NFT-Based Reward Mechanisms: Sybil Farming, Vesting, and Stochastic Verification

Abstract: We study NFT-based reward mechanisms in which a user can create multiple identities and submit fraudulent claims that mature a reward subject to vesting. We assume that the issuer stochastically verifies claims during the vesting period and that identities can be linked into clusters so that the detection of one identity submitting a fraudulent claim causes the whole cluster to be forfeited through a penalty. A farmer's payoff is then non-linear in the number of identities: rewards increase linearly, while the probability of avoiding detection decreases geometrically. We characterise the optimal farming scale in the continuous relaxation of the problem. This allows us to derive a sufficient condition for deterrence and then consider the issuer's choice of reward vesting and claim verification. Vesting reduces the probability that a fraudulent claim is paid but also affects genuine participants, while verification is costly for the issuer. We characterise the sufficient deterrence frontier for the issuer in terms of auditing cost, vesting schedule, and penalty value. When small amounts of audit capacity can be added at negligible marginal cost, vesting alone is not optimal. We also distinguish the role of penalties from that of cluster-level auditing. Finally, we discuss the implications for NFT reward programmes on high-throughput ledgers, such as Hedera.