What are the directions and concepts institutions can explore to utilize Web3?
When posed the question above, some very interesting explorations of engagement were discussed in our WAC Fellowship session. Nxt Museum detailed their wishes to create an awesome user or visitor experience blending the real-life experience with an online museum, and ideated what a future-facing museum and brand within the Metaverse might look like.
Signal Festival talked about their artwork which will be represented over 4 nights and were curious to understand how Web3 might bring a more permanent existence to the artwork, as a means of extending the existence of the exhibition. They explored the utilization of NFTs - for example, as a souvenir, proof of attendance token, or NFT rewarded through a loyalty policy, and finally, as a platform to diversify revenue streams.
Both Signal Festival and LAS are interested in creating NFT smart contracts for community engagement, while the latter institute would like to pursue collaborations with artists to present NFT collections. Similarly, C/O Berlin discussed shared ownership between people who participated in a project, plus the artist, and the institution via a smart contract, to give agency over digital artifacts.
Other institutions such as Octobre Numérique were curious to understand how people can connect with artists through a smart contract and imagined a common virtual world, shared by a city and an artist. Finally the Van Gogh Museum admitted they want to do something with NFT but what? And how? Should it be a replica of real-work or something novel? It is still an open question and the fellows were ready to explore more!
Last week we discussed what a smart contract is and recognize it to be a program which runs on the blockchain and implements business rules. It is public and its functionalities are transparent, open to all, and auditable. If written in way that protects its integrity, a smart contract is potentially unstoppable and will keep going in a permission-less state, if the gas (or transaction fees) can be afforded. Smart contracts offer transparency over when tokens were minted and who owns them. Crucially, they can run independently with the creator having potentially limited control over their outcome (see Hic et Nunc discussion from Web3 Part 1).
A bit about tokenomics
Tokens, which are one of most popular use-cases of blockchain, can actually represent anything, but their common functionality is as a digital asset tracked on a distributed ledger (a crypto token), and is defined by the smart contract which run on top of blockchain. A token smart contract can keep balances for token holders (how many tokens do I own?), implement transfers (how much can I give to someone else?), implement restrictions (what and who can I transfer to?), and finally, it can implement rules for creating tokens (who has ability to create more or new tokens?).
A crypto token is classified as fungible, or interchangeable (such as is the case with gold or loyalty points), but there are other types of tokens. Art, music, tickets, and proof of attendance tokens are unique items, or non-fungible (NFTs) and cannot be exchanged in place of another. A third type of token is known as semi-fungible, and represent a set of identical things. From a technical perspective they are the same as fungible, but they differ in that while they can be interchanged with each other (such as a set of non-numbered original copies of artwork), they cannot be exchanged with a different series.
In understanding the many functions of tokens, it is useful to look as some use-cases. Utility tokens serve some form of direct application, for example a token you can spend to buy an item within a game or a token you can use to trade computational resources. Other examples of tokens in action can be found in security tokens, for buying shares in a company (ie bonds), or - the questionably valuable but certainly popular - synthetic DeFi assets, which are created through a formula based on the value of other tokens and used for managing risks and speculation in decentralized finance. And still, some tokens such as NFTs don’t necessarily represent a utility nor shares in ownership, but instead act as digital goods in collecting and trading.
How can we ideate tokens in the arts & culture world?
When we imagine use-cases for token systems in arts & culture, we can see some inspiring range of applications. Aside from the more common themes we know in using tokens to pay for tickets or entrance fees, we also discussed using tokens with smart contracts to prove authenticity of art, as well as building a community through co-owning an art project or by splitting a token amongst people who can then use it to exchange services or buy from other communities. We heard ideas of producing digital content and then reusing the content as a token to be sold again, for recycling the digital into reimagined art. Finally, some interesting discussion emerged around the use of semi-fungible tokens. First, as a way to augment accessibility and people’s experience of art to attempt to diverge from the typical format of NFTs and fungible tokens. This was followed by an example of using semi-fungible items in a game, where you have X amount of time to collect an NFT and Y amount of time to exchange it. The outcome is a means of engaging the user in a continuous conversation within a certain NFT framework or world.
How to distribute the tokens?
Tokens can be either ‘dropped’, where the exact day and time is released, as well as the minting price of an NFT, or they can be ‘airdropped’. An airdrop is a free distribution of tokens, either given randomly or through targeted means, for instance only to certain addresses. Many projects use the latter method as a mechanism to kickstart a community or to give a certain valuation to a project. This could be done either by airdropping to already interacting members of a community as a reward, or distributing the delegated tokens as voting rights.
Challenges in governance
Issues of governance can occur in these network token systems, and so care should be taken to ensure that any mechanisms that could be programmed in as a measure to circumvent issues, are. Let’s look at an example through fractionalized art. In theory, a fractionalized NFT is the same as a DAO (which we will get into later), and is used for co-owning or co-governing a project. This is a token system where fungible tokens are created out of one NFT and multiple holders co-own that piece of artwork. What should happen if one person owning 1%, while you own 99%, doesn’t want to relinquish control? Another scenario might be that when you deploy a smart contract, when can you decide to sell the whole NFT? These parts of the voting process must be predefined. We can see a real-world use-case of this dilemma in action, via a past Gitcoin bounty that dealt with fractional NFT ownership.
Communities have to think about a number of possible problems that may arise when governing together. While the protocol of a governance process can be upgraded, use-cases must be well thought out before deployment. There are of course many avenues of governing systems possible, but there are also a number of game theoretical components that must be held in tandem during execution.
Are we gamifying? Or simply creating a game?
By their very nature tokens create game mechanisms, but we can consider if we are making something more like a game (ie gamification) or are we actually creating a game? Using gamification is a certain way to excite immersion and novelty into a system, for example people receive a random selection of tokens, or reach a set of tokens by the end of a game. This effectively incentives people to collaborate with each other. But we can also extend the scavenger hunt concept past the digital into the physical, where some system is triggered, via a QR code, social media function, a sensor, or an IoT device to function as an oracle, and some action follows. Creating smaller interactive games has less game theoretical components but are great for community engagement. However, as is this theme for the day’s discussion, the complexity to program these interactions depends on what you want to do!
DAOs - record of votes
As discussed last week, the function of multi-signature wallets in a DAO is essentially a pared down version of a smart contract. There are three categories to assigning voting rights in a DAO: token based permission-less systems, where fungible tokens are airdropped to people to get more voting power; identity-based, where one person equals one vote; and finally, via a proof of work model where more work equals more voting rights. What is to be governed may either be treasury-based (on-chain governance of a pool of funds) or curatorial (deciding who can enter the platform or which tokens can be distributed in the decentralized exchange). Ultimately, the only pre-requisite to the DAO is that it happens on-chain.
Of course, DAOs do add a layer of complexity but they also afford an opportunity of interesting token economics at play. Owning to the network effect, the more people that buy in to a system, the higher the value of a token. This creates incentive models, and opportunities to connect a value to a token. Let’s imagine one such incentive model, in which you, as an expert in your domain, create a DAO with 9 other experts in their respective fields. The token economic DAO is highly competitive and would like to be the most expert DAO and so, it values 1 token each at 1,000 euros in cost. Each expert grows their knowledge, increases the DAO’s cumulative publishings, holds twitter space with a high following, and eventually, create enough buzz that new members want to join. However, the DAO has been pre-programmed to only allow 10 members. Eventually, one expert will need to be bought out; that leaving member can sell their token at a higher rate than they bought it for. The DAO is monetizing the cumulative knowledge inside the group, and is being driven up in value as remaining members (and new additions) are incentivized to contribute more to the DAO. We could also imagine potential for past members to receive contributions of expert knowledge lent in the past. As we can see, beautiful complexity can arise out of governing! The most important thing to consider before creating any such governance system is: what are its goals?