NFTs to control destination of trading fee payments for token minters

People creating new Index tokens are entitled to a share of trading fees. The starting assumption is that the minter address is currently the recipient of any fees destined for user (as opposed to DAO destination). Along the lines of Univ3 LP NFT’s where people can trade liquidity positions, this proposal suggests that people, entities or businesses can change the ownership of the fee allocation for creating new index tokens and that an NFT is an ideal mechanism to facilitate that.

If a new index token is particularly successful, the fees revenue that flows from the trading could be substantial. This receipt of trading fees means the ‘minter’ has generated something of value and it should be able to be traded.

Reasons why changeable fee ownership is a good idea:

  • Encourages people to create popular index tokens
  • Gives creators a physical asset they can see in their portfolio (NFT)
  • Allows me to pass this fees NFT between wallets if my main wallet is compromised or I’m moving to new one for tax purposes etc…
  • Allows me to realise asset value ‘today’ i.e. sell my future revenue based on historic performance data
  • Acts as an advert for Phuture each time an NFT changes hands (Imagine an NFT that generates $500k fees revenue a year changing hands for $4-5m)
  • Generates revenue for the DAO that potentially outpaces trading fees - if NFT’s regularly change hands and a e.g. 10% of sale value allocation reverts to DAO, the revenue could be substantial and potentially outperform the trading fees of the token (short-term)

What would the NFT need to do?

  • Be created when new index tokens are minted
  • Mint the name of the token, erc20 contract onto NFT face
  • Mint the original asset creator onto asset face
  • Mint the class onto asset face (e.g. v1,v2,v3) as technology changes
  • Embed a fee return to PHTR DAO wallet into contract (fee fixed at 10% resale value) meaning resales net revenue back to the DAO
  • Look cool like the Univ3 NFT’s

Other considerations:

  • In house market for exchanging fees NFT’s
  • The ability to burn an NFT via DAO vote in the event a NFT is stolen via a compromised wallet (this issue exists for any compromised wallet)
  • Phuture payment engine to recognise NFT’s via contract and current owner for payment allocation

To be prudent lets first outline the fee mechanic for index creators. Fees are generated and distributed to the index creator. On the other hand, index minters do not participate in earning fees. Creators of dynamic indices (those that update their target weights) earn fees whilst the index is funded.

What does “funded” mean?

Funded means that the creator has deposited eth which is used to pay for updating target weights and assets each month, lets call this reweighting.

These funds naturally run out over time and it is the creator’s job to ensure that funds are always available. When funds run out the index fees accrue within the contract until enough funds are deposited.

In the context of your suggestion, when reweighting funds run out the NFT that is linked to the index is no longer eligible to collect fees until the current NFT owner adds reweighting funds. In this model, indices are reliant on index creators selling their NFT positions when they no longer want to fund the index. This could work, but it opens up the possibility for an index creator to grief the system by sitting on an NFT without trying to sell it nor adding funds to the index for reweightings. In this situation, no one can access this index to add funds since they dont own the NFT and the owner isnt selling it. Of course, if this is a profitable index then the owner has incentive to either sell their NFT or add funds, but they may act irrationally.

Our current thinking is more along the lines of the ENS model. The initial index creator owns the index and receives fees whilst they are paying for the monthly reweights. When their funds run out they are given a grace period in which they can deposit more funds. If this grace period ends without a deposit from the creator, anyone who would like to be a creator can add funds to the index contract. The new creators are now entitled to all accrued fees during the grace period and all ongoing fees (as long as they maintain their deposit). This model prevents creators sitting on indices, not funding their index and not selling their NFT’s, which essentially crowds out other creators from participating and prevents that index from being useful (since no reweights).

This means that an index that is profitable will always attract creators to fund it, even if the original creator is no longer participating.

At least from my understanding, it looks like NFT (or erc-20) can still be used via the ENS model. It can do all the things mentioned above, but mainly to determine Owner/Fee recipient. The contract that manages the Index system can always keep track of current NFT validity and revoke if necessary, and the new owner would have to mint a new one (after grace period is over). Or if possible, the NFT could be automatically transferred (as long as contract has rights and if it’s cheaper than minting the another NFT). This way the owner can still choose to sell/transfer ownership when desirable.

I think the limitation of our current model is that it doesnt allow for creators to transfer their creator position for the present value of future index fees. If creators were static then it would be trivial to implement an NFT representation of ones ownership (and we should). But static creators lead to a lack of trust in the index product itself as it solely relies on that one creator acting accordingly into perpetuity.

So now we are in a multi creator world and considering the implementation of an NFT. It seems, to me, counterintuitive to on the one hand have the NFT be a beacon of ownership but then have it overridden
if the creator is replaced. This would likely undermine the value of the NFT.

I do think this is a very valid idea and would like to start exploring variations on it that might be more appropriate.

Once an index grows large enough, there is really no need for the creator to continue funding it because the index generates enough fees to cover its reweighting costs. At this point, the index is self sufficient. In this case, the creator cannot be displaced (unless index fees drop significantly) and an NFT can act as the sole channel of ownership.

I think in this case the NFT is not a prize only a tool for valuation of ownership change and to make it a liquid position, while generating revenue to DAO on ownership change [maybe the word NFT is throwing off the idea, but only going with it because it was stated as such in the beginning, but the better analogy is to something like an LP token] . You could make it more than that but at it’s core, it’s for composability of fees. Very similar reason is also why Bancor v3 is bringing back token representation.