July 24, 2021
Social Tokens: Guilds in the Metaverse
Imagine a digital guild. Individuals with a range of skills fit for the information age, distributed across the world, identifying under a single flag. The community had begun as a loose collection of crypto natives who’d gravitated towards similar music, art, and maybe fashion. It quickly organized into something more directed and deliberate. Members began providing services like education, art commissions, health(care), and temporary housing to the community. The treasury grew and issued grants and loans, initiated by community vote, that were issued to member entrepreneurs. Their projects solved needs in the marketplace, matured, generated clientele and revenue, and a portion of the proceeds landed back in the treasury. The community grew and became more productive, adapting nimbly to a world that had long since moved beyond the industrial age. The guild became functionally autarkic, having forged a respectable internal economy.Instead of a flag, the members of this digital guild, who’d passionately constructed a fractionalized citadel in cyberspace, rallied around a digital token.
Depending on your predilections, the idea of an independent digital community equipped with native currency will either be alluring or threatening. But regardless of how we might feel, a shift in this direction is afoot. This cypherpunk fantasy is not as idealistic, nor as far fetched as it may seem. Digital communities convening around social tokens are cropping up all over crypto.
Some of these communities are structured around a particular eminent personality, like EDM artist RAC. We can think of these communities as superfan clubs, where supporters may be able to participate in their’ idol’s success, monetarily or otherwise. Another digital community takes form in the collective owners of the CryptoPunks NFTs. Created in 2017 by LarvaLabs, CryptoPunks was one of the earlier NFT projects on Ethereum. A CryptoPunk’s value lies almost completely in its community. As more shrewd crypto navigators than I have said, “community is the Layer 0”. With a floor price of $40K, or 17.9 ETH1, a CryptoPunk now serves as a status symbol and conduit for the digital identity of the crypto elite. As interesting as these communities may be, what excites me is the potential for grassroots digital communities to amass scarce resources and begin profitably solving real problems for their members and for broader society.
Friends with Benefits
To flesh out this concept, let’s dive into Friends with Benefits ($FWB), a social token community composed (for the moment) mainly of artists, content creators, musicians, and investors. Founded by Trevor McFedries, FWB refers both to the digital community that lives on Discord (a messaging platform) and the community’s native token. In an interview with James Beck of Consensys, Trevor explains how, as a creator, he envisioned a world where creatives could more fully realize the fruits of their productions. This broadly held Web 3.0 sentiment is embedded in the adoption of NFTs, a digital artifact that enables artists to monetize their creations by interacting directly with buyers. This model stands contrary to the Web 2.0 framework we’ve grown accustomed to, where creatives and consumers interact via a gated platform that extracts most of the value (e.g. Instagram, YouTube). FWB was conceived with a simple idea in mind: promote the endogenous creation of valuable projects and enable the community to participate completely in the upside.
FWB’s HQ is its Discord server, which uses Collab.land to verify that prospective community members have the requisite number of $FWB tokens for entry. During the first “season”, entrants needed to hold 40 $FWB tokens. Season 3 recently kicked off with a minimum of 75 $FWB. To incentivize engagement and quality content, the server is trawled by SourceCred, which screens for positive reactions to posts and rewards high-quality contributors with FWB. The assets under management in the FWB treasury currently sit at $2,240,000. These reserves are composed purely of crypto assets: ETH, WHALE, USDC, UNI, FWB, and DSGN.
As of 6/30/2021, 2,322 unique wallets held $FWB. FWB runs a grants program, where community members can receive funding for projects that the ecosystem might benefit from. A total of 1,943 FWB have been issued as part of the grants program. We are witnessing a fledgling decentralized autonomous organization (DAO), composed of geographically and vocationally diverse people, plot its own monetary policy and generate economic activity. It issues its own currency which can be earned by productive members but importantly also trades freely on Uniswap. Like any economy, liquidity for native assets invites outsiders to participate.
At this stage, most of us recognize the irrefutable power of a network effect—the basic idea being that a network’s true value lies in the square, rather than the sum of the nodes within it. Competitors struggle to overcome a strong network effect because it is self-reinforcing. As an upstart, how do you convince users to migrate to your network if there’s no value on it? And if you’ve solved the chicken-and-egg problem, how do you encourage and support growth on the network? Borne of the Web 2.0 era, I think it is this particular problem that crypto-economic protocols are so uniquely positioned to tackle. These protocols adapt to the network effect problem in two ways:
Protocols can subsidize and galvanize migration to the network by pushing tokens to individuals who demonstrate some commitment to the network. This is similar to the Web 2.0 tactic of “blitzscaling”, or taking losses in the short run to bolster adoption over the long run.
Once the network is populated and its token semi-broadly held, holders have skin in the game. Some of these will be able to choose to contribute work to the network. They now have a stake in sustaining the network. It is this second reason that most directly applies to social tokens.
When a few individuals in a network begin producing valuable work, the value a node ascribes to being part of the community grows. This should, all else equal, drive the price of its native currency higher. As the token’s value rises, insiders will be even more driven to improve the utility and content within the network. An appreciating token will foster broader awareness of the protocol/network. Outsiders will be drawn into the network and generate additional productive content that the community needs. This puts further upward pressure on the token, perpetuating the cycle. This is fundamentally more powerful than the Web 2.0 network effect, where the value that could symbiotically propel a network forward is instead captured mainly by the platform. A token native to a network supercharges the network effect of that ecosystem. The ecosystem is able to harvest the fruits of its labor and continue building the infrastructure necessary for growth because it is predicated on a mutually held digital token.
How do we go about thinking about the “value” of a digital community’s native token? My instinct is to approach valuation of crypto assets through the valuation models I was taught. Where are my cash flows? What is my discount rate? For some protocols, namely those which direct some of the fees generated by the protocol (Sushi, MKR, ETH) to token holders, we might be able to jam our traditional equity models in. But then what to do for a discount rate or opportunity cost of capital? Should we use the discount rates used by VCs for start-ups? Should we use the discount rates applied to Web 2.0 fintech equity? It is unclear which alternative project’s risk is commensurate with that of the protocol token we are attempting to value. Part of the dissonance lies in crypto’s complete novelty. Not just in its technology, but in its economics. Code redefines the bounds of monetary policy and supports bespoke ways of issuing interests to stakeholders.
We could discuss the difficulties in applying DCFs to crypto all day, but that is outside the ambit of this piece. Instead, I’ll propose an alternative lens to approach the essence of social tokens. To me a social token like FWB represents allegiance to and financial interest in a productive community. In a digital guild. If people project their identities in meatspace by signaling allegiance to brands, why would this principle fail to hold in cyberspace? Moncler signals something about its wearer. An iPhone signals something about its user. A social token’s equivalent in the real world would be an alternative reality where iPhone users were issued stock in AAPL2. If that user had the ability to make the Apple ecosystem and thus the equity more valuable, he/she probably would.
The design space for social community tokens is unbounded. Users are not invariably betrothed to decaying public and private institutions but instead may architect their own institutions. Many digital guilds will probably balkanize and erode under the inefficiencies of decentralized governance and execution. Others will cultivate deep cultures, specialize in function, and grow into venerable networks, pregnant with assets and powerful digital guildsmen. New land has been discovered and the Network State has laid claim.3