The numbers are now in for an ambitious NFT experiment that challenged collectors to “melt” an extremely popular NFT in exchange for a reward: Nearly a third of holders of the SSX3LAU piece “FACES” participated in the operation, pouring almost $1,000,000 in estimated value into this digital smelting operation.

At the time of writing, the value return for all participants has been underwhelming. Since the event, which took place around the peak of the frenzy in the Nifty Gateway marketplace, prices for most NFTs – including FACES – have cratered. GLASS, the piece given to collectors who burned the most FACES, has been selling for less than its established value of six times the price of FACES.

Those who melted one edition FACES have yet to receive their promised loyalty token, so the value of that piece has yet to be established. But it seems unlikely to match the value of a FACES piece based on its own merits. (UPDATE 5/7/2021: the loyalty tokens were distributed today and are much cooler than was initially previewed.)

Despite this, OPERATION: MELT FACES was a useful experiment in NFT tokenomics that offers many lessons to artists and collectors. And, as any HODLER knows, near-term price changes are not necessarily reliable indicators of long term value. Upside remains for holders of these pieces given the artists’ intentions to reward long term holders of their work.

My findings are based on original research and analysis. I used Dune Analytics to review the transaction data that was publicly available around OPERATION: MELT FACES, and combined that with numbers gleaned from the Nifty Gateway ecosystem.

In this piece I will walk through my analysis of the operation, the current state of the market after the burn, and my personal reflections on how the event went overall and how it could have been improved.

BACKGROUND: OPERATION MELT FACES

Last month, NFT superstars Justin Blau, known as 3LAU, and Mike Parisella, aka Slime Sunday, announced a surprise: holders of their multimedia NFT piece “FACES” were invited to destroy their editions in order to receive a new piece of art. They called this OPERATION: MELT FACES. (The artists’ combined alias is SSX3LAU. FACES was released in the IRIDESCENT Open Editions collection on Nifty Gateway on March 13, 2021.)

I participated in the event by buying an edition of FACES and “melting” (or “burning”) it in the specific manner described by the artists. In return, I was promised an NFT that will act as a loyalty token for future 3LAU/Slime Sunday events. (I have faith it will come, although at the time of writing, this token has yet to appear in my wallet.)

Burning an edition of FACES was always a risky proposition. It was the most popular piece in the Nifty Gateway secondary marketplace by trading volume. The value of FACES fluctuated wildly in the lead-up to the burn, rising from its opening price of $333 to, at times, around $1,000. Around the time of the operation, pieces were trading for around $700 (which is about what I picked my edition up for).

And the return on the burn was uncertain. How would the market value of “GLASS,” the piece gifted to holders who burned 6 FACES? How would the market value the SSX3LAU “loyalty token” distributed to holders who burned 1 FACES? How would the market reward the remaining editions, whose supply would be reduced and who would come to symbolize a certain type of loyalty to HODL idealism?

Knowing that both artists are invested in the NFT space for the long term, and 3LAU in particular has spoken about how he plans to reward holders of his art, I decided to take a shot at the burn myself. For science. And the thrill. And for the intriguing, ineffable value of an early SSX3LAU loyalty token.

ANALYSIS

For weeks, I’ve wondered about the success of the experiment. I had not seen any announcements about the operation by the artists after the burn. Had it been a flop?

When I discovered Dune Analytics this weekend – a dashboarding platform that allows for analysis of the Ethereum network using simple SQL queries – I realized I had the tools I needed to answer that question. I decided to make this the subject of my first investigation. (Make sure to check out the full dashboard associated with this post!)

By analyzing the trading activity related to the “FACES” tokens and the designated burn account, and inferring from numbers available in the Nifty Gateway marketplace, I concluded that at least 1,363 FACES, representing a combined value of $954,100, were “melted” in the burn. (Note that this value didn’t necessarily disappear: Those who burned FACES will retain the value of whatever tokens they receive(d) in reward for the burn.)

IMPACT ON PRICE

FACES had been one of the most successful offerings ever on Nifty Gateway, with nearly 5,000 pieces minted. The FACES burn reduced supply of the piece by at least 28%. Yet, despite the sacrifice of over 1,000 pieces, we did not observe an increase in the value of FACES immediately after the event. Rather, price fell considerably almost immediately after the burn. Thus, the operation did not achieve a boost in demand for the piece, at least in the short-term.

(Note that in the roughly two weeks since the burn, prices have collapsed across the entire secondary market on Nifty Gateway. FACES and GLASS have not been spared from this phenomenon, which makes it difficult to isolate the effect of the operation on prices of these two pieces.)

At the time of writing, FACES is trading for around $400 in the Nifty Gateway secondary marketplace. Niftysecondary.com shows a steady gradual decrease in value from around $450 on April 16th, the farthest back date for which data was available. (The burn event concluded at 12AM pacific time on April 13.)

At the time of writing, the last four editions of GLASS traded hands for just $2,000 – less than the estimated value of 6 FACES at the time of the burn ($4,000), and less than the current value of 6 faces (about $2400).

MISSION ACCOMPLISHED?

Was the experiment successful? From a participation standpoint, I do think it’s impressive that the artists managed to engage almost 30% of buyers in this elaborate and novel scheme. That being said, I think the participation rate could have been higher, as I will explain in the next section.

From a value standpoint, I do not think OPERATION: MELT FACES achieved its goals, as far as we can judge in the present. OPERATION: MELT FACES had the potential to be a value-add exercise for all four parties involved:

The artists, who benefit from a 10% resale fee any time FACES or GLASS is traded

In my estimation, the four parties not only made out quite differently, but there was actually a value transfer that created winners and losers from the operation.

The artists made out the best, having collected thousands of dollars in pure profit from resale fees as prices rose and then ultimately fell around the event.

“Melt-6 collectors” were rewarded with a very cool, unique NFT. Although the value of this piece is down right now, I personally believe that if NFT prices are to recover at all to where we saw them in March, GLASS is a prime candidate to reach a premium price due to its limited supply, obvious audio and visual quality, its association with the two artists, and with OPERATION MELT FACES.

Collectors who held on to FACES have not seen the value of the piece increase in the wake of the operation, and I do not expect they ever will. (More on this in the next section.)

“Melt-1 collectors” seem to have fared the worst in the experiment. Based on pure aesthetics, the NFT they received in return for the risk they took on is clearly of lesser value than the original piece. (More on this in the next section.) Not to mention, since it is being distributed outside of the Nifty Gateway closed ecosystem, there will be hefty fees associated with any trade of the loyalty token. For their sake, I do hope SSX3LAU does their best to create long-term value for holders of the token. (UPDATE 5/7/2021: the loyalty tokens were distributed today and are much cooler than was initially previewed.)

From an artistic and entrepreneurial standpoint, I love the concept of OPERATION: MELT FACES, and I think it was well worth undertaking. This type of experiment highlights the unique value of NFTs and is a fun, tongue-in-cheek way to explore the many possibilities they open up.

But since the operation failed to create value for all holders involved, my overall view is that OPERATION: MELT FACES should be considered a mixed bag at best. I think the artists would agree with me that fans who were bold enough to participate in the experiment should be rewarded with some sort of fair value exchange, if not a value add. And if the ultimate winners from the exercise were mostly the artists, that risks turning off fans and collectors in the long term.

CONTRIBUTING CIRCUMSTANCES

In this section I’ll explore the factors that I believe contributed to the disappointing result.

In one important aspect, the project was a victim of its own success. The astronomical minting numbers from the open edition drop may have doomed long-term FACES holders from the start. 5,000 editions is an almost unheard of figure in the Nifty Gateway world, and was a record for Nifty Gateway at the time. As a result, the market was flooded with these pieces. The price after the burn reflects the continuing glut in supply and relative lack of demand. (Two notes here: the IRIDESCENT drop probably got a major boost by lucky timing – happening to take place right at the peak of NFT mania on Nifty Gateway. It’s worth considering, too, as the market deflates, whether FACES contributed to the bubble burst by pulling in new NFT buyers who soon found themselves holding an item bound for deflation.)

Inconsistent communication added another issue to the mix. SSX3LAU had first promised those who melted 1 FACES that they would receive nothing but a single entry for a giveaway in return for the burn, before offering instead the loyalty token in addition to the giveaway entry. This may have led to confusion from holders, and/or turned off many who felt the burn would not be in their interest (who would give up value for nothing?).

In addition, I personally think the actual loyalty token offered was not a good value match for FACES, and fair to call “lame.” The artists’ announcement makes clear that the token was not only a second thought, but also not the result of a thoughtful creative process: “one of our first NFT experiments in 2020, slimesunday made this animation while messing with logo concepts.” (UPDATE 5/7/2021: the loyalty tokens were distributed today and are much cooler than was initially previewed.)

One other reason I believe the participation rate was lower than it could have been is that I did not observe much publicity around the Operation during the launch. Apart from one tweet from 3LAU, I didn’t encounter any other reminders that the melting was in progress. I believe SSX3LAU could have used their platforms more aggressively to get the word out.

Finally, one potential contributing factor to the large drop in price could be competition. Soon after the FACES burn, the much more publicized multi-day drop by PAK on Nifty Gateway employed a similar burn mechanism – and that drop, too, succeeded in minting thousands of open edition pieces. It’s possible that the PAK experiment stole some of SSX3LAU’s thunder – and demand.

PREPARING FOR FUTURE MISSIONS

In order to create the most value for fans, and not just the artists, future exercises modeled off of OPERATION: MELT FACES should take heed of the above circumstances, and make one key change in the structure.

Instead of releasing the initial token as an open edition, which introduces variability into the total number of editions minted, future artists following this model should limit the drop size to a fixed number of editions. The number should err on the small side in order to ensure continual demand for the piece during and, crucially, after the operation. Consider that if even 1,000 editions of FACES had been released, a similar burn rate of 28% would have left over 700 pieces still on the market – still many more editions than in vast majority of collections, and a number almost sure to deflate demand.

OPERATION: MELT FACES was an exciting exercise to participate in, and one that was highly affected by the time of its release. Despite the less-than-stellar value produced for some holders, it will remain an innovative drop structure and an important case study in how to optimize value for fans in similarly structured releases.

Holders of the FACES and SSX3LAU loyalty tokens will at least be able to point to an interesting piece in their collection that was part of a pioneering experiment in NFT tokenomics. And, who knows – it may turn out that in the coming months and years ahead, these tokens may still hold secret value yet to be revealed.