PawnHouse: the Innovation of Decentralized NFT Oracles

After experiencing the summer bull market of 2021, NFTs have completely changed from a niche market to a golden path that everyone cannot ignore. According to CoinGecko’s data, as of end-September 2021, the total NFT market value was $22.97 billion U.S. dollars, accounting for 1.2% of the global cryptocurrency market value. Furthermore, the 24-hour transaction volume was $3.25 billion and still maintaining strong growth momentum.

Apart from currencies, most objects in the real world are unique and have values that are also different. Therefore, the characteristics of NFTs are perfectly adaptable to the world and can help realize the tokenization of various objects in the digital world.

NFT Assets Lack a Solid Price Discovery Mechanism

At present, the main problem facing NFT assets is still low liquidity. The fundamental reason for the inferior liquidity of NFTs lies in the lack of an effective price discovery mechanism. Inefficient pricing mechanisms also make the application scenarios of NFTs relatively narrow. For example, current users involved in crypto cannot effectively carry out financial activities related to NFTs.

At present, the valuation method of NFTs mainly relies on historical sales prices, which are the recorded sale price formed by individual subjective judgments in past transactions. However, this valuation method contradicts the low liquidity of an NFT itself. Moreover, because of the low turnover rate, the historical prices of these NFTs are limited. When factoring in issues such as manipulation and hype, the price data becomes even less meaningful for reference.

Some NFT fragmentation agreements also provide new ideas for NFT price discovery by pricing a single fragmented unit and multiplying it by the total amount of fragments to calculate the price. But are the broken pieces valuable? Does this separation deviate from the meaning of NFTs as a unique feature? The management and distribution of this NFT ownership and governance rights are worth thinking about.

We believe that NFT oracles divide into two models: centralized and decentralized.

A centralized model is where NFT appraisal experts assess the value of an NFT. A consulting group composed of professionals who know the artwork itself and the market provides evaluations and insights on the pricing of NFTs and charges a fee for the service. We recognize that NFT appraisal agencies are very likely to appear in the future. However, the problem faced by the expert assessment may be an insufficient amount of decentralization. Appraisers’ subjective inferences and negative appraisals could be potential public concerns. As far as the current situation is concerned, it is difficult to respond to different NFT valuation needs and many NFT products with just a handful of experts.

Another solution is a decentralized oracle where participants voluntarily evaluate the value of NFT assets and receive rewards in the evaluation to encourage more people to participate in the review. This model better reflects the consensus that the minority obeys the majority. However, in works of art that require a certain degree of appreciation, consensus may not necessarily reflect its value. This is also the logical basis of the solution provided by PawnHouse.

The Wisdom of Crowds in NFT Pricing

In “The Wisdom of Crowds,” James Surowiecki believes there is no need for professional qualifications when people estimate a value. The average value of all ordinary personal estimates is the closest to the correct answer. It is undoubtedly more accurate than the estimate of any outstanding individual in this group.

Price forecasting is an important activity, especially when historical information is lacking or unavailable. PawnHouse uses public opinion crowdsourcing to eliminate the risk of centralized biases that could transform into corruption. With a synchronized price proposal machine accompanying the auction activities, the primary purpose of this machine is to gather the crowd’s opinions. Then, based on actual results, the proposer can directly obtain the return of the pricing behavior from the market. A proposer’s incentive model will ensure that providers with honest and accurate results get the greatest return. And those quotes that deviate significantly from the final result will become worthless.

The proposal behavior of this mechanism charges fees. Price proposers with high accuracy (approximately 40% of the total) will be rewarded, and proposals with high deviation will lose the quotation fee. The entire pricing activity trajectory can be used as a reference for the bidders of the actual NFT auction activity and is also an indicator of the value of NFT assets.

Here we apply the idea of “wisdom of crowds”:

Under the right circumstances, even if most people in a group are not well informed or rational, they can reach a wise decision collectively — Surowiecki 2005

Although a single individual may have very little information, in general, their cognition and feedback themselves are a lot of information. And, the price proposal of others is also part of the information. Thus, the pricing of a proposal machine based on a specific target NFT can quickly gather people who usually don’t cooperate, thereby increasing the information diversity and independence of the oracle machine.

In addition, prediction markets have been shown, both theoretically and empirically, to generate less biased, more accurate forecasts in a number of settings — Wolfers and Zitzewitz 2004

The unique feature of PawnHouse’s NFT pricing mechanism is that it generates a price value for NFT and contains a variety of possible answers for the uncertain public to the specific value of the price variable (private value). It also reflects the possibility of the future value of NFT assets by all proponents, including various information such as data, opinions, and intuition. The collection of various price proposals produces comprehensive information that measures the market consensus and stability of the asset in the future.

In other words, the emergence of quotation oracles is a kind of aggregate prediction of decentralized masses. It enriches people’s understanding of uncertainty, forms results, and conveys value.

In the next beta version of the price proposal machine, we will focus on solving two problems:

  1. How accurate is the prediction of the value of NFT assets through the wisdom of the public pricing?
  2. What are the driving factors for an accurate pricing, and how should we control these driving factors to achieve better predictions?

_________________________________________________________________

About PawnHouse

The PawnHouse project team combined and applied both the SMRA theory (2020 Nobel Economic Prize) and The Wisdom of Crowds theory to effectively solve the issue of decentralized NFT asset-pricing and improve the liquidity of NFTs.

Due to its unique characteristics, the historical transaction price of NFT is determined by private value. This results in less effective price information and is easier to control. By introducing price proposers to the market, PawnHouse satisfies both common and private values, and provides a comprehensive and rich price collection strategy. While building a price corridor for NFT assets, PawnHouse also supports NFT’s collateralization and auction transactions.

Follow us:

Related news:

PawnHouse, The World‘s First NFT Oracle

LIQUIDITY | EQUALITY | ACCURACY

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
PawnHouse

Provide Better Liquidity and Price Discovery Mechanism for Nonstandard Assets