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Nouns Auction

Auctions governance tokens at fixed intervals, directing proceeds to a collective treasury governed by those token holders.

Nouns Auctions operate through two core components: 1) daily token auctions and 2) token-holder-controlled treasury. Each new auction creates and sells a single token to the highest bidder, with proceeds automatically flowing into the shared treasury. The treasury's resources are then allocated through proposals that any token holder can submit and vote on. The key innovation is that membership expansion and treasury growth are intrinsically linked through a perpetual auction.

The mechanism was first implemented in 2021 by the Nouns DAO, which auctions one NFT for sale each day in perpetuity. NFT holders then decide how to allocate funds to various projects that increase the value of their NFTs. It has since spawned numerous adaptations, including Lil Nouns (15-minute auctions), Nouns Builder (customizable implementations), and various projects that utilize the mechanism to fund creative collectives and public goods for particular ecosystems.

Advantages

  • Perpetual Funding: Creates a sustainable treasury model through regular auctions, avoiding the common challenge of depleting initial fundraising capital without reliable subsequent revenue.
  • Controlled Growth: The fixed-interval membership expansion allows culture and governance norms to develop organically without manual intervention.
  • Self-Sustaining Alignment: The auction mechanism ensures each new member values governance rights at market price while growing the treasury they help govern.

Limitations & Risks

  • Volatile Participation: System effectiveness depends on consistent auction participation, with the perpetual auction mechanism potentially creating challenging liquidity dynamics as there is always a token available on the primary market.
  • Pace of Fundraising: Fundraising pace is fixed by the auction epochs, which can impede the system’s ability to respond to market changes and react to time-sensitive needs or opportunities that require immediate funding.
  • Control Distribution: Continuous decentralization of control can potentially fragment organizational focus over time.

Design Considerations

  • Auction Frequency: Balance participation levels and governance quality. Options include low-frequency auctions (fewer tokens, higher prices, concentrated governance power) and high-frequency auctions (lower entry costs, broader participation but potential dilution of engagement).
  • Governance Security: Strengthen governance resilience against manipulation. Mechanisms include vote-escrowed tokens, where voting power increases the longer tokens are locked, discouraging short-term governance attacks; quadratic voting, which limits the influence of large holders by making additional votes cost progressively more; rage quit, allowing dissenting members to exit with a proportional share of the treasury, ensuring governance remains aligned with active contributors; and veto, which can be granted to a council or multi-sig to block harmful proposals while still allowing decentralization over time.
  • Batch vs. Sequential Sales: Optimize auction structure for efficiency and community dynamics. Look into single-token perpetual auctions (maintaining exclusivity and strong brand identity) and batched auctions, where multiple tokens are sold at once to enhance price discovery and reduce gas competition.

Resources

Examples

Nouns DAO

Implements daily auctions where each new NFT represents governance rights over an expanding treasury. In 2023, it was attacked by “DAO raiders,” who purchased enough Nouns NFTs to execute a vote distributing all remaining funds (~$27m in ETH) to NFT holders.

Purple

A Farcaster Public Goods DAO that demonstrates how the Nounish model can support ecosystem development. Purple provides funding for public goods, apps, bug bounties, protocol contributors, and community events that bolster the Farcaster user base. It operates independently from the organization developing the protocol and was established permissionlessly. As the protocol's usage grows, new individuals join the Farcaster ecosystem daily, discover Purple, and compete at auction to get more involved in the protocol, resulting in a constant stream of new members.

The Park

A creative collective showing how Nounish DAOs can align cultural production with governance. The DAO's members are collaborators and fans of a band called The Park, and together, they curate a unique onchain music experience. The Park hosts "Fridays at The Park," a recurring event that brings together music collaborators and web3 thinkers to create music in the studio and engage in dinner discussions, often centered around web3. DAO members gain access to a token-gated live stream of the event. The recorded sessions are expertly edited and released as NFTs through DAO Proposals. The Park's members, being both fans and collaborators, are highly aligned around the vision and eager to participate in shaping the future of music. Creative DAOs enjoy the advantage of releasing art and music, which expands the fan base and attracts a steady influx of new members eager to join the DAO.