NFTs, like fungible tokens, offer a wide range of applications and advantages – they represent digital property rights and may be used to transfer ownership to users. They may be utilized for fundraising, marketing, and administration. NFTs, on the other hand, are often the goods themselves, as opposed to fungible tokens, which collect value from things but do not produce value directly – see Fidenzas, CryptoPunks, and music NFTs.

As a result, the token distribution methodology becomes an even more important aspect in deciding an NFT project's success (or failure). Token distribution models reflect supply and should be created with predicted demand in mind. If supply and demand are in balance, prices might remain steady or rise. There will be a lot of price fluctuation and anger in the community if there is a large mismatch between supply and demand.

The most terrifying time for NFT projects is often the debut. It entails both putting the NFTs into the hands of the proper people (users rather than speculators) and generating cash to realize the founder's goal. A failing mint results in lost momentum and low morale. As a result, it is critical for teams and investors to research and understand the various distribution models in order to have the highest chance of success.

Overview of the NFT distribution models landscape

NFT teams have been experimenting with various distribution schemes over the last 2-3 years. Some models are straightforward to grasp, while others are more complicated (e.g., VRGDA). This is a critical component of NFT "tokenomics" for many reasons:

Building a lively, engaged community is typically a major priority for NFT teams, so getting the NFTs into the hands of the appropriate individuals who believe in the vision or are active contributors is critical.

Because NFTs are often utilized as a fundraising technique for growing teams, teams have the incentive to boost their selling price. However, maximizing price means limiting the community's potential upside and increasing the likelihood of a "death spiral" in floor pricing. It is often assumed that the strongest communities are formed by making everyone in the community wealthy (e.g., BAYC).

Because NFTs are so diverse, there is no one-size-fits-all distribution model. Some considerations for model selection include the following:

What is the initial supply going to be? A greater supply implies more potential cash raised and NFT owners, but it may be more difficult to sell out. It is critical to evaluate market demand.

Will the supply be constant or variable? Unlike ordinary mints, daily auctions or progressive Dutch auctions let the supply rise at a set pace over time.

Is fundraising a primary goal? Dutch auctions are designed to maximize price discovery, while free mints do not generate any revenue.

Let's take a high-level look at today's NFT ecosystem before delving into each distribution model in depth.

Source: Delphi digital

We examined the top 100 NFT projects based on the 30-day volume between December 9th, 2022, and January 9th, 2023. The table above displays the top ten projects from the 100 we assessed to give you a sense of what was featured.

We concentrated on Ethereum projects since they now account for the bulk of trading volume and liquidity. While this sample reflects just a small part of all NFT projects (estimated at 100,000+), we feel it represents the bulk of current interest in NFTs. This data may be used to discover a variety of patterns worth addressing.

The majority of the top NFT projects (60%) in our sample were started using a regular minting method – a set supply and fixed price per mint, generally with some type of allowlist. 25% were free mints handed out to early registrants or airdropped to owners of existing NFT collections (e.g., RTFKT's MNLTH).

Standard mints and free mints are simplistic NFT distribution models that lack the flexibility and benefits of more advanced distribution models. This shows that we are still in the early stages of NFT development.

We discovered that the median mint price for initiatives launched via Dutch auctions in our dataset was 1.5 ETH. The remaining projects launched via Dutch auction were PFPs (such as VeeFriends, Azuki) and membership passes, with more than half of them being art-related (e.g., Art Blocks Curated, RarePass, QQL Mint Pass) (PROOF). Standard mints' median mint price was substantially lower, at 0.08 ETH (range: 0.005-5.3 ETH).

There might be many explanations for this, including

Dutch auction projects tended to be high-demand, limited-edition ventures.
Based on demand, Dutch auctions aim for the highest possible mint price.
It should be noted that the figure does not account for differences in supply size, which would almost certainly have an impact on mint prices.
Many of the best NFT collections have collection sizes ranging from 8,000 to 10,000. This is due in part to the following:
In order to seed an initial community, the team and community desire a somewhat substantial collection size. It might be difficult to acquire momentum and develop brand recognition if the community of holders is too tiny.

While this is an intriguing reference point, we would want to emphasize that teams should adjust their supply to the predicted size of their audience/users as well as the intended usefulness of the NFT. Art NFTs, for example, will often have a lesser supply since mint originality is vital. In-game NFTs, on the other hand, may not need to be substantially distinct (e.g., Axies). Rather, they often demand a sufficient supply to feed all of their future participants.

Fixed-Supply NFT Distribution

Standard Mints

A regular mint has a defined price and a predetermined quantity of NFTs to sell. Prior to the mint, the public is aware of this. Initially, teams would start a public mint on a first-come, first-served basis. This resulted in gas battles and a high incidence of botting during popular project mints.

Teams nowadays often use a whitelisting method to identify and reward engaged community members. Whitelisted members get a guaranteed mint and may occasionally mint for less or even for free. Based on how much of the supply is allotted to the whitelist, there may or may not be a public mint.

PREMINT is a well-known allow listing service that is utilized by several notable NFT projects.

Source: Premint

PREMINT is a prominent service provider that allows NFT teams to simply create allowlists and hold public lotteries for allowlist positions. According to the website, it has handled 30,000+ projects and received over 50 million registrations from 3.5 million unique wallets.

Benefits of Standard Mints:

Users will find it simple to grasp.
The whitelist procedure allows the team to choose and have direct control over who is admitted to the owner community.
Immediately available money for the Treasury.
So far, the most prevalent distribution model. Standard minting contracts have been battle-tested and optimized. Azuki, for example, pioneered ERC-721A, which enables considerable gas savings for batch minting of NFTs.

Standard mints have the following disadvantages:

The mint price must be determined and established in advance. This may be problematic since estimating demand before the mint to identify an ideal pricing point is tough. Founders often establish an arbitrary mint price based on previous successful mints. If they set the price too high, not many individuals will mint, while setting the price too low would result in speculative trading and less money collected.
Another reason it is difficult to establish a fixed price upfront is that there are no valuation measures for NFTs; therefore, it is generally based on social proof. Minters who are interested in a project sit on the sidelines until important influencers mint it or the initiative begins to show indications of minting out.
A variety of initiatives have tried, with varied degrees of success, to tackle the price problem. Valhalla, for example, had a presale of 500 NFTs (which were locked for three months after mint) for 0.25 ETH, where bidders could express their interest. It was significantly oversubscribed, with substantial bids from key influencers, giving the team confidence that there would be adequate demand for the main mint at that price. It then went on to mint out at 0.35 ETH.
Post-mint is driven by a huge, abrupt rise in supply with low demand.
Gas wars may erupt when demand is overestimated and vastly surpasses supply. Much value is wasted on miners/validators rather than holders and the team. This is incredibly wasteful and the number one stumbling block for NFT teams. For example, Ethereum gas prices rose to nearly 10,000 Gwei during the Otherdeed auction in May 2022, which was a fixed-price, over-allocated whitelist mint. This resulted in almost 55,000 ETH in gas burnt from the mint alone, valued at $157M at the time.

Standard mints are the most basic distribution mechanism and may be used for NFT projects in all industries, including digital collectibles and fixed-price products. We anticipate that many initiatives will continue to raise funding using this technique.

Successful projects started using standard mints include:

Bored Ape Yacht Club
Doodles
Moonbirds
Tim Ferriss’ Cockpunch

Free mints

Free mints are often used as

A current NFT community receives a free airdrop.
A new project trying to swiftly bootstrap a community.
A promotional item or a sign of gratitude.

Except that the price is zero, the distribution process is identical to that of regular mints (allowlist or public mint). This implies that teams do not utilize them as fundraising tools. Despite the fact that they are free, free mints may command exorbitant prices, notably those in (1) and (2). (2). DigiDaigaku, BAKC, and MNLTH have all hit thousands of dollars in floor costs.

An intriguing tendency is that free mints have large royalties and depend on them as a source of revenue. The creator royalty for DigiDaigaku is 10%, whereas The Potatoz by Memeland is 9%. However, it is becoming more obvious that royalties are not a viable revenue model for NFT initiatives. Royalties may be substantial during the initial launch and excitement period, but they nearly invariably diminish over time as the focus shifts to the next major announcement.

Limit Break has been a staunch supporter of the "free-to-own" notion, in which genesis NFTs are given away for free in exchange for the ability to generate additional products as "factory NFTs.

Benefits of Free Mints:

In theory, they lower financial barriers to entry and may be more democratizing.
They are often the quickest approach to establishing an initial community and users.

The disadvantages of free mints are as follows:

If information about the launch is not well guarded or the allowlist is not adequately maintained, insiders may mint all of the NFTs and sell them for greater prices on the secondary market. As a consequence, the average user would still have to pay the price to access it.
Despite the fact that no money is generated, the team is often expected to produce value for the NFT.
If the team is not already well-funded, there is a greater likelihood of failure.

Free mints are a flexible NFT distribution mechanism that may be utilized for a variety of reasons (e.g., a budding artist sharing some of his early work). Expectations are lower, and there is less conflict between the team and the community since there is no cost to the user other than gas expenses. Free mints are also appropriate for well-funded initiatives that do not need funding from the mint.

One of the most effective applications for free mints is in gaming, where free NFTs are sent to participants ("starting pack") and may be used as a motivator to encourage users to play the games. Because there is no money involved, free mints may allow teams to avoid Apple's 30% levy on in-app sales in mobile applications.

Here are some examples of successful free mints:

DigiDaigaku
The Memeland Potatoz
The Boring Ape Kennel Club (airdrop)
CryptoPunks
Rektguy

Dutch Auctions

In Dutch auctions, the price of an NFT begins high and gradually decreases over a certain period of time until the lowest feasible price is attained or all tokens are sold out. Everyone pays the same ultimate price in various Dutch auctions (fair Dutch auction or last price Dutch auction). Others charge various rates based on when the transaction was made.

In a normal Dutch auction, prospective bidders begin by standing on the sidelines. There will be relatively few mints until the price goes low enough to achieve a demand tipping point. Then, a large number of bidders arrive, causing FOMO among the remainder, who swiftly put in bids, causing the auction to sell out. The majority of Dutch auctions are accessible to the public, while some have an allowlist.

There are several tactics for engaging in a Dutch auction, which makes it appealing to game theory enthusiasts. One method is to forecast the price level at which it will mint out and begin purchasing shortly before it reaches that level. This gives you the opportunity to make several purchases before the collection sells out. Another technique is to use Etherscan to keep a close eye on the contract address — if there are a large number of pending transactions/bids, rapidly put a bid with a high gas price and hope the transaction gets through.

The Benefits of Dutch Auctions:

Unlike traditional mints, there is no need to set a price in advance. Instead, a pricing range is established.
They are a very efficient technique of fundraising since they allow for price discovery based on market demand.

The disadvantages of Dutch auctions are as follows:

While they strive for the best price, this may be a double-edged sword. High pricing may provide less opportunity for future price increases.
They have the potential to generate emotional purchases/FOMO towards the closing of the auction. These individuals may later feel the buyer's regret and sell for less than their acquisition costs.
When the auction is available to the public, botting might be an issue. Many Art Blocks Curated collections demonstrate this. Skulpuur, for example, sold out rapidly
at 5 ETH during its Dutch auction owing to bots. Within a week, the floor price had dropped below the mint price.

Dutch auctions are appropriate for collections when the demand for NFTs considerably outnumbers the supply. They are often used to sell limited-edition NFTs by well-known artists and creators. It should be noted that Dutch auctions are not a cure for low-quality projects and will still fail if there is insufficient demand.

Here are some examples of successful Dutch auctions:

Curated sets of art blocks
Azuki
Mint QQL Pass
RarePass from SuperRare

Dynamic-Supply Distribution

Daily Auctions

One NFT is auctioned off at a defined time period indefinitely under the daily auction paradigm. Unlike fixed-distribution models, the collection's supply grows linearly over time. Nouns pioneered daily auctions, in which one Noun is auctioned off every day. While we use the phrase "daily auctions" for convenience, they may be tailored to any timetable (e.g., one auction per hour).

The Benefits of Daily Auctions:

They are more egalitarian since they allow anybody to join the community at any moment, whether they discovered the project a year ago or just learned about it today. There are no gas wars or allowlists.
There is little supply-brand value-demand discrepancy. Rather than starting with a large supply, this approach enables the supply to expand as teams execute their community, marketing, and product roadmaps.
Because the treasury expands over time from everyday sales, it is a significant tool for long-term capital building. Nouns have amassed about 28,000 ETH in its treasury during the last year.

The disadvantages of daily auctions are as follows:

The owner community begins modestly and expands gradually.
Constant inflation with no supply constraint may dampen prices, particularly during tough times when demand is low. In the current bad market, nouns have been a victim of this, with daily auction values plummeting below 35 ETH (down from 100 ETH in the middle of 2022).
It is difficult to build a fixed-rarity/trait system because trait scarcity varies with supply increase over time.

With the introduction of Nouns Builder, Nouns has made it simple for teams to fork and implement their daily auction model. So far, Nouns Builder has been used to construct 66 NFT projects, averaging 2-5 projects each week. This methodology is ideal for DAOs and decentralized initiatives that value community quality and are willing to expand at a slower pace. We anticipate that the Nouns auction concept will be used by more decentralized teams in the coming months.

Variable-Rate Gradual Dutch Auctions & Gradual Dutch Auctions

The normal Dutch auction has the disadvantage of taking place over a short period of time. There may not be enough timely purchasing demand to complete the transaction, or the price obtained may be suboptimal.

Enter the gradual Dutch auction, which divides an NFT sale into a succession of discrete Dutch auctions. In such setups, teams may use Dutch auctions to sell tokens that are issued at a consistent rate (e.g., 15 tokens per hour). Each Dutch auction begins at a greater price than the preceding auction. This essentially extends the NFT's selling period, giving the market more time to find purchasers. While conceptually intriguing, we are unaware of any NFT projects that have successfully implemented this in reality.

Gradual variable-rate Dutch auctions (VRGDAs) are a variation on the GDA that allows you to issue NFTs using almost any supply model/graph while still enabling customers to acquire them at any time.

Source: Paradigm

The price of the NFT in VRGDAs changes based on how much the number of mints has strayed from the predicted token supply at the moment. More mints produced ahead of schedule equals a higher price and vice versa.

For example, if 100 NFTs were predicted on day five but only 120 were minted, the price would be high. If no one mints, the price will eventually return to the baseline and may even fall lower if the actual number of mints falls below the planned issuance.

The Paradigm team created VRGDAs, which are currently an experimental idea. Only a few ventures have begun in this way, and none have achieved significant success. Art Gobblers is the most visible project using a VRGDA mechanism, and it demonstrates how this may work in practice.

Art Gobblers were released in November 2022 with an allowlist-free mint and a quantity of 2,000. It was intended to produce a maximum of 10,000 NFTs during a ten-year period. GOO, a fungible token used to mint new Art Gobblers, is also emitted by Art Gobbler NFTs. At any moment, anybody may create an Art Gobbler. However, the mint price (in GOO) varies according to the number of mints, as dictated by the VRGDA mechanism.

The total number of new mints follows a pretty smooth curve that is close to the intended supply timetable. In this regard, the VRGDA mechanism has done its job and behaved as planned.

There was, nevertheless, substantial price fluctuation. Despite being a free mint, demand outpaced supply at the launch, forcing prices to surge as high as 20 ETH. As a result of FUD concerning one of the founders, as well as the awareness that individual holders were at a disadvantage versus GOO-mining cartels (where users pooled their Art Gobblers to mine GOO at quicker rates), values began to fall.

The addition of a fungible token and farming function to the VRGDA model meant that users were optimizing for yields rather than the project's initial goal of promoting artists and art collections. This sparked a frenzy of conjecture similar to a new DeFi yield farming operation.

Benefits of VRGDAs:

More freedom in designing the supply inflation model. Instead of only a linear function, NFTs may be produced at a rate proportional to the square root of time.
An NFT may be purchased by anybody at any time. There are no restrictions.
The VRGDA mechanism "forces" the actual number of mints to increase in line with predicted supply inflation over time.

VRGDA disadvantages:

VRGDAs are complicated and might be challenging to explain to consumers.
Because time is crucial, they have a game theory component. The best moment to enter is when there have been no mints for a while, and the price is at the local trough.
Even if supply inflation follows the predicted model, price volatility may be severe.

VRGDAs are appropriate for NFT projects that need more control and flexibility over their supply curves. This includes both game projects and ones having a DeFi component. We expect that as the use cases for NFTs get more complex (beyond art and collectibles), more teams with unique products will utilize the VRGDA mechanism to onboard new community owners and establish recurring income streams.

Notable Less Common Distribution Models

Liquidity bootstrapping pools: These are fair-price discovery tools for fungible tokens comparable to Balancer LBPs. NFTs are sold over a certain length of time utilizing a liquidity pool under this strategy. The mint price begins high and gradually decreases. In contrast to Dutch auctions, the mint price rises with each successive mint. Buyers may opt to buy NFTs when the pricing is right for them. LBPs have the benefit of being more resistant to minting bots and snipers – bots that purchase at the top when the auction begins will lose since each buy raises the price, making it more difficult to acquire big volumes at once.

Fjord Foundry is the primary source of LBPs for NFTs. However, utilization has been limited, with just four NFT projects launched via its LBPs thus yet. Anyone may simply generate a fair NFT drop using Fjord on their website.

Ranked Auctions: Everyone enters bids with the greatest price they are willing to pay in ranked auctions. The top X bids (where X Equals supply sold) win at the conclusion of the bidding session. In the end, all successful bidders pay the same sum.

Source: Metadrop

Webaverse's ranked auction bid distribution. It ended with a closing price of 0.45 ETH. Metadrop is the source.

Several NFT projects have been established using ranked auctions, including the following:

RaidParty
Loomlock Wassies
Anata
Webaverse
Gangster All-Stars
Genesis Doodles Box

Unfortunately, all of them are now priced below their mint values. One explanation might be that ranked auctions cause intense FOMO and passionate bidding. There is generally a bidding battle towards the end as purchasers raise their offers in an attempt to meet the cutoff. Buyers are often at a disadvantage in ranked auctions since they do not know how much they will pay for the NFT until the end and must enter the highest feasible price.

Ranked auctions, on the other hand, maybe an effective fundraising technique for teams trying to optimize their selling values.

Open Editions: There is no supply limit with open editions. Anyone may mint an open edition during the open period, which might be a few minutes, a day, or forever. Open edition collections are often released by artists and photographers.

Among the most well-known open edition sets are:

Pak's Merge
Max Pain and Frens of XCOPY
The First Day of DrifterShoots

Open editions are ideal for artists who want to reach as many collectors as possible without worrying about supply constraints. However, popular open editions with a huge supply tend to suffer on the secondary market in terms of pricing. This is because there are fewer possible purchasers after the transaction since most will have already minted. Furthermore, all of the things in an open edition are identical, with no rarities, making them less appealing to traders.

Some artists, such as Lascaux, have used burn mechanisms to offset this and restrict the availability of their open editions over time. As an example, you could burn three open edition NFTs to acquire a different artwork NFT. There is a game theory aspect since the rarity of each collection is determined by how many individuals opt to burn their NFTs.

Conclusion

We discussed the most prevalent models for NFT distribution and emphasized their advantages and disadvantages. This is by no means comprehensive, and other, more innovative methods of delivering NFTs will be developed. NFT teams should be very deliberate when creating their distribution models since they are exceedingly difficult, if not impossible, to change once they are live.

The ideal match for any project is determined by its aims and requirements, whether it is for fundraising, community seeding, or marketing. Instead of solely optimizing for the price, we prefer distribution methods that concentrate on getting NFTs into the hands of consumers (rather than speculators) while striking the correct balance between value capture for the team and community members.

We anticipate a transition from simpler models (standard mints) to more complex, gamified distribution schemes that can closely match supply and demand. Meanwhile, observers may make better predictions about NFT pricing by knowing the supply dynamics of alternative distribution models and overlaying them on top of the anticipated demand curve.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

A deep analysis of NFT distribution models