TL;DR
PaCo (Partial Common Ownership) NFTs are a modified ERC-721 contract where every NFT is always on sale at a price set by its owner.
- The owner sets a price for their own NFT and pays a Harberger-like fee, a Self-Assessed Fee (SAF), proportional to that price.
- This encourages every holder to price their token how they truly value it, eliminating holdouts and creating greater allocative efficiency.
- The fees collected from a PaCo NFT are a function of the project's overall value, as opposed to its volume, aligning incentives between holders and creators.
- The collected protocol fees can then be funneled to a multisig or DAO address.
Check out the protocol code for yourself 👇
Core Token Mechanics
PaCo tokens are always for sale: when bought, the buyer must set the price for someone else to buy it from them. The token owner can modify the price at any time.
What’s stopping someone from setting the price to a billion dollars?
The owner pays a Self-Assessed Fee (SAF) proportionate to the price they’ve set. The percentage is at the discretion of the deployer. Because this fee scales with the price set, it creates an incentive to price the token close to how the owner truly values it.
If they want to hold onto the NFT, the owner can set a higher price (incurring a higher fee). If they want to flip it, they can set the price closer to the floor and pay less.
How is the SAF collected?
The token owner posts a bond greater than or equal to a protocol-determined percentage of their self-assessed price. A small amount of their bond drips out every block to pay their SAF. The rate must be non-trivial to mitigate attack vectors explained later.
Where do the collected protocol fees go?
An address can be set at deployment. Whether this address is a multi-sig, a DAO, or the creator’s personal wallet is at the discretion of the deployer.
Every NFT should be in the hands of the person who values it the most.
PaCo ensures fair pricing for NFTs, creates deep sell-side liquidity, and eliminates holdouts.
What’s a holdout?
Let’s say a developer wanted to buy four contiguous plots of land in some metaverse; they buy the first three, but before buying the last, its owner catches wind of the developer’s intent and 10Xs their sale price. Because they have a monopoly over this asset, they can hold out until the developer pays their price.
With PaCo, the owner wouldn’t increase their sell price without incurring a higher SAF for themselves. Encouraging them to keep the land listed at the price they truly value it, a self-assessed price high enough at which they would be happy to sell, but not so high that they doubt it will.
An asset being in the hands of the person who values it the most — and can make the best use of it at a given time — is the crux of allocative efficiency. PaCo uniquely enables this by eliminating the manipulative pricing holdouts.
What’s the benefit of allocative efficiency?
No manipulative pricing means speculators can find and arbitrage mispriced NFTs more easily, creating a stronger sense of a collection’s holistic value versus just its floor price. In addition, being able to reason about prices at different tranches within a collection enables more accurate appraisal, potentially unlocking opportunities when composing code against a PaCo collection.
PaCo provides more stable DAO/creator funding and aligns incentives between holders and creators
Imagine a scenario where an NFT mints for a low price and hype builds in the first 48 hours, bringing massive volume. However, within a week, the volume crashes and does not return to its previous peak.
In this interval, the creators are enriched by the royalties reaped from volume and have a reduced incentive to continue growing their project. The holders, however, are hurt by this scenario because they want the project’s value to appreciate over time.
In a PaCo NFT, that initial pump would not enrich the project's creators because their profit would be collected over a longer time horizon as a percentage of the project's holistic value, as opposed to its volume. This brings the creators and holders in complete alignment as both are first-and-foremost incentivized to increase the overall value of the community and collection.
Token Mechanics cont.
What happens if the bond runs out before the NFT sells?
When the holder’s bond runs out, the token enters the Liquidation Phase. In this state, the token's price exponentially decays over time, increasing the likelihood of being bought. The token can exit the Liquidation Phase in one of three ways:
- Someone buys the token from the previous owner, setting a new Listing Price and posting a new bond in the process.
- The current owner posts a new bond for the current Listing Price or changes the Listing Price and posts a new bond.
- The current owner transfers the token to another address that has signaled their intent to receive and post a bond for the token.
Why does the bond need to be >= some % of the stated price?
Posting a bond ends the Liquidation Phase and sets the price back to its initial value. Without this, a malicious holder could post a $0.01 bond and forever lock their NFT up behind an un-purchasable self-assessed price.
Acknowledgments
A big thank you to my good friends Eddy Lazzarin, for helping me design this protocol (and coining PaCo), Jeffrey Piercy, who wrote the efficient liquidation price algorithm, and Jack Buck for invaluable edits and brainstorming while designing this protocol — in addition to the many others who took the time to help review and problem-solve, including my colleagues at Sound: Kevin Teng and Matt Masurka (Gigamesh).
I would also like to thank Eric A. Posner and E. Glen Weyl for their work on Radical Markets, the content of which provided much of the inspiration for this protocol.
Disclaimers
The PaCo protocol has not been audited. The code is being provided as-is. No guarantees or assurances are being made about its quality or usefulness for any purpose.
Anyone interested should check out the code, create issues, and share any feedback.
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