A Game-Theoretic Approach to Substantiating NFTs
An exploratory game-fi concept that rewards users for wagering on their own (and others’) NFTs and determines winners through popular-vote.
tldr: I wrote a smart contract for an NFT game and a dapp (decentralized app) to go along with it with the goals of 1) popularizing/substantiating NFTs and 2) helping wade through the sea of trash NFTs in existence. This is done through wagering and popular-vote based gamification, with payout calcs using a spin on pari-mutuel betting (think horse races) . Check it out at this link.
Introduction
Chances are you’ve heard the acronym NFT dropped colloquially over the past several months. Better chances are you don’t actually know what the letter F means in Non-Fungible Token. But that surely hasn’t stopped you from buying your first piece of digital art and adding it to your crypto wallet, right? But now what?
I understand very well I may be in an NFT echo chamber, but realistically a lot of people are sitting on recently purchased NFTs hoping for the extremely slim chance either a friend will ask them about it or their virtual horse NFT will have some form of utility in Q4 2023. And even if you don’t own an NFT, how can one differentiate between a good investment and a potential bust when it seems like the number of NFT projects doubles on the daily? Seems to me like there is an opportunity here.
And that’s what got me thinking - how do you fill this void in which people want to show off what they own and also add some form of utility before their anticipated project either succeeds or, more likely than not, fails magnificently? Moreover, how can you help the population at large weed out these apocryphal projects? My solution to this problem was to create a dApp (decentralized application) that has the following functionality: NFT owners can challenge other NFT owners using their NFT, this challenge can receive wagers from participants and outside observers, and the winners will get paid out based on popular vote.
If you’ve gotten this far I’d like to give a brief disclaimer — this is all an experiment. I may have gone about this task in completely the wrong way; heck, there may not be an opportunity here whatsoever. But regardless, I would love any and all feedback for how to improve this or what features you would like to see in the future. As is the case with the the blockchain community, the majority of projects are game-theoretic experiments testing the power of incentives, and I’ll be the first to admit that the incentives and logic I’ve lined out may not be the best way to go about this. And that’s where I would like your help — I’ll give you the lay down on how this project works and why I implemented various designs, and if you do have any feedback, whether that be in the form of clapping on this post or commenting on it or even blocking me all together, I would love to hear all forms of it. With that being said, let’s get into the mechanics.
The NFT Gulag: How it Works
The word gulag is a reference to the Call of Duty showdown in which two players who recently died get a chance to go at each other 1 v. 1 for a chance to revive and reenter the game. So, the title NFT Gulag alludes to this concept of a 1 v. 1 battle, but instead of using video-game guns and knives as a means of trying to win, your NFT now acts as your weapon and community votes act as your ammunition.
There are three types of participants in this NFT Gulag community — Gulag Creators, Gulag Challengers, and Gulag Observers.
Gulag Creator
Gulag Creators are people who have enough conviction in their NFT’s ability to garner more popular-votes than an opposing NFT and will put their money where their mouth is by wagering cryptocurrency on this outcome. To do this on the dApp, Gulag Creators submit all the relevant information in the form below, and upon verification of NFT ownership (via web3) and transferring of funds to the NFT Gulag smart contract (currently via Metamask), they will have officially created a Gulag.
To see the gulag they’ve created, they can click the Live button in the Navbar to navigate to the Live Gulags page. Now with the bait in the water, the Gulag Creator waits for a Gulag Challenger to bite and enter this 1 v. 1 contest.
Gulag Challenger
A Gulag Challenger is a person who, similar to a Gulag Creator, is convinced their NFT will collect more popular-votes than an opposing NFT and finds an existing Gulag that they want to join. There is one major difference between Creators and Challengers: Challengers cannot select how much to wager, but instead must wager the amount the Creator wagered on the Gulag they are attempting to join. In the dApp, this process takes place through the following form, and once again, upon verification of NFT ownership and the transferring of funds, the Challenger successfully joins a gulag.
Gulag Observer
The last type of member is the Gulag Observer who doesn’t need to own an NFT to participate in an NFT Gulag. As a Gulag Observer, you are allowed to vote and/or wager on any Gulag that is currently active. Observers are limited to one vote and one wager per gulag. And that’s it — simple enough.
Rules of the Game
After you have a full gulag (only a Creator and Challenger are required), the rules are simple: vote and/or wager for your favorite. If a Gulag Creator put up CryptoPunk #9578 and a Challenger submitted CyberKong #46, it’s up to you to determine which one you like better. Do you like the Pit Vipers on the CyberKong better than the 3D movie glasses on the CryptoPunk? I mean how gnarly is it that a gorilla can have a pierced ear, right? Go ahead and toss the Kong a vote to show your support. Now the tougher question is which NFT do you think the majority of others will vote for? If you’re convinced they’ll follow suit and vote for the Kong, that’s when you should consider throwing up a wager because those who wager on the winning NFT get to share a portion of the pot.
States of Gameplay
Now that we have all the pieces to understand this NFT Gulag concept, let’s take a look at how to play the game. There are 4 states of gameplay for gulags (listed chronologically): Awaiting Challenger, Wager Period, Voting Period, and Gulag Finished.
- Awaiting Challenger
The Awaiting Challenger phase begins as soon as a Gulag Creator starts a gulag. Gulags in this phase display the Gulag Creator’s NFT along with the wager that the Gulag Creator placed when starting this gulag. This wager amount is the amount a Gulag Challenger must put up in order to participate in this gulag.
There are two ways to get out of the Awaiting Challenger phase. The first method is to allow 1 week to pass without a challenger joining your Gulag. At this point, all funds tied up in this Gulag minus network fees are returned to the Gulag Creator and the Gulag terminates. The second way is when a Gulag Challenger successfully submits an NFT along with the wager amount specified by the Gulag Creator, at which point the Wager Period begins.
2. Wager Period
After the Gulag Challenger successfully enters into an existing gulag, the Wager period opens up. For the next 7 days, anyone can wager on either of the two NFTs with the thought process of trying to wager on the NFT that you think is better and will get more votes when the voting period starts. One important thing to note about this wager period is that only the total value of existing wagers will be displayed on the Gulag itself. The specific splits will only be displayed after the Gulag has terminated.
3. Voting Period
The Voting Period begins as soon as the 1 week Wager Period ends and itself lasts 1 week. During this period, anyone can vote but you are only allowed to vote once per NFT battle so choose wisely! Since voting can be performed by anyone with a crypto wallet, don’t be afraid to send the link to your friends so they can vote on the NFT they think is better. The vote count will be only be shown once the battle is over .
4. Gulag Finished
And that’s all she wrote — after the 7 day Voting Period comes to an end, come back to the Gulag and click the Completed button to see how everything turned out. At this point, you will finally be able to see the wager and vote splits to see what the world thought about these two NFTs. Did you win? Wahoooo. Click the Redeem button to get your winnings (payout calculations will be discussed in the following section). Didn’t win this time around? Don’t worry — there will be many more opportunities to get the W.
Payouts
The payout mechanism used in the NFT Gulag is a spin on pari-mutuel betting, which is the most common form of betting for North American horse races. Assuming you’ve never heard the word pari-mutuel and you didn’t click that link to learn more about it, the gist of pari-mutuel betting is this: odds are not predetermined and winners divvy up the losing pot proportionally based on how much they wagered. The reason this is so popular is because it guarantees the house a percentage of the pot — it’s impossible for the house to lose. Let’s take a look at an example to see how this works in action.
For simplicity’s sake, let’s assume only 5 people are involved in a Gulag: 1 Gulag Creator, 1 Gulag Challenger, and 3 Gulag Observers. A diagram of this setup can be seen below — take a second to look it over and see if you can follow along with what’s happening.
All participants in this Gulag have wagered on either the Creator or Challenger (according to the color of the coins below them) and then the wagers are split up into three pots: a main pot, side pot and an observer pot. One question you may be wondering is why are there three separate pots? Valid question. We’ll get to the reasoning for that in a bit. But for now, all you need to know is that the side pot is taken as a portion of the Creator and Challenger initial wagers and the side pot can only be split up amongst Observers (assuming there is at least one Observer who wagers on the winner). The rest of the wagers then end up in either the main pot (if you are a Creator or Challenger) or an observer pot (if you are an Observer), and these pots payout solely to their respective participants.
The easiest way to see how payouts work will be to walk through a theoretical outcome and see how winnings flow to various Gulag participants. So, let’s assume the Challenger receives more votes and let’s calculate winnings for all 5 participants above by using the payout diagram below. And to make things even simpler, we’ll also assume each pile of coins represents 1 ETH.
Payout Scenario
Creator Winnings
Zippo, nada, nothing. They lost and should likely consider selling their NFT because nobody likes it.
Challenger Winnings
Total Winnings= 11.4 ETH (Full Main Pot) + 1 Gulag Token (~95% return)
Observer 1 Winnings
Observer Pot Winnings= 4 ETH (Initial Pot Wager) + (4 ETH/(4 ETH+ 3 ETH)*(4 ETH)) = 6.28 ETH — 0.01*6.28(Dev %) = 6.22 ETH
Side Pot Winnings= (4 ETH/(4 ETH + 3 ETH)*(0.05*12 ETH)) = 0.343 ETH
Total Winnings = 6.22 ETH + 0.343 ETH = 6.57 ETH (~64% return)
Observer 2 Winnings
Observer Pot Winnings= 3 ETH (Initial Pot Wager) + (3 ETH/(4 ETH+ 3 ETH)*(4 ETH)) = 4.714 ETH — 0.01*4.714(Dev %) = 4.7 ETH
Side Pot Winnings= (3 ETH/(4 ETH + 3 ETH)*(0.05*12 ETH)) = 0.257 ETH
Total Winnings = 4.7 ETH + 0.257 ETH = 4.957 ETH (~65% return)
Observer 3 Winnings
Observer 3 will receive the same winnings as the Creator — which is, unfortunately, a whole lot of nothing.
Pot Splitting
There are a few reasons for having 3 separate pots for these Gulags. I’ll talk about the pro’s and con’s of each pot, and in doing so, will hopefully convey the necessity for these distinctions.
Main Pot
Keeping the main pot separate from the rest of the pots allows for those who take the most initial risk (either the Creator or Challenger) to have as close to a moneyline bet as possible. The importance of this moneyline bet can be seen as wagering from Observers increases. Consider the scenario in which the Gulag Creator and Gulag Challenger each put up 1 ETH, and Observers have wagered 100 ETH on the Gulag Challenger. If the Gulag Challenger wins this battle, the Challenger’s payout would be their initial bet + 1% of losing pot, which, after other fees, would equate to about ~1% returns. Keeping this pot separate from all other bets allows for the closest thing to double your money.
Side Pot
Now with the knowledge that a main pot is required, let’s take a look at the side pot, which to me is the most significant pot in order for the game to work properly. The scenario to consider this time is one in which a Gulag has just formed. What incentive does someone have for wagering on it? If the NFT they wagered on loses then they lose all their money, and if the NFT they wager on wins then they only make back their initial wager. Since creating money out of thin air only appears to happen during ICOs, we can’t just guarantee that the first Observer will be able to win something unless we take a portion of the Main Pot.
An additional scenario is consider is what happens if the only Observer wagers on the wrong Gulag participant? For this specific scenario and any scenario in which all Observers wager on the wrong participant, all of the money in the Side Pot will be merged back into the Main Pot.
Observer Pot
With the requirement of the two pots above, the Observer Pot is a necessity in the sense that it must handle the leftover wagers that don’t fall into either the Main Pot or the Side Pot.
Final Thoughts
And that’s it — thanks for sticking it through! Check out some of the links below if you’re curious, and feel free to drop a comment with your thoughts on this NFT game concept.
As of this writing, the smart contract is live on the Ropsten network, which is Etherium’s test network. The current plan is to work out any kinks or bugs, and then once it is battle tested, deploy it to the Etherium mainnet and let the real games begin!
