Web3 — Tokenised Communities vs. Tokenised Economies

Community first, economy second

Tokenisation is a mechanism for networks and communities to incentivise collective value creation and enable contributors to partake and share in the value captured. This is why I continue to believe that community is the most compelling killer application of web3 tech and tools. By aligning incentives across members and stakeholders, tokenised web3 communities can maximise both social capital and utility value. Through issuing their own tokens, communities can become true ownership economies, with members enjoying a direct connection to like-minded peers and to the icons, creators and brands they love, while having a stake in the collective value upside they co-create. The value of the community token asset in itself will be determined by its utility value (what the asset provides by way of access, exclusivity or benefits within the community it’s being recognised in), its social capital (community belonging and vibrancy, member status and reputation) and the ownership value (community governance and resource allocation) it provides to holders.

That’s the core thesis of Variant’s ownership economy, with crypto unlocking a new economic model for communities and networks that are built, operated and owned by their users. Ownership creates incentives to grow community value and capture the upside, accelerating network effects and resulting in platforms that grow bigger, faster. However for a community to transition into a self-regulated and self-sustaining (sovereign) micro-economy, it needs to think about funding and monetisation models that move capital resources and revenue streams on-chain. Without it, there is no value being captured by the community to redistribute or re-allocate.

Tokens aren’t a quick fix for product-market fit. While tokens can be useful in capturing user attention and bootstrapping initial member activation, a community’s core value proposition needs to go beyond ownership. To sustain and grow value, a community needs to be able to monetise either its social capital or its utility value. As such, tokenised communities can provide and monetise three types of value:

  1. access/network value: community access, belonging & connection around a common meme/mission/purpose> option to monetise via token-gating subscriptions or token-gating brand sponsoring or affiliations

  2. output/production value: utility, tools, products and services provided by and for the community> option to monetise via on-chain transactions, revenue-share or royalty allocations, and token-gated commerce or marketplace redemptions

  3. ownership/governance value: community roadmap governance and resource allocation

     > option to monetise by selling governance and/or security tokens as equity

In the long run, the most vibrant communities will be those that deliver (and capture) value on all 3 axes: belonging, utility and ownership. But whatever monetisation model a community decides to adopt, its value capture mechanism needs to be expansive, not extractive. The primary focus for any community tokenomics model should be to create value by and for the community, rather than capturing and extracting value from its members or outsiders. Also, any value captured by the community should be directly aligned with the value its members have co-created. That doesn’t mean all value should be redistributed to members, but at least value should accrue to the community’s treasury to support ongoing projects.

Tokenised communities are meme-focused capital allocation networks. Community tokens accrue value based on how well they incentivise token holders to fund meaningful collaboration that propagates a common meme. Tokenised communities turn members into entrepreneurs, creating a network of projects, products, companies, and sub-communities that are working toward a common meme or mission. https://forefront.market/blog/tokenized-communities-value

The core idea and promise of tokenised communities is to create a self-sustaining and self-reinforcing flywheel, with members putting skin in the game to earn social status, access utility and/or earn a stake, which in turn creates incentives and network effects for members to invest and contribute even more. And with mutuality and agency being the driving forces and organic fuel keeping the flywheel humming. Mutuality ensures members are subscribing to a common purpose and shared values based on symbiotic and reciprocal benefits, which in turn is a prerequisite for members to commit agency by actively participating and tangibly contributing to the community.

Community Flywheel

Within a community flywheel, tokens act as programmable incentives to create and capture value. Smart contracts will define how tokens can be earned and what these tokens unlock in terms of value or holder rights. In other words, you can program crypto tokens to incentivise community members to invest and contribute to deliver certain output and outcomes.

You can give people digital tokens to do things you want them to do to create outcomes that you want to create, all without spending a dollar, a euro, or any traditional currency. Tokens are a new form of money essentially created out of thin air. But that money will only be valuable if the underlying activities this new type of money is incentivizing are deemed valuable. Programmable Incentives — by Lyle McKeany and Rockwell Shah (substack.com)

Which brings us back to square one. Tokens will only accrue value if the community flywheel they underpin will deliver and monetise value, one way or another. For a tokenised community to become its own micro-economy, it needs to be thinking and acting more like a profit-making business. That’s not to say that every community, or for that matter tokenised community, needs to generate profits, but to sustain token value, at least the value and profits should accrue to tokenholders. Many token projects today simply aren’t profitable (and lack a road to profitability) or their mechanism to distribute value and profits are simply flawed.

A lot of chatter in the industry is happening around why products that are good don’t accrue value to their token. I’ve been thinking about it at a deeper level and came to two conclusions around why this is the case. Nothing escapes these three principles: 1. The startup is not profitable (revenues ≠ profit) 2. The profits do not accrue to tokenholders (not LPs) 3. The mechanism to distribute profits is flawed Revenue — An Abused Word in Crypto — by Joel Davies (substack.com)

To become a value accretive (vs. extractive) community, i.e. generating value by and for the community in a sustained and scalable manner, it would be tempting to start with defining the community’s actual revenue generating product or value proposition. However, being a big fan of Simon Sinek’s golden circle framework, I would argue for starting with the WHY and HOW of community instead, before nailing the WHAT (output, product, proposition). Applying this to community, the proper staging would look like this:

  • WHY — Community Purpose: WHY is not about making money; that’s a result. WHY is a common purpose, cause or meme. It’s the very reason your community exists.

  • HOW — Community Flywheel: HOW is about creating the right dynamic, culture and incentives that attracts the right members, competencies and resources to collaborate and propagate the core purpose, mission or meme.

  • WHAT — Community Value: WHAT is the combined social and utility value a community delivers and which ultimately needs to get monetised when tokens are an integral instrument in driving the flywheel.

By applying this strategy staging framework, you’ll ensure that you don’t prematurely launch a token, before having established a ‘minimum viable community’ and validated your ‘community-market fit’. Starting small and organically weaving from the inside out will allow you to test and tune your flywheel, but more importantly source input for crafting your community’s value proposition and token model design from a core team of committed and like-minded insiders.(See also some of my previous posts on community staging and design)

There is no single right model to bootstrap your community flywheel. Across the 3 value axes, access-utility-ownership, any single one can be chosen as the kickstart to your flywheel. Ownership can lead to access, as much as access can lead to ownership. Web3 Academy’s DAO roadmap is based on gradually growing from a valueless token to a valuable, or value accruing token, by staging from earn to own, to token-based governance, token-gated utility and ultimately revenue and token liquidity over time. Whereas brand communities have the benefit that they can build community on an established brand and product foundation, and as such tokenisation would enable a production-network-ownership (utility-access-ownership) flywheel, which is the main thesis of tokenising loyalty programs or DAOfying brand communities.

https://forefront.market/blog/tokenized-communities-value

At the end, no matter how you decide to sequence your value roadmap, healthy communities will be those that are able to sustain a value creation and value capture flywheel which:

  • attracts capital resources or generates revenue income on-chain

  • allocates those resources and income effectively for maximum impact (i.e. propagation of mission/purpose/meme)

  • ensures value flows back to community proportional to its contribution (i.e. value accretive vs. extractive)

Which also begs the question as to how communities and DAOs can manage collective governance to maximise on-chain revenue, but that’s a topic for a follow-on deeper-dive on monetisation and governance strategies.

Even though we’re in the ownership economy, where users get more power and ownership than they’ve ever had before, DAOs need to balance that with making enough money to at least take care of their core teams. The paradox of DAO profitability (quorumnewsletter.xyz)

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