Web3 — Designing sustainable incentives for mutuality & agency

Incentive design is a critical part of the overall operational and economic design of tokenised communities

In my 2 most recent posts I explored how web3 can turn communities into economies. When communities issue their own native token or virtual currency, they effectively create a way for members to buy, earn, redeem or sell within a semi-open, semi-closed economy. Like with any national economy, supported by its own national currency, it’s one that enables intra-community value exchange and transactions, as well as one that can be traded or exchanged for other currencies or to access or pay for goods and services from outside the community. And similar to fiat currencies, community tokens will appreciate in value when the underlying economy grows.

The core idea with community tokens is to enable the creation of a participatory economy between creators, contributors, and community members. In doing so they encapsulate the total value of the community’s micro-economy, or the GCP (Gross Community Product). Like it’s better known GDP counterpart, the GCP measures the total economic activity and overall well-being of a community, both in financial and non-financial terms. While being bespoke to every specific community and aligned to the respective community purpose ans scope, wellbeing will clearly stretch beyond financial measures and include things like social, experiential and overall cultural capital. That’s why we shouldn’t consider community tokens as pure financial assets or value a community solely based on the price of it’s underlying token.

Indeed, as their name suggests, social tokens are, before anything else, the tokenization of human interaction and the opportunity it provides. They represent an itemized version of the value you add to the Web3 ecosystem. With social tokens, contributors in tokenized communities finally have something tangible and tradable to represent their work, connections, and history. De-Financializing Social Tokens — by Eliot Couvat (substack.com)

There is a valid concern that by tokenising human interaction intrinsic motivations of participating in and contributing to a community will be overpowered by new financial incentives, fundamentally changing the behavioural dynamics that drive organic community vibrancy. If quid-pro-quo becomes the new norm, how do you ensure members are driven by pure motives and aligned to the common cause? And how do we keep communities sufficiently open and inclusive, if access and experiences are gated by tokens?

As an ecosystem, we need to rethink the value of a token from the ground up. The decentralized communities of tomorrow will be centered around what we do, instead of what we have. Social Token Paradox. In the metaverse, when we look in the… | by Gaby Goldberg | Medium

The case for tokenised communities doesn’t need to start or end with a financial or economic logic. First and foremost, community tokens, whether fungible or non-fungible, are ways for individual members to both fit in and stand out. Community tokens or NFTs act as membership badges or passes, showing affiliation and belonging. They can be given out for free, earned or bought, but the basic premise of owning a bespoke community token is a testament of fitting in and belonging to a specific group of like-minded people. In addition, the number or type of community tokens one accumulates over time are also a way to stand out, as a reflection of specific affinities, community reputation and status, or member tier and role.

At their most basic level, tokens are programmable incentives which, when modelled thoughtfully, drive participants to exhibit desired behaviour and align the collective to pursue and accomplish its bigger purpose. However, the creation of native token by itself will not necessarily align the incentives of users to act in the best interests of the community. The first step is understanding and defining the type of member participation and activities that drive value, and then designing targeted reputation and rewards schemes to incentivise these behaviours. Incentive design is a critical part of the overall operational and economic design of tokenised communities.

For incentives to be effective, they need to relate to and reward activities and behaviours that can be mastered and controlled by individual members, such that they are enabled and motivated to act accordingly. And they need to be aligned with the overall goals and long-term purpose of the platform to ensure members’ actions are value contributing. This goes for both tokenised financial rewards and non-monetary incentives, such as reputation systems, in order to shape individual and collective member behaviour to cooperate and create the value that will ensure the success of their community.

In short, and with the risk of repeating myself, it comes down to mutuality and agency. Interests need to be aligned (aka mutuality) across all community stakeholders, with as much focus on the individual (what’s in it for me, what’s expected from me?) as there is on the collective (what’s our community purpose, what do we want to collectively achieve?). This is to ensure members sign up with the right motives, buy in to the community’s vision and scope, and commit to putting skin in the game. As such, it’s not enough to shape a compelling narrative that wins people over to your community, you should also define a ‘minimum viable expectation’ for what it takes in terms of minimum skin in the game (time, effort, investment) as well as potentially ‘proof-of-x’ to be accepted or recognised as a full member. Attracting the right members from the get-go and weaving from the inside out will ensure token incentives will reinforce intrinsic motives and organic agency, while highlighting and rewarding positive-impact activities. In addition, working with seasons and building a consistent off-boarding and re-onboarding rhythm will also help to resurface opportunities to contribute and have members recommit to the next season’s scope. While you should be rigid and directive on the why (community vision and purpose), you should leave sufficient room and space for the community to steer the what & how (community scope and projects).

Incentives are ideal when they are mutually beneficial to individual members and the community. This will create positive-sum games, where everyone has an aligned ‘economic’ interest. Community tokens are most effective when they incentivise coordination and engagement between members. Token incentive design therefor needs to stretch beyond pure financial pay-for-performance, to include vision and social incentives as well. Vision incentives align members and participants to a common purpose and leverage membership tokens as a sign of affiliation and mutual endorsement. These tokens often grant rights to holders to participate in community decision making and governance to shape the community’s purpose and steer its scope and projects. Social incentives on the other hand recognise and reinforce one’s status and position in the social hierarchy of a community. They are effective at supporting the duality of ‘fitting in while standing out’ and are often combined with access gating to unlock incremental benefits, perks, permissions and governance rights. Finally, economic pay-for-performance incentives are effective means to recognise specific project or role-based contributions, using a combination of bounty, guild and grant programs to reward ‘x-to-earn’ member contributions.

As a result, more complex and mature token incentive schemes will often be based on dual or multiple interconnected token models, to maximise inclusive value creation and distribution, while at the same time disincentivising value extractive or destructive token dynamics. Many of the web2 social networks and early web3 communities tend to gyrate towards concentrated and inequal distribution of tokens with initial core team and early adopters, with little promise of ‘status mobility’ for newcomers. Broad token distribution and high status mobility are key for community growth and gravity. To ensure maximum inclusion and distribution, reputation models and token incentives should be designed such that they align recognition and rewards to actual value creation over time. This includes mechanisms such as season-based token distribution, token vesting schemes, decaying reputation points, weighted voting systems, as well as enabling new members to quickly earn their place amongst equals. A community’s gravity is determined by its ability to pull members consistently closer to the core, both by getting new members more involved and by getting active contributors to become community leaders. At its best, gravity becomes a self-sustaining force that drives both community reach (member growth) and love (member engagement), supported by dynamic incentive models that appropriately recognise and reward member engagement and contributions at every step in their journey.

In conclusion, the core idea of tokenised incentives and gating is not to make communities less inclusive, but introduce ways to segment and recognise members based on actual contribution value and reward them accordingly with increased permissions, power and ownership. And as a result, build communities that are self-sustaining, growing reach and engagement, while creating value over the long term in pursuit of a bigger vision and mission.

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