Newsletter: DAOs Business Models & Governance Financialization

Welcome to issue 123: Reddit Rolls out Community Points on Ethereum, Jad Esber and Scott Duke Kominers Part II on Progressive Decentralization, Jacob Horne on Delegation Market, PleasrDAO launches PleasrHouse feat Daniel Ellsberg and Edward Snowden, mainstream latest and more...

By Forefront - Jan 16, 2023

Welcome to issue 123:

▹ Week's Highlight
▹ Reddit Rolls out Community Points
▹ Progressive Decentralization by Jad Esber and Scott Duke Kominers
▹ Jacob Horne on Delegation Markets
▹ 0xJustice on Protocol-first DAO Strategy
▹ PleasrHouse Launch by PleasrDAO
▹ Mainstream Latest and more...

--- Let's get into it!

Year in Review…

We'll be publishing our Tokenized Communities Year in Review next week, and we're very excited to get it into your hands. In the meantime, let's check out one more trend from last year: business models.

From 2020-21, tokenized communities really only had one business model that seemed to be working, if you could call it a business model at all: treasury diversification rounds.

In March of 2021, FWB governance approved a treasury diversification of 7% of the token supply at a $10M valuation. Later that year, they approved a treasury diversification at a $100M network valuation. Forefront also conducted a treasury diversification round at a $20M valuation in late 2021, with Cabin and others soon following.

This model was clearly flawed: tokens were being sold in bulk like equity, taking them out of the hands of potential active members and still failing to create sustainable revenue for the treasury. This is why the Nouns perpetual auction model was so exciting for folks: revenue could scale as the community and its meme scaled.

However, it's clear that most tokenized communities still struggle to generate sustainable revenue. No other "nounish" DAO has been able to generate even a fraction of the revenue through the perpetual auction mechanism that Nouns has.

Some communities like Water & Music and Forefront have managed to generate revenue through "membership passes," analogous to web3-native media subscriptions. Others, like FWB, focused on brand partnerships.

Meanwhile, the end of 2022 saw experiments with open editions as a mechanism for DAOs to profit off of important media or cultural artifacts. Nouns DAO minted a DAO explainer video using Zora, which generated upwards of 300 ETH.

We'll continue to see business model experiments in 2023, and Forefront will be kicking off a research project on this topic in particular in the next month. Stay tuned!

What's Poppin'

Reddit Rolls Out Community Points. Arbitrum Nova, a new Ethereum scaling solution built for games and social apps, launched to the public back in August. At the time, Reddit announced that they would use Nova to scale its Community Points rewards program. This week, Reddit kicked off the program, announcing that subreddits will be able to activate community points to build user reputation, be an in-community currency, or even participate in governance over shared resources. In short: subreddits are becoming tokenized communities, and we could not be more excited. Reddit has the opportunity to unlock the next ten million users in tokenized communities with these developments, and if it's anything like their foray into NFTs, they'll be sure to capitalize.

Progressive Decentralization: a High-level Framework. "Progressive Decentralization" was coined by Jesse Walden of Variant Fund, and has since become a critical mental model in thinking about how to structure DAOs and protocols alongside their stakeholders. This piece from Jad Esber and Scott Duke Kominers outline some "Minimum Decentralizable Units," explaining how the core team, contributors, tech stack, finance, and operations can all be centralized and decentralized at various points of time in the life of a community or protocol. Ultimately, the core team will be responsible for pushing decentralization efforts forward, but there are plenty of good and bad examples to learn from over the last year that can help founders and operators progressively decentralize.

Governance Financialization via Delegation Markets. Governance financialization is accelerating at a rapid pace thanks to a new feature from Nouns Agora: delegation markets. The product now allows Nouns holders to "rent out" their vote to the highest bidder for a set period of time. Jacob Horne argues that this might not be as bad as it might sound. MEV was once seen as a net negative in the ecosystem, and Horne believes that delegation markets fall under the same umbrella. Instead of trying to thwart or ignore the bribery and solicitation that may happen behind closed doors, we can create a transparent, accessible and permissionless market to form around delegated votes. By creating a market for these votes, we might see an increase in vote utilization. Whether or not this is true remains to be seen, but we are certainly further down the path of governance financialization.

Protocol-first DAO Strategy. This essay from 0xJustice is a much needed read for everyone working in tokenized communities. Community-first building must give way to protocol-first, he says, which entails starting with a business model and a strategy for creating sustainable value. Startups are not communities; the DAO ecosystem is destroying itself by acting like they are. This does not mean that every community must be predicated on a protocol, but that building should be done by core teams and coordination/capital allocation can be pushed to communities. Justice does a fantastic job of mapping out the pitfalls the ecosystem has fallen into and how we can solve them with these new frameworks for thinking about DAOs. Must read.

Regulate Web3 Apps, Not Protocols Part II. Miles Jennings and team have published Part II of their regulation essay focused on web3 apps. This Part 2 builds on their approach to regulating web3 businesses (not software), exploring how various factors should influence web3 app regulation. In light of FTX and similar debacles, a balance is necessary. Critically, that balance shouldn't necessitate that we eliminate all potential uses of web3 technology for illicit activity - we don't regulate SMTP just because email can be used for crime. But it does require measures that disincentivize and reduce the risk of such activity. Great piece from the a16z crypto team.

The Open Edition Boom. Open editions are having a moment, and ZORA and Manifold are at the heart of it. This piece gets into the many dynamics of the trend, most interestingly the "Collector vs. Investor" dynamic. According to the author, betting on OEs financially isn't wise. Collecting OEs as digital memorabilia and to provide patronage to creators you like is the ticket, though, and anything that comes beyond that is just icing on cake. This dynamic was demonstrated in the groundbreaking "This is Nouns" drop.

Latest on Mainstream... First off, 2023 is already looking to be a year of high volume illicit crypto usage relative to last year, although as a percentage of total usage, illicit activity is a fraction of 2017-19 levels, Chainalysis reports.

Next, the SEC charged both Gemini and Genesis with unregistered offering and sale of securities to retail investors, some of whom were in the U.S. This comes amidst a public fight between the leadership of the two companies, which already ended their partnership on the program under scrutiny.

Finally, crypto prices meaningfully rallied in the last week for the first time in months, seemingly due to decreasing inflation numbers. ETH crossed $1500 with no signs of slowing down long-term given burning post-merge.

Enjoyed this issue? Help us spread the word!

Signal Bites

▹ FF Library - A New Philosophy of Markets
▹ Read - Digital Governance <> Liberalism
▹ NFT - Foundation Launches Worlds
▹ DeFi - Cross-Chain Order Flow Auctions
▹ Watch - Plurality Research Network Conference
▹ Listen - Scott Moore on Club Podcast
▹ Cool - PleasrHouse Launch
▹ Interesting - Party vs Party Gaming
▹ Resources - NFT Marketplace Roadmap
▹ Web2 - How ChatGPT Hijacks Democracy
▹ Tooling - Remint your Favorite NFTs
▹ Techy - Paradigm Latest on SNARKs

Check out Signal  for daily top web3 social headlines

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The information in this newsletter is not intended to constitute legal, financial or investment advice and should not be construed or relied upon as such. Any opinions reflected are the opinion of the author(s) of the newsletter only and not necessarily of Forefront. Please DYOR.

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