Web3 has introduced a new type of organization: Tokenized Communities.
By Forefront and Jihad Esmail - Mar 21, 2022
Web3 has introduced a new type of organization: Tokenized Communities.
While they have much in common with more traditional organizations, tokenized communities promote fundamentally different economic models than the mainstream organizations that preceded them.
For example, we value traditional companies based on assets and cash flows. Companies with more capital -- or expected ability to absorb more capital in the future -- are ideally valued more highly than others.
That isn't the case for every organization. Jacob Horne argues in his essay on "Hyperstructures" that crypto protocols built with certain traits are valuable not because of cash flows (e.g. through extractive fees) or asset valuation. Instead, they are valuable due to the shared ownership of the protocol by those building on and using it.
Jacob highlights the "threat of the fee" -- the ability for token-holders to turn on fees at the protocol level -- as the valuable component of ownership, since rational owners won't want to devalue the protocol by enacting an extractive fee.
In other words, companies are valuable when they continuously extract value for shareholders. Protocols are valuable when they continuously create value for the public.
However, not much has been written on the economic model for tokenized communities more broadly. This essay will explore what tokenized communities are, why they are valuable, and why they will create fundamentally new means of value-generation and distribution.
What is a tokenized community?
Tokenized communities can take many forms, but they can be defined by the following:
- Tokenized: coordinates around a commonly held token on a blockchain.
- Platformless: not inherently tied to any centralized platform or tool.
- Self-managing: leadership is distributed amongst roles, not individuals.
- Collectively governed: governed by all token-holders.
- Meme-driven: working toward the proliferation of a common meme.
- Positive-sum: economic model is expansive, not extractive.
- Aspirational: actively working to progressively fulfill the first 6 criteria.
Tokenized community: a progressively self-managing and collectively-governed community that works toward the proliferation and development of a common meme using a token as its primary means of coordination.
A tokenized community doesn't need to be centrally planned or mission-driven from day one. Tokenized communities are often "headless brands," developing emergent narratives through decentralized means. However, while the mission of a tokenized community may be emergent, the consensus must be clear to and embraced by stakeholders.
Let's dig into each of the characteristics in detail:
A tokenized community must be tokenized... shocker!
What does it mean for a community to be tokenized? Simply put, tokenization implies that a community is using a token as its primary means of coordination. The token is a proxy for some larger meme or set of values.
For example, FWB is tokenized. Membership is limited to tokenholders above a certain threshold. Events are token-gated. Content is token-gated. Life in FWB revolves around the token.
On the other hand, Time Magazine minted an NFT collection. Time is not a tokenized community. The community at-large has not adopted the token as a means of organizing around the brand in any meaningful way.
Tokenized communities are platformless social networks.
Given their use of a token as the primary means of coordination, they are not tied to any communications tool or social media platform. They are independent of centralized infrastructure.
A good way to test this for most tokenized communities today is to ask: if their primary communications tool (e.g. Discord) disappeared, would this community still exist?
Being platformless means that tokenized communities can be truly global and open.
In self-managing organizations, leadership is distributed across roles, not individuals.
Rather than there being one leader in a community, there are many. Hierarchy is dynamic based on the specific function being carried out, the scope of the decision, or the context of the work.
Tokenized communities enable us to unlock new forms of work and coordination across previously unrelated groups of people.
Tokenized communities are collectively governed.
This does not mean that token-holders vote on every decision in the community. Rather, it means that power in the DAO ultimately lies in the hands of token-holders.
Tokenized communities ensure some means of voting out core contributors and creating, editing, and ratifying community-wide proposals. This is most commonly manifested in treasury governance -- members of tokenized communities have a say in how the group's treasury is allocated.
While leaders might be pushing the community forward, tokenized communities make sure that the puck stops with the collective.
Collective governance is pointless without a common meme driving the community forward.
Tokenized communities are working toward a collective goal or upholding a shared set of values. In other words, tokenized communities use tokens to coordinate around the proliferation of a shared meme.
By meme, I mean an idea or element of culture that evolves as it spreads throughout a network.
Let's take some examples:
- Krause House: own and operate an NBA team.
- Gitcoin: support and fund public goods.
- Forefront: support and build tokenized communities.
Being meme-driven is a necessary component of tokenized communities -- it makes "sharing in common" valuable.
Tokenized communities are positive-sum.
Tokenized communities create value by building expansive value on top of existing protocols and information in line with the shared meme of the community. Despite being open source, with little to no "proprietary" resources, tokenized communities create value for the entire network by giving supply and demand side access to tokenholders.
Finally, tokenized communities are aspirational.
While using a token doesn't inherently make a community self-managing or decentralized, the benefits of (and value accrual to) the token aren't maximized unless those criteria are upheld.
However, no organization will fulfill the first 6 criteria purely on day one. Tokenized communities are progressively working to fulfill the above criteria, making an underlying and defining north star of every tokenized community to build a better tokenized community. This is best articulated in the thesis around "progressive decentralization."
The Economics of Community Tokens
Tokens are investments in memes. Tokenized communities use tokens to coordinate around the proliferation of a meme.
This simple idea has deep implications for token economics.
As mentioned at the beginning of the essay, protocol tokens are financially valuable in large part because of the "threat of the fee." Taking this idea to its extreme, a token's governance power is powerful because it gives you the ability to conserve the vibes. As a builder on the protocol, you hold to help ensure that you can't get deplatformed. As a user, you hold to help ensure fees don't increase. As a passive investor, you hold to help ensure that the protocol continues to grow.
All of these goals are served by playing positive-sum games, ensuring that the protocol stays open and as valuable as possible for everyone.
Community tokens follow a similar path to value accrual. While short-term value may accrue to the token through gating access (e.g. to Discord, content, product, events, etc.), long-term value accrues when community members are holding to:
- Influence the meme. As a holder, I want to have a say in how the meme is manifested. In other words, token governance is a means of contributing to a headless brand. The balance between meme conservation (group) and evolution (individual) is manifested in the Vibes Infinity Flow.
- Spread the meme. As a holder, I also want to ensure that more value is continuing to be created for as many new community members as possible. This increases the value of the meme, a net-positive for everyone involved.
In some ways, this is no different than other financial assets in communities we're a part of today: I want to make my neighborhood as nice as possible so that my home value increases. I want to give back to my university so that the value of my degree increases. I want to be a productive citizen so that the national economy grows.
Community tokens serve as financialized coordination tools in previously unfinancialized communities.
So how do tokenized communities economically sustain themselves? This is primarily a question of how individual members and contributors get paid, so that they aren't forced to allocate time elsewhere. Unlike protocols, people need to be paid.
I don't think this question has a concrete answer yet, but there are many promising experiments. Paying contributors with the native token is one way, and I believe long-term there will be more creative ways to use community tokens across the DeFi ecosystem.
However, a key point to make is that fees/traditional pricing models aren't inherently bad, but they should be expansive: the value captured should be directly aligned with the value created. Economic models for tokenized communities should be viewed through the lens creating value for the community rather than capturing value from the customer.
One Token, Many Communities
If tokens are investments in memes, every community doesn't need a unique token. Protocols already have this figured out.
The most successful protocols are built to be the foundations of countless platforms. Zora is built to be the infrastructure powering millions of NFT marketplaces. Uniswap is built to power exchanges across a variety of apps and wallets that integrate it.
The most valuable community tokens will be widely used across organizations as a means of coordinating the development of a common meme.
You could imagine thousands of communities with unique membership NFT collections, each with their own perspective on how public goods should be funded. Each of them could use the same ERC-20 ($GTC) as a coordination tool.
This isn't the only way forward. Very opinionated tokenomics might not be possible without each tokenized community having some sort of unique coordination token. The point is that if club tokens are representative of the memes, then "community M&A" might actually take the form of just... using the same token.
Rafathebuilder touches on this idea in his post on DAO leadership:
The last piece is crucial. The benefit of developing others compounds over time and outweighs the initial investment required. As a result, those with most influence in web3 are often those that have helped others become leaders.
This might be the killer feature of DAO leadership: there's an incentive for mutual growth. This self-reinforcing loop becomes a recursive process.**
The same is true at the organizational level. Tokenized communities become more valuable as they empower other communities to form and grow around a shared meme.
Just as the biggest protocols will have millions of platforms building on top of them to serve specific users, the most successful community tokens will have millions of communities building on top of them to serve specific sub-groups and expand access to new sets of people.
Thus, community tokens can be broken into two categories:
- Network Tokens: tokens that represent a shared meme that act as a "schelling point" to connect other communities that aim to proliferate that meme in a specific way or for a specific audience.
- Membership Tokens: tokens that represent membership in an individual community that falls under a "network's" umbrella.
This is why both NFTs and ERC-20s will continue to be important tools in the community token toolbox. Much more on this in another essay to come.
The Future is Tokenized Communities
This essay takes heavy inspiration, in format and in content, from Other Internet and Jacob Horne, who have written extensively about protocols, tokens, and "market-protocol fit."
Like protocols, there will always be some incentive to fork community tokens. Today, launching your own token is basically free money. Speculation is a powerful force which is why we see so many tokens (and rugs) launched every day.
However, tokenized communities are not protocols. At birth, tokenized communities are "a token and a dream." They are an opportunity for and a mechanism by which people can coordinate around a shared meme. They are meme first, protocol/product second.
As the ecosystem matures, communities will realize that it is mutually beneficial for participating groups to lean into a shared network token rather than minting their own from scratch. Community tokens will act as a "schelling point" for groups embracing a common meme, who will be able build on top of existing economies rather than recreating their own.
Tokenized communities are the future of organizing. Let's keep building that future.
Thank you to Scott, Katie, Chase, Krish, Ed, Joey, Julia, Flex, and Reka for edits, comments, and jam sessions for this piece.
Also, a huge shout out to Other Internet, Jacob Horne, and Rafa for the incredible insights that brought this essay to life.