In short, why do tokenized communities matter?

Historically, it hasn’t been easy for large internet communities to collaborate towards a common goal. Since most social media platforms optimize for engagement instead of community building, user’s interests are rarely aligned. And without internet-native financial tools built on transparency, it has been difficult to pool resources together at scale.

Only recently have the right tools started to emerge, enabling productive financial coordination at scale. Central to this new stack of tools are crypto tokens that align community members under a set of common objectives. Using community tokens, groups can do the following:

1. Distribute governance over a shared on-chain treasury

2. Enable community members to participate in the upside of their network

3. Token-gate access to exclusive spaces, content, events, and other resources

The rest of this essay will unpack how tokenization can solve some of the issues faced by internet communities today.

The problem with most social networks today

The average American spends almost two hours and thirty minutes per day on social media, including platforms like Facebook, Instagram, YouTube, and other platforms.

In a world where our attention remains one of the scarcest resources, these platforms are in constant competition for it. To support their paid advertising business models, social media platforms have optimized for user engagement above all else - since the longer we scroll, the greater their ad revenues.

For users, the outcome tends to be an entropic news feed of random media. Yet from the platform’s point of view, there is nothing random about it. Content is carefully curated in the backend to entertain users, and sometimes the best way to keep us engaged is to enrage.

While Facebook and others might have been founded on ambitions to bring people together, they’re not necessarily built to align users. Rather, they often optimize for divisive and clickbait behavior, and this is partly why communities have struggled to collaborate online. Even within private Facebook groups, subreddits, and Twitter Spaces, the most engaging and viewed content tends to be provocative, random, and distracting.

But there’s hope. Alternatives to today’s large social networks are emerging, and we’re starting to see migration towards more niche, bespoke social networks that rely on paid subscriptions instead of ad revenues. Since platforms like Are.na don’t necessarily optimize for user screen time and maximizing engagement, they can focus on building a network designed for learning and valuable connections.

Are.na isn't the first niche social networking platform to emerge recently. Over time, it's likely that instead of regularly visiting Facebook, Instagram, and Twitter, internet users will belong to a handful of niche social networks catered to their specific subcultures. These communities might have their own custom interfaces or simply use Slack/Discord for communications. Regardless, with less noise and content that isn't simply curated to engage, we’ll see greater user alignment.

The need for transparent financial collaboration

Networks like Are.na might give rise to more internet-native collaboration. But can members of an online community really work together without any sort of financial alignment?

There’s a reason why companies are so productive. Thanks to equity and other forms of financial compensation, founders and employees are highly aligned with a company’s mission.

By owning equity in a company, individuals have contractual rights to any financial value that accrues. Then, as equity is distributed amongst contributors, their objectives converge as the collective aims for greater value creation. The result is a highly aligned group of founders, employees and other stakeholders.

Communities don't usually benefit from the same types of financial alignment. Unlike companies, large-scale communities haven’t been able to leverage the distribution of equity to drive incentive alignment. To do so, they would need to formally incorporate. And that isn't feasible for large-scale communities.

At the same time, internet communities haven’t been able to access an internet-native financial system, capable of enabling large groups to pool resources and govern over them transparently without centralized control.

For example, if 10,000 people wanted to crowdfund resources to sponsor independent scientific research, how would the funds be managed? In a fiat world, the online community would delegate treasury management to a subgroup, leading to risks of proceeds being stolen or misallocated.

What if there was a better way to both manage shared resources and align users under collective ownership?

Crypto can solve these problems

It's now clear that social media platforms don’t optimize for alignment. We also know that the internet inherited financial infrastructure that does not support transparent crowdfunding and treasury management. Now, we’ll explore how public blockchains and the tooling built on top of them can solve these problems for internet communities.

Crypto apps and tooling are now enabling communities to manage shared treasuries in a decentralized and bottom-up fashion, lowering any risks associated with centralized control. Tokens are at the core of these systems, and they can act as a quasi-equity instrument that captures and distributes any value generated by a network. The result is a tokenized community, equipped to manage a community’s treasury and align member’s incentives. But what makes an online community “tokenized”?

A tokenized community is effectively a network of highly-aligned individuals empowered by a shared treasury that is not subject to centralized control. Each tokenized community has a specific purpose and set of objectives. By owning the community’s crypto tokens, members are incentivized to work in order to increase the value of the community.

Even though tokenization is not a perfect solution for internet communities, it can solve many of the problems facing large-scale, internet-native communities today.

While communities have benefitted from the ability to scale rapidly, only companies have been able to align members under the financial incentives that arise from the distribution of equity. Yet, tokenized communities can benefit from both scale and alignment.

More specifically, tokenization can help communities in the following ways:

Tokens align users: Just like equity holders are aligned to increase the value of a company, token holders are aligned to increase the value of their community. Community tokens are designed to capture value generated by the network, and will therefore increase in price if demand to join the network outpaces supply.

Tokens act as voting rights over a community’s shared treasury: To enable widespread governance over a community’s shared treasury, tokens can act as voting rights. In this way, each token represents a unique vote over each proposal brought forward by community members.

Tokens are programmable: Communities can choose to token-gate access to chat rooms, specific content, IRL events, and more. By doing so, communities can use their native token as a coordination tool, since only those holding the token can gain access to resources.

Tokenized communities today

Many crypto-native communities are using tokens to help scale their respective networks and distribute value back to users in different ways. To learn more about how communities are experimenting with tokenization, you can browse through the recent projects incubated by Seed Club.

For now, here’s a snapshot of some of the most notable tokenized communities today:

The Symmetrical - The access point for GenZ in web3

As a tokenized community on a mission to onboard the next million genZs into web3, members of The Symmetrical co-invest in on-chain assets, consult major web3 brands, and network with crypto x consumer founders. Through these initiatives, members can gain a better understanding of the ecosystem while making connections in the process.

The $TSYM token is used to distribute governance and ownership over the community’s shared treasury, which is invested in a handful of tokens. $TSYM is also used to gate access to specific fireside chats, events, and other resources. 

Chainforest - A new spin on venture capital

Chainforest is building a powerful ecosystem of web3 builders and investors at scale, using collective insights and knowledge to generate value for both limited partners and portfolio companies. 

Unlike any other crypto-native investing community, Chainforest is experimenting with token utility by distributing carry in the fund to members who contribute to the investing process. For example, if members bring deal flow to the community or participate in the diligence process, they earn $RAINDROP tokens if the VC fund invests in the deal. Then, upon successful exits, a portion of the fund’s income is distributed to token holders. 

LinksDAO - Building the world’s greatest golf community

The tokenized community is on a mission to own one of the world’s greatest golf courses. Along the way, they are building a passionate community of golf enthusiasts and delivering exclusive member benefits.

LinksDAO NFTs give holders the ability to vote on treasury proposals and access token-gated events, merch, and discounts. As the organization looks to acquire its first IRL golf course, NFT holders will also have a say in which course is selected. 

Krause House - The first tokenized community to buy a professional basketball team

Krause House is governed by a community of basketball-loving fans. Together, they have acquired a stake in the BIG3 Ball Hogs team. They also have ambitions to be the first community to own an NBA team, and are bringing fans together under this objective. 

The $KRAUSE token is used to distribute governance rights over the communities shared treasury, which will be used to purchase stakes in various basketball teams. Tokens are also used to gate access to their exclusive community of basketball fans. 

How do community tokens capture value?

With an online community, the network tends to be the product. In other words, the subjective value of belonging to the network will drive demand for the community’s token. In general, by striving to maximize value for members, communities will see their tokens appreciated as more people want to join the network.

In addition to the subjective value of belonging to a network, there are also other dimensions upon which value accrues to community tokens. Outlined in a recent essay by Jihad Esmail, the three dimensions of community token value accrual are the following:

Network Value: The most fundamental layer which captures the subjective value of belonging to a community with a shared mission. For example, HiveDAO is evolving as a selective group of crypto-curious minds. By combining our knowledge, backgrounds, and networks, we are much stronger than the sum of our individual parts. To some, there is value in gaining access to this network.

Ownership Value: This layer captures the governance value of a community’s native token. Once a tokenized community pools capital together, there can be inherent value in having a say in how the treasury is managed. 

Production Value: This layer captures any financial value generated by the products, services, and content that the community produces. In HiveDAO’s case, if content was placed behind a paywall, then subscription revenues would flow to the community treasury and could be paid to token holders in the form of dividends. Since token holders are responsible for content creation, they would be entitled to any income earned from their work.

Almost all community tokens capture network and ownership value. However, tokens will often be designed not to capture production value to avoid the risk of violating securities regulations by failing the infamous Howey test. Refer to the FAQ to understand how businesses and tokenized communities intertwine. 

How can communities keep speculation to a minimum?

Tokenized communities are not a perfect solution to the problems faced by many online groups today. They provide open and trustless alternatives to collective crowdfunding and governing over a shared treasury, while also enabling community members to participate in the upside of their network. But at what cost?

When tokens are designed to capture such value, community memberships effectively evolve into financial assets. And as these assets quickly become liquid, many token holders lose sight of the community’s broader value, shifting their focus to short-term speculation and profit maximization.

Is speculation all bad though? Across industries, it drives technological innovation. In crypto specifically, it can be used to bootstrap networks. 

Speculating over which community tokens will be valuable in the future is also not dissimilar to VCs evaluating pre-product market fit startups. Yet, venture capital investments tend to remain illiquid for much longer, while access to the asset class at large has been restricted to high-net-worth accredited investors.  This is at least partly why the SEC is at odds with crypto.

To ensure that speculation remains more of a feature, and less of a bug, how can communities make use of tokens productively?

1. Communities can reduce speculation in the early stages of their development by issuing non-transferrable tokens to members, which cannot be sold or transferred to others. 

2. Rather than letting members buy their way into the community, communities can retroactively “airdrop” tokens to members who perform valuable work. In this way, tokens are rewarded to contributors, and not to speculators who only want to hold the asset for financial purposes. 

3. Communities can develop stricter token vesting schedules, distributing tokens to members evenly on a straight-line basis, rather than all at once. 

4. Communities should not rush to tokenize. Instead, they can focus on progressive decentralization.

Why should we care about tokenized communities?

We are seeing tokenized communities buy sports teams, golf courses, invest in early stage startups and fund groundbreaking scientific research. Under a collective ownership model that optimizes for transparency, individuals can align with strangers across the internet who share common objectives and values. This is happening now for the first time.

Tokenization can help foster highly aligned networks optimized for collective action. Under this new model of organizing internet-native networks, we may see tokenized communities achieve even greater heights while distributing the value it generates across all active participants. 

As both community members and managers, you don’t want to discount the power of tokenization.

FAQ

Are tokenized communities businesses?

No, tokenized communities are simply networks of people with a common objective and shared treasury. They are not businesses in themselves, and earning income should not be their primary objective.

However, to solve internal needs and to better realize the community’s objectives, groups may decide to allocate a portion of their treasury towards various business ventures. To no surprise, it can be more effective to accomplish something as a small subgroup incentivized through direct ownership, rather than as a large collective. 

Here’s an example:

As a tokenized community on a mission to own a stake in an NBA team, the Krause House community recently voted to allocate a portion of their treasury to fund a business. Heat Check (prev. MyJerry), is a play-to-earn social game that connects basketball fans around the world and gives them access to exclusive rewards. To kickstart game development, several community members drafted a proposal requesting about $90,000 from the Krause House shared treasury. The proposal passed, and the funds were distributed to the founders of Heat Check in the form of a grant.

It's important to note that while Heat Check received its seed funding from the broader Krause House community, only those who built and now operate the game have rights to any income earned by the business. In other words, Heat Check isnt community-owned, despite being community-funded. 

Should this raise a flag for members of the Krause House community? Isn't web3 supposed to be all about decentralized ownership? In this case, several factors that must be considered.

Founders are taking the greatest risk, not the community: The platform’s founders are responsible for building and operating the game, and by holding most of the equity in Heat Check, the founders are properly incentivized to see it succeed. Nonetheless, the broader tokenized community funded the project and acted as the platform’s initial users. In an ideal world, a revenue-sharing agreement would be established, such that a percentage of Heat Check’s revenues be distributed to $KRAUSE token holders. Is this possible?

Securities law prohibits community ownership: While it would be quite simple to establish a programmatic revenue-sharing agreement between Heat Check and the broader Krause House community, it would likely be considered an unregistered security under the SEC’s guidelines for not passing the Howey test. 

The Krause House community can benefit from Heat Check even without rights to profits: When the proposal was initiated, $KRAUSE token holders knew that the grant would not convert to any sort of ownership over Heat Check, yet the proposal passed anyways. That is because community members saw the play-to-earn game as an opportunity to grow the Krause House brand while bringing members closer together. In hindsight, 90k will probably be seen as a small price to pay for the value that Heat Check created for the broader community.

Value generated by Heat Check will indirectly accrue to $KRAUSE: Despite no contractual ownership over Heat Check, Krause House token holders will see the value of their tokens increase as the play-to-earn game improves the value proposition of belonging to a community like Krause House. As the game makes it easier and more fun to connect with other basketball fans, more of them will be exposed to the community’s mission, and will look to join through buying $KRAUSE tokens. In this way, the $90k grant should be seen as a marketing expense for Krause House.

By funding businesses that align with a community’s core values, many tokenized communities engage in the same sort of activities as Krause House. While tokenized communities are not businesses in themselves, business-building is a tool that should be used to grow network value. 

Although if extracting profits is a group's main objective, then they should simply start a business. On the other hand, if they want to build a network of like minded individuals, upon which projects, businesses, and other initiatives can be built, then they should consider a tokenized community.

Are tokenized communities DAOs?

No. While all DAOs are tokenized communities, the converse isn’t true. As communities without hierarchical structure and centralized controls, DAOs are a subset of the tokenized community “landscape”. I began to explore the idea of a DAO here, and then later tried to explore their use cases here.

Effectively, DAOs are blockchain-based organizations that rely on smart contracts for trustless financial collaboration between members. Because DAOs operate on-chain, all transactions, treasury balances, and rules are verifiable by members and outsiders alike. While these characteristics are common to all tokenized communities, DAOs are unique in a few ways. For one, governance over a DAOs treasury is managed by token holders, and proposals are made in a bottom-up fashion. Once the DAO’s smart contract is executed, there is no need for centralized oversight. 

Additionally, DAOs are meant to rely on their underlying smart contracts to operate somewhat autonomously. For example, if a NounsDAO member makes a proposal to host an IRL event for 20 ETH, the funds will automatically leave the DAO’s treasury and be sent to the proposer if it passes.

Early on, it's common for a tokenized community to refer to itself as a DAO, even if control is somewhat centralized and smart contracts are not yet optimized to automate operations. For example, if HiveDAO wanted to accurately describe the community at this stage, we wouldn't refer to ourselves as a DAO. Yet, the “DAO” is there to remind us of our long term objective to build a widespread network of researchers that operates autonomously.