Ethereum Founder Vitalik Buterin on Yuga Labs' 'Otherdeed for Otherside' NFT Sale
Last night, Yuga Labs sold out its 55,000-edition Otherdeeds NFT collection sale (total collection size expected to be 200,000) amid an historic gas war. More than 54,000 ETH was burned during the event, which is roughly equivalent to $150 million at the time of writing.
Twitter timelines filled with controversial statements about Yuga Labs' decision to avoid a Dutch auction or raffle, how the team's mint contract wasn't optimized, the team allowing two NFTs per wallet instead of one, and much more.
Responding to the criticism, Yuga Labs posted a Twitter thread about the unprecedented demand, how Yuga Labs needs its own chain to scale, and refunds to those who had failed transactions during the mint process.
"We know that the Otherdeed mint was unprecedented in its size as a high-demand NFT collection, and that would bring with it unique challenges," the team said. "The hope was that those challenges would be assuaged via a rigorous gating mechanism in the form of an on-chain [know-your-customer verification], a max mint of two per KYC'd wallet, and a significant clearing price at 305 ApeCoin (~$6,600)."
"It seems abundantly clear that ApeCoin will need to migrate to its own chain in order to properly scale," the team continued. "We'd like to encourage the DAO to start thinking in this direction."
"We are aware that some users had failed transactions due to the incredible demand being forced through Ethereum's bottleneck," the team concluded. "For those of you affected, we appreciate your willingness to build alongside us - know that we've got your back and will be refunding your gas."
We wanted to say a few words about the mint tonight. 🧵— Yuga Labs (@yugalabs) May 1, 2022
For some, this still doesn't explain the lack of contract optimizations.
Cygaar, one of the developers for the popular NFT project Azuki, posted on Twitter about how he rewrote the contract with ERC721A and other small changes and reduced gas by 50 percent.
"The changes made [include] removing non-mint related code just for testing purposes, changing to ERC721A, and making mint price a constant 305," he tweeted. "[There was a] 50 percent reduction just by doing this. We can shave off a good amount more by making further changes to the contract."
Alright, one last post from me regarding the @OthersideMeta drop. I rewrote the contract with ERC721A + small changes and was able to mint 2 tokens for 199k gas. So 50% reduction in costs and there's even more optimization to be done.— cygaar (@cygaar_dev) May 1, 2022
More details below:
But perhaps it isn't quite that simple.
Jesse Friedland, one of the developers for another popular NFT project Cryptoon Goonz, posted on Twitter about how ERC721Enumberable is the only solution for a non-sequential mint of this magnitude.
But What Does Vitalik Buterin Think?
Technicalities aside, Ethereum co-founder and figurehead Vitalik Buterin stepped in to offer his advice.
"[I] don't think optimizing the contract would help," he wrote on Twitter. "Regardless of contract details, [the] transaction fee goes up until [the] list price and transaction fee equal market price. If gas usage per purchase decreased two times, the equilibrium gas price would have just been about 12,000 gwei instead of 6,000."
In other words, even with contract optimizations, the gas war would have ended up burning the same amount of total ETH (in USD) because that is the market-clearing price.
Don't think optimizing the contract would help. Regardless of contract details, tx fee goes up until list price + tx fee = market price. If gas usage per purchase decreased 2x, the equilibrium gas price would have just been >12000 gwei instead of 6000.— vitalik.eth (@VitalikButerin) May 1, 2022
In his "Alternatives to selling at below-market-clearing prices for achieving fairness (or community sentiment, or fun)," Buterin writes about NFT and token sales with below-market-clearing pricing, like this most recent Yuga Labs Otherdeeds NFT sale.
In contrast to Yuga Labs recent statement that "Dutch auctions are bullsh*t," Buterin suggests that when a seller doesn't know the market-clearing price, they should sell through an auction.
"Selling below market-clear price not only sacrifices revenue for the seller; it also can harm the buyers: the item may sell out so quickly that many buyers have no opportunity to get it at all, no matter how much they want it and are willing to pay to get it," Buterin writes. "Sometimes, the competitions created by these non-price-based allocation mechanisms even create negative externalities that harm third parties - an effect that, as we will see, is particularly severe in the Ethereum ecosystem."
A multi-billion-dollar company like Yuga Labs is probably aware of these downsides. But why did they sell with a below-market-clearing price anyway?
Buterin suggests three potential reasons for NFT projects in general to do so: fairness (or the illusion thereof), public perception of demand for the item being sold, and the likelihood of a post-launch item price increase.
Optically, it looks bad to price certain people out of an NFT drop. Keeping prices semi-affordable increases community sentiment (until the gas war).
"A particular concern is fairness and the desire to not lock poorer people out and not lose fans or create tension as a result of being perceived as greedy," Buterin notes.
Beyond perceived fairness, projects want to create FOMO (fear of missing out). That happens when a particular drop is highly hyped. Again, it's about public perception, not true demand (i.e. the true market clearing price).
"In addition to fairness issues, there are also the perennial arguments that products selling out and having long lines creates a perception of popularity and prestige, which makes the product seem even more attractive to others further down the line," Buterin explains. "Sure, in a rational actor model, high prices should have the same effect as long lines, but in reality long lines are much more visible than high price are. This is just as true for ICOs and NFTs as it is for restaurants."
And finally, projects want their NFTs to increase in price post-launch. This creates a second wave of FOMO that can lead to high royalty fees (see Moonbirds) and ultimately keeps buyers happy.
"The most basic rule of community sentiment management is simple: you want prices to go up, not down," Buterin writes. "If community members are 'in the green,' they are happy. But if the price goes lower than what it was when the community members bought, leaving them at a net loss, they become unhappy and start calling you a scammer, and possibly creating a social media cascade leading to everyone else calling you a scammer."
Yuga Labs certainly achieved the goals Buterin highlights.
Calling Dutch auctions "bullsh*t" creates perceived fairness within the community. It paints Yuga Labs as the hero, even though the auction turns into a gas war, which also prices out poorer people.
By allowing people to mint two NFTs per wallet, Yuga Labs created long lines, or FOMO. If Yuga Labs would have sold Otherdeeds NFTs for 7 or 8 ETH, the gas war likely isn't as bad and the perception of demand decreases.
And due to that perception of demand, the floor price of Otherdeed for Otherside is currently three times as high as mint costs (the true market-clearing price). Even with gas prices taken into consideration, it is at least double the cost of mint.
Holders will forgive the gas war as long as Otherdeed for Otherside remains in the green.
Will Yuga Labs update its method for the next NFT land sale? Only time will tell.