There needs to be some context explanation before we can get to where we want to go with this piece. If you’re new to the blockchain space, or not familiar enough to be DeFi savvy and understand the concept of liquidity mining in & out, you might need some definitions to understand what’s behind the concept of creativity mining. If you got into the Decentralized Autonomous Organization (DAO) space through the prism of culture and community, this might feel boring and uninteresting as we’ll have to dive into Decentralized Finance (DeFi) mumbo jumbo, but please bear with us as we promise we’ll try to make it worth your time.
As reported & analyzed many times since its inception, Compound protocol kickstarted the concept of liquidity mining by distributing $COMP tokens to its users in June 2020. From there on, most DeFi projects started to adopt this method to attract liquidity to their project and reward users for bringing this liquidity.
What does liquidity mining exactly mean though?
People often confuse liquidity providing and liquidity mining. Thankfully, Glenn BONΞZ Bona made a very welcomed and easy to understand distinction in this blog post:
Liquidity provision is where a user provides liquidity to a trading pair and reaps rewards from trading fees. So when a user swaps between the two tokens a small fee is charged. This fee is where rewards for liquidity provision providers come from. [...] Liquidity mining is similar in the sense that you provide liquidity however you’ll then receive a LP token that needs to be staked in order to earn rewards reserved for the mining program. These liquidity mining rewards come directly from the project's liquidity provision incentives.
From the point of view of a DeFi project, liquidity mining programs can be broken down in 3 steps:
The reward is usually the project governance token (or DAO governance token). Depending on the success of the project, it holds a certain value, and also gives the right to its owner to participate in the governance of said project. Liquidity mining is a powerful tool that has been used heavily for about 2 years now, but has started to show some limitations.
We will try to be brief here, as this article is not meant to be about liquidity mining. Andrew Thurman went over these limitations in an article published on Coindesk recently. The obvious problem that most liquidity mining programs run into is that the amount of tokens allocated to these programs is limited, so one of two phenomenon eventually happens:
-The supply of tokens allocated to liquidity mining programs runs dry
-The yields offered by new projects with a fresh supply outperform the yield older projects can offer and we see a migration of the liquidity from one project to the other.
Either way, this is not a sustainable incentive. How does this relate to the topic of this article though?
Well it’s pretty simple. We are going to see how creativity mining uses a similar mechanism to liquidity mining, but in a more virtuous and sustainable way for artists coming into web3.
Based on what we’ve seen so far, the concept of creativity mining could be summarized in 3 steps, similar to liquidity mining:
In the concept of liquidity mining, users are rewarded for the risk they’re taking by providing liquidity on DEX, where they’re subject to potential Impermanent Loss. This makes sense in a classic model of risk/reward.
In a creative environment however, there’s no “risk” to reward (we’re not going to explore philosophical considerations around creation as a risk here, and just assume there’s no risk). Rather, creativity mining rewards creation in an environment where this creation benefits the entire DAO because the value of the creation somehow gets reflected in the DAO token value. If you create a DAO where you want to build a movie collaboratively, or a painting collaboratively, you can imagine a situation where:
Of course, there has to be sets of rules in place: what is an artistic contribution, who decides which contribution deserves to be integrated in the final work, how many tokens should one contributor receive, etc…All these rules can be decided collectively by the DAO members - they’re not insurmountable issues.
One of the problems of the liquidity mining program, as we’ve mentioned earlier, is that it is not sustainable. Either the supply runs dry, or the yield offered by the program becomes outweighed by other programs. These two problems are the results of several factors:
From a DeFi standpoint, these problems are hard to overcome because the DAO usually doesn’t have a product or service to sell to people. DeFi-based DAO usually offer services that are free and collect a small fee somewhere in their application flow, but this small fee is generally not enough to provide for the needs of the DAO & finance a strong and sustainable liquidity mining program at the same time.
Now imagine somehow they were able to come up with a sustainable liquidity mining program, meaning users of these programs could perceive value indefinitely, the trade-off here being that this value would be smaller, but last longer. In this case, It would only take someone to fork the code and offer higher yields to drain the target DAO’s users (See Vampire attacks). The reason why this is possible? DAO in the DeFi space are often weak when it comes to creating culture, and culture is at the heart of community building. When you don’t have culture or community, the only thing that connects your DAO to its members is financial incentive. As we’ve seen with vampire attacks, this can come and go very fast.
With creativity mining however, things are totally different. First, for DAOs operating in the culture space, through each creative cycle a collaborative product comes out as a result. This cultural product gets to be sold as a NFT, gets to be exploited IRL, etc… It generates extra value that can be redistributed to the members of the DAO - those who have helped create it. On top of that, these DAOs usually create a strong culture and sense of community, because they’re usually built around a shared interest that goes beyond money: Love of books, love of cinema, love of music, etc… You can fork a DeFi project’s code, but it’s much harder to fork a strong cultural community.
At each step of the product cycle (elaboration, sale as an NFT, exploitation IRL), value can be extracted by the DAO and be redistributed to its DAO members through virtuous tokenomics. In this case, in contrast to web2, it’s ok to extract value from the DAO members for the DAO itself, because the users themselves own the DAO through token ownership, and so this value eventually gets redistributed to them. (see figure below).
In the example above, we get a glimpse into a potentially sustainable value redistribution cycle:
DAO’s artists produce art, which gets sold online/offline and generates value. This value gets split in two: one part is allocated to paying artists for their contribution (2) and the other part is used to replenish the DAO’s treasury (3), controlled by the artists. Then, through the creative cycle, a fraction of this DAO treasury will be used to reward artists with a creative reward airdrop using governance tokens (1).
In France there’s a state run organization called the “Centre National du Cinema”, CNC, which is intended to help finance the production of French movies. Here’s how it works, in a nutshell: There’s a tax on movies being exploited in France at cinemas, on television, and on video. This tax is imposed on every movie, even foreign movies. The money collected goes into a common pot, and every year, it’s allocated to new movie projects based on a committee approval. In this system, creation finances creation in a virtuous cycle. Bigger, more commercial and successful movies help the creation of smaller, more progressive movies.
This system has been in place for more than 50 years in France, and is regularly praised by the entire cinema industry there. Creativity mining is simply mirroring this, showing that fair redistribution of the created value in art & culture can lead to a sustainable financial system.
DeFi shows us that with the proper incentives in place, you can move mountains (or liquidity). DAOs built around culture & art show us that these are the strongest priorities for a community to solidify around. The combination of these two is creativity mining: exchange your creativity for governance tokens in the DAO that will govern the final cultural product, the result of a collaborative work between DAO members.
This model is still very experimental, just like DAO, DeFi and the whole web3 space in general. It will keep evolving, maybe it’ll stick, maybe it won’t. But we are convinced this is a potential paradigm shift for artists, and something that is achievable thanks to all the technology enabled by web3.