Nouns — Hyperscaling a Brand & Treasury From Zero

AUG 16, 2022 • 13 Min Read

Teng Yan

DISCLOSURES: THE AUTHOR & EDITOR HAVE NOT PURCHASED OR SOLD ANY TOKEN FOR WHICH THEY HAVE MATERIAL NON-PUBLIC INFORMATION DURING THE RESEARCH AND DRAFTING OF THIS REPORT. THESE STATEMENTS ARE INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL ANY TOKEN, OR TO USE ANY PROTOCOL. THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE INVESTMENT DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.

Metus vulputate eu scelerisque felis. Nulla facilisi cras fermentum odio eu. Scelerisque fermentum dui

faucibus in ornare quam viverra orci sagittis. A iaculis at erat pellentesque adipiscing commodo elit. In

fermentum et sollicitudin ac orci. Ultrices sagittis orci a scelerisque purus. Faucibus ornare

suspendisse sed nisi lacus sed viverra tellus in. Mauris cursus mattis molestie a iaculis at erat

pellentesque adipiscing. Volutpat diam ut venenatis tellus in metus vulputate. Eu consequat ac felis

donec et odio pellentesque. Eu mi bibendum neque egestas congue quisque egestas diam. Quam

lacus suspendisse faucibus interdum posuere lorem. Quam id leo in vitae. Ut faucibus pulvinar

elementum integer enim neque. Id ornare arcu odio ut sem nulla pharetra diam sit. Molestie ac feugiat

sed lectus vestibulum mattis. Ipsum nunc aliquet bibendum enim facilisis. Euismod nisi porta lorem

mollis aliquam ut porttitor.

Iaculis nunc sed augue lacus viverra vitae congue eu consequat. Gravida neque convallis a cras.

Nunc scelerisque viverra mauris in aliquam sem. Non odio euismod lacinia at quis risus sed vulputate

odio. Purus faucibus ornare suspendisse sed. Turpis egestas maecenas pharetra convallis posuere

morbi. Nec feugiat nisl pretium fusce id velit ut. Nunc congue nisi vitae suscipit tellus mauris a diam.

Posuere sollicitudin aliquam ultrices sagittis orci. Urna nec tincidunt praesent semper. Turpis nunc

eget lorem dolor sed viverra.

suspendisse sed nisi lacus sed viverra tellus in. Mauris cursus mattis molestie a iaculis at erat

pellentesque adipiscing. Volutpat diam ut venenatis tellus in metus vulputate. Eu consequat ac felis

donec et odio pellentesque. Eu mi bibendum neque egestas congue quisque egestas diam. Quam

lacus suspendisse faucibus interdum posuere lorem. Quam id leo in vitae. Ut faucibus pulvinar

elementum integer enim neque. Id ornare arcu odio ut sem nulla pharetra diam sit. Molestie ac feugiat

sed lectus vestibulum mattis. Ipsum nunc aliquet bibendum enim facilisis. Euismod nisi porta lorem

mollis aliquam ut porttitor.

Iaculis nunc sed augue lacus viverra vitae congue eu consequat. Gravida neque convallis a cras.

Nunc scelerisque viverra mauris in aliquam sem. Non odio euismod lacinia at quis risus sed vulputate

odio. Purus faucibus ornare suspendisse sed. Turpis egestas maecenas pharetra convallis posuere

morbi. Nec feugiat nisl pretium fusce id velit ut. Nunc congue nisi vitae suscipit tellus mauris a diam.

Posuere sollicitudin aliquam ultrices sagittis orci. Urna nec tincidunt praesent semper. Turpis nunc

eget lorem dolor sed viverra.

lacus suspendisse faucibus interdum posuere lorem. Quam id leo in vitae. Ut faucibus pulvinar

elementum integer enim neque. Id ornare arcu odio ut sem nulla pharetra diam sit. Molestie ac feugiat

sed lectus vestibulum mattis. Ipsum nunc aliquet bibendum enim facilisis. Euismod nisi porta lorem

mollis aliquam ut porttitor.

Introduction

In school, we are taught that nouns are a fundamental backbone of the English language. Similarly, the web3 incarnation of Nouns is building important primitives for the space. It is a protocol for cultural growth and governance that becomes a blueprint for future teams to follow and use. This makes it one of the most exciting projects today. It is thriving.

Consider:

  • Every single day, without fail, there is someone who buys a Noun for a 6-figure sum of money

  • There is 26,000+ ETH ($36M) in the Nouns treasury, fully controlled by its members

  • Nouns has named a newly discovered species of the frog after it

Nouns is an open-source brand where anyone can build whatever they want. It’s an experiment on how to scale a brand in the fastest way possible. Nouns celebrated its 1st anniversary earlier this month, a major milestone: it was started a year ago by a group of 10 founders led by punk4156.

3 key components underpin Nouns:

  1. Daily auctions for Nouns

  2. DAO governance using NFTs

  3. An open protocol: CC0 and Intellecutal Property (IP) in the public domain

Each of these 3 components is crucial to the magic behind Nouns, a virtuous cycle between the Nouns brand and the DAO treasury. The treasury funds initiatives that grow the cultural value of Nouns, which in turn lead to demand and growth of treasury through the daily auctions. It’s a beautiful mechanic when it works right.

Daily Auctions & Treasury

Brand value is intangible and difficult to quantify, but I have included a simple model in the charts below. Here we assume an exponential brand growth curve for a successful project.

In a typical PFP distribution model (e.g. Bored Apes), all 10,000 NFTs are released into the market at once, at the same price, during the mint. This rewards early entrants, who can resell to late buyers for a tidy profit if the project takes off. There has been a large gap between the NFT supply and actual brand value for a long time. The result? Significant price volatility since most of the value is highly speculative. It takes time for teams to execute on their community, marketing, and product roadmaps.

With the daily auction economic model, however, the NFT supply starts from a tiny base and expands at a predictable rate. In the Nouns daily auctions, one new noun is auctioned away every 24 hours with 100% of auction proceeds going into the treasury. 1 out of every 10 nouns goes to the founding team as compensation.

This aligns token inflation more closely with the growth of the brand over time and reduces the supply-brand value gap. Plus, it provides breathing space for a tight-knit community to emerge. It will take 27 years for Nouns to reach the same 10,000 supply as CryptoPunks or Bored Apes.

Daily auctions are also an experiment in an equitable method of on-chain NFT distribution. It allows everyone the same opportunity to enter the ecosystem at any point in time — whether you found the project a year ago or just heard about it today. There are no allowlists or gas wars.

Other notable features of the daily auction model include:

  • Constant dilution of % ownership for holders. This matters because every Noun has governance rights to the DAO treasury. The dilutive effect reduces over time as the total number of Nouns (denominator) increases.

  • Difficult to implement a trait rarity system (which may be crucial for certain projects), since the scarcity of traits changes over time.

  • A tiny initial community that takes time to grow. This can be a limiting factor in overall attention and interest.

Remarkably, the daily demand for Nouns has remained strong and consistent for over a year. This is despite major fluctuations in cryptocurrency prices during this period. Auction closing prices have been slowly climbing up over the past year, now hovering around 100E.

This has funded the treasury, which sits on 27,100E, equivalent to $52M at today’s prices. Because the treasury is held entirely in ETH and staked ETH (stETH), it has been significantly affected by the drop in ETH prices. The all-time high value of the treasury was in April this year, where it was valued at almost $80M.

It is a hard lesson. Treasury management and diversification are essential areas for consideration. This is especially relevant because many grants involve spending in dollar terms.

DAO Governance Using NFTs

The daily auctions interplay very closely with DAO governance. One major reason for sustained buyer demand in the daily auctions is because every Noun has an equal, proportionate governance right to the treasury. 1 Noun = 1 Vote. If we break it down simplistically, every Noun controls ~66E worth of treasury funds today.

What do the Nouns intend to do with the treasury? The current prerogative is to experiment, take risks, and fund initiatives that have a positive impact on the brand.

Let’s look at the ownership and voter structure. Voting power is well-distributed, with almost half of all votes held by Nouners with just a single Noun. 6 wallets have more than 10 Nouns, of which one is the Nouns DAO treasury wallet. If we exclude that, <20% of voting power is concentrated with large ‘whale’ owners. This is an effect of the daily auctions, a system that dilutes ownership over time. As the daily auctions continue, we expect the number of single owners to increase over time.

This can be seen as an improvement over other DAOs where governance power is highly concentrated in a few groups of people. In such cases, collusion and corruption become quite possible especially when there are economic incentives to do so. Most token-economic models are already established at the beginning of the project, making governance power very difficult to re-distribute (there will be a lot of resistance from existing holders).

On-chain transparency is another highlight of this governance model — there is no hidden ownership or upcoming unlocks. Compared with fungible governance tokens, it is much harder to hide your allegiances and intentions during voting with a small number of unique NFTs that do not change hands often. Your NFT’s voting history is visible to all.

There are a few ways to obtain funding from the Nouns treasury:

On-chain proposals

All Noun owners can submit an on-chain proposal that details the plans and funding required. The proposal will be subject to a majority vote to determine if it passes. Funding is directly released if so. A quorum of at least 10% of the total votes is required.

There have been 128 on-chain proposals so far, of which 102 have been successful (80% acceptance rate), with 13,843E allocated and spent.

Voter participation rates are very high, with 20 – 40% of owners voting on every on-chain proposal. This is 5X greater voter turnout than other DAOs (typically <10% votes). This metric can be a good indicator of the underlying health of a DAO. Low participation rates are a significant problem in DAOs because it means that a small percentage of votes (10 – 20%) can lead to major decisions.

Reasons for high voter participation rates in Nouns DAO include:

  • Ownership of the NFT as a PFP makes owners feel more invested in the DAO

  • Tight & cohesive community

  • Filtering mechanisms ensure that proposals that get to the voting stage have met a minimum quality threshold.

Highlights of the top 3 funded proposals so far:

  1. Nouns Around Town (609E): A comedic documentary film about the story of Nouns DAO and the journey to get Nouns featured in the 2023 Pasadena Rose Parade. This has an expected audience of 22M people in the US & globally. A large part of the funds will be used to build a float and 6 life-sized Nouns costumes.

  2. Nouns x Fitz Frames Prescription Subscription (550E): A program that includes visiting schools, doing eye exams, and dispensing spectacle subscriptions to kids-in-need. The aim is to cover 3,000 kids over 1 year.

  3. Protocol Guild Pilot (500E): Funding Ethereum public goods and protocol development through a collective of protocol contributors which maintains an on-chain membership registry

As of Jul 22, there have been 31 large on-chain proposals with funding requests >100E that have been passed. They fit into one of the following categories:

  • Branding & Marketing (36% of passed proposals >100E): Sponsorship of esports teams, animated video, Nouns clothing, comics, etc.

  • Internal Ops & Product (19%): Governance tools, stipend for core contributors

  • Charity & Public Goods (16%): Gitcoin grants, Ukraine donations, Ethereum public goods

  • Grant Funding (13%): Funding approval for smaller Nouns grant committees

  • New Product Lines (13%): Nouns luxury sunglasses, mental wellness app, Nouns coffee

  • Investment (3%): Equity investment in startups

Many grants make use of Nouns IP to create and commercialize new products (e.g. coffee, sunglasses), yet interestingly there is usually no expectation for the revenue generated to go back to the DAO. Nouns wants to be the go-to place for creative entrepreneurs: anyone starting a business can consider leveraging Nouns’ IP & obtain seed funding. The core belief is that all these projects will expand the Nouns brand value — the top priority — and lead to more treasury revenue indirectly through the daily auctions.

As we have seen in other DAOs, on-chain proposals have significant challenges. They require committed and active contributors. It is a heavy lift to get a proposal off the ground: ideation, finding an eligible proposer, canvassing for votes. As the rate of proposal submission grows, it would be unreasonable to expect all members to read and participate. Scalability becomes a problem, which leads to…

Prop House

Prop House is an experimental new approach to capital deployment: an auction of ETH where the bids placed are proposals that anyone can submit. At the end of each auction, Noun owners & appointed communities vote on which proposal gets funded. This promotes competition & prioritization of proposals, rather than the traditional Yes-No approach.

Two key effects of Prop House:

  • Forcing treasury spending. Since there is usually inertia to spend treasury funds while the treasury is growing daily.

  • Minimizing friction for proposals, allowing the proliferation of new ideas not limited to Nouns owners, and making it easier for anyone to launch an idea.

Prop House was launched in March 2022. It has been pivotal in supercharging ideas and spending. Since its inception barely 4 months ago, there have been >350 proposals submitted for funding, with voting done on a regular cadence. We expect this to continue growing quickly.

Prop House represents a more scalable way for capital deployment since it does not require a full vote by Nouns members who may not have time to go through every proposal. Instead, part of the responsibility is delegated to various Nounish communities. While it has been mostly used for small grant requests, the scope of Prop House will likely expand as it shows success as an efficient capital deployment mechanism. Several other communities, such as Lil Nouns & mfers, are already using Prop House as a funding mechanism.

Small Grants Committee

This is an appointed committee that manages the small grants fund and makes decisions on smaller funding requests. No on-chain voting is carried. Most of the discussion for small grants happens on Discord.

An Open Protocol: CC0 & Public Domain IP

The third pillar that underpins Nouns is that its art, along with its smart contracts, are in the public domain. This means that anyone can use and commercialize it without requiring permission or a license from Nouns DAO. Nouns DAO champions the use of the CC0 (Creative Commons 0) framework for public domain IP. Hence, we can think of Nouns as a protocol, which is open for others to build upon.

Let’s not forget the art. The essence of Nouns culture is distilled and captured in the art, which sets it apart from investment DAOs. These are 32×32 pixel characters that are highly memeable. There are no defining rarities for the Nouns and the traits for each new Noun are entirely random. The squarish Nouns glasses are the most visually recognizable feature of Nouns, a cultural artifact on its own.

Since its inception, many projects have been modeled off Nouns. Some are simple derivatives of the artwork (e.g. Fast Food Nouns), while others are more serious implementations of the daily auction and/or DAO governance mechanics. Packy outlines the concept of “DAO forking” in his article Go Fork Yourself: “positive sum forks that accrue value back to the original token and brand”. If this holds true, the more forks there are, the more valuable Nouns becomes.

Today, there are at least 85 related “forks” in the Nouns ecosystem. A few notable projects include:

  • Lil Nouns: 15-minute auctions with a separate treasury and governance but also contributing to Nouns. A “testnet” for Nouns, as prominent Nouns contributor Brian Flynn puts it.

  • JokeDAO: started as a Nouns fork, now evolved into a platform for creating & running contests and minting voting tokens.

  • SharkDAO: a sub-community that collectively owns 5 Nouns and participates in Nouns governance.

The Path Ahead

Nouns are an evolving experiment in 2 major web3-aligned concepts: DAO governance & CC0. It has achieved initial success that is worth celebrating. Every single day, a Noun is sold for a 6-figure sum. The DAO controls a very sizable treasury.

The mechanisms built into Nouns solve for capital formation, but capital allocation and coordination remain a challenge. This is an existential issue for Nouns: fragmentation of efforts and project funding can lead to mediocre results. Squandering funds on projects with little or no ROI is a real risk. 

Hence, measurement of results is crucial. Two simple but important metrics provide an indicator of the success of the Nouns experiment:

  1. Daily auction settlement price: Price fluctuates because of the tension between 2 opposing forces: downward pressure due to inflation & dilutive effect, and upward pressure from an increase in brand value & demand. The direction of price movement indicates which forces are winning out.

  2. Number of “soft forks”: Good forks accrue value back to the original token & brand. The more the merrier.

Other challenges ahead include:

  • As the DAO grows, can community members stay aligned with their vision? Divisiveness can lead to paralysis and poor decision-making.

  • General apathy and limited public interest: the nouns community is small today and the price of entry is high. After another year of auctions, there will be another 365 new Nouns owners, at most.

Ending Thoughts

Nouns sees itself as a playground. A sandbox to test out various brand-growing ideas quickly without being constrained by traditional mindsets. A grand experiment in CC0, to see what the community can build with the IP, and how it can proliferate the Nouns brand across the internet and the world. Would this produce better results than projects with a focused strategic direction and artistic vision, led by an experienced “Chief Brand Officer”? I am optimistic about this open approach, although only time will tell.

The people I’ve encountered within the Nouns ecosystem are some of the most passionate and brightest people in the space, willing to think outside of the box. A thousand possible paths lie ahead for Nouns, but I believe Nouns will be trailblazers and pave the road for others to follow.

Create a free account to continue reading

Go Pro at 40% off

Immediately access the entire catalog of research for Delphi, Office Hours & private Discord