EP 47: Experimenting Licensing as an NFT: EDBK Case Study
EDBK Case Study.
Welcome to all our new subscribers! Please forward today's note to a friend, neighbour, colleague, frenemy, or in-law to spread the word. And for those who missed last week's episode, you can find it here.
TLDR below. This is not financial advice.
Catch the episode on YouTube
Economics of tokenisation and ecosystem is free weekly in your inbox. Please share it with anyone that can benefit from this knowledge.
What we can build within NFT is amazing because one of the pillars in the economic design framework is mechanism design. With mechanism design, we can build different kinds of mechanisms to allow more efficient allocation or investment in any particular resource. It can be more than just art or graphic design.
What if we can tokenise property rights, and instead of signing a thick legal contract you just sign on your smart contract with an embedded mechanism design! When you are selling and distributing these tokens there is a lot of economics and science behind them and that is what we want to talk about today. I also want to share the experiment that I am working on which is tokenising distribution rights and publishing rights of a book (my book!) as an NFT.
Problems with Traditional Publishing
How I got started with this idea of tokenising publishing rights as an NFT is that I published a book and it took me two years of failures to finally release it. The first two years were difficult because nobody really wanted to publish the book. I went to a lot of publishing houses and spoke to a lot of editors but they found this to be very niche and risky for them and they did not want to invest. In property rights, long-term investment and allocation efficiency are the two trade-offs. In the investment area, a publishing house does not want to invest in a niche book because they do not know if there is demand for it, which is completely understandable. In addition, the bigger the publishing house the more risk-averse they will be.
Allocation efficiency means that the book needs to be allocated to the right kind of people who are actually interested in this field. Self-publishing is an efficient allocation because you are publishing and distributing it to the right people in your network.
How the system works
In general, the token will represent the distribution rights for this specific book and the price of this distribution right will increase as more people come in to distribute it. The pricing model here is a way to express the risk aversion of the person distributing the book. When you are buying the distribution right or the NFT to be able to distribute the book during the early stages, it will be a lot cheaper because you are taking on more risk. I want to compensate you for taking on more risk by making it cheaper for you. As you go up the ladder you realise more and more people know about the book and more people are asking for it in different jurisdictions. Now there is an incentive for another person to come in to buy the distribution rights and distribute the book within their jurisdiction. In this scenario, there is less risk because there has already been promotion, advertising, and awareness of the book around the space, so you have to compensate for that by paying a higher price to buy the distribution and publishing rights.
There is a very simple bonding curve to measure how the system works. In the smart contract, you can embed things like expiration limits to the number of books and all those kind of funky things.
The Need for Tokenisation
Tokenisation exists because it is a very powerful way to do internal calculations or accounting. When Bitcoin started, it was a way to create this global accounting system to correlate the buy-side and the demand on the sell-side. This is the same for physical books; there are distribution rights and agents will sell the books within their jurisdiction. Every time you sell the book you are promoting it in a lot of different ways.
Some people do not want to buy the physical book and just want the e-book. E-books are quite hard to calculate because someone living in Thailand might look at the book that is promoted in New Zealand but buy the book for a friend in San Francisco. In this case, it crosses many jurisdictions and compensating that advertising to the right kind of people is important. This is where tokens come in and the proportion of physical books sold can be used to calculate how much of the profits generated by the e-books will be added to these distributors so it becomes a new revenue stream for the distributors.
Reselling & Licensing
The paper that Professor Anthony Lee Zhang wrote talks about depreciating licenses, where after a certain time a part of the license is resold to the market and you have to purchase it back to continue using it. If you don't want to use it anymore then you can resell it to someone else.
Everything can be done using the second price auction method which is the mechanism that was awarded the Nobel Prize last year. It is an evolution of this new area of mechanism and market design that is currently flourishing in the economic space.
There are a lot of ways that we can play around with this in the traditional world but I want to take these concepts and apply them in crypto because the testing time or experimentation term is a lot faster. It is a lot better for us to test these kinds of economic theses. As economists, we love creating and building beautiful models with a lot of assumptions that everyone is rational. Sometimes reality is not like that and the best way to test these theories is through actual experimentation.
If these experiments could be in radio spectrum or 5G spectrum allocation that would be great, but it is a bit too risky at this stage for government to come and experiment around in this space. We can start experimenting on a smaller scale like the licensing of book distribution so that we can figure out if there is allocation and investment efficiency and start scaling up from there to a lot of different areas. We can do this for other licensing mechanisms and in something like layer 1 and layer 2 blockchain validator allocation, especially when we are moving to the proof of stake system.
Ultimately, tokenising the publication of the book is a new idea and also an interesting approach. This can extend to any right to use services or other resources such as libraries, to access certain features or to represent something. NFT tokens can all achieve these goals easily and they are quite new to be fully applied and known by many people. In the future, we believe the above will become the same as the way social media and e-commerce change users today.
Ps: Order the textbook "Economics and Math of Token Engineering and DeFi" today!