Social Token Paradox

In the metaverse, when we look in the mirror, who do we see?

Last week, John Palmer wrote about new Internet logic. He argued that the next wave of companies built in web3 will need to build on a new “mental model” of the Internet.

John is right, and many aspects of web3 have already done so. The decentralized publishing platform Mirror (where this piece is hosted) puts power in the hands of writers. Royal, which recently launched, lets fans buy ownership in their favorite artists. The distributed hard drive Arweave offers a permanent repository for information. And The Graph sorts through it all by allowing its community to query and curate its vast store of data.

Across all these verticals, web3 is rethinking the Internet. Many of these projects, using this new Internet logic, will become the building blocks for a new economy. But social tokens today still have yet to adopt the latest mental model. If the goal of web3 is to overturn the Internet status quo, then the structure of social tokens today is fundamentally flawed from the ground up. Tokenized communities are centered around what you have — often social or financial capital — while they should instead be centered around what you do.

Today, decentralized communities, or DAOs, are primarily valued proportionally to their token price. When the value of a token goes up, so does the value of its community. And when the token price is higher, the community naturally becomes more desirable to join. We saw this over the last few weeks as decentralized community Friends with Benefits ($FWB) skyrocketed to nearly $200 a token.

$FWB token price over the last 3 months
$FWB token price over the last 3 months

The problem here — in what I call the Social Token Paradox — is that with this mental model, tokenized communities are incentivized to uphold exclusivity. Let’s work backwards: if you want your community to be valuable, you need your community’s token to go up in price. This makes sense, sure. But to make the token go up in price, you have two choices: you can either increase the price of the token, or you can decrease the number of tokens available to prospective members. Either way, this restricts access to the community and promotes exclusivity, codifying and enforcing a level of scarcity that feels almost at odds with web3’s vision of a truly open Internet.

So how do we solve the Social Token Paradox? 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. This will be accomplished through both pre-existing on-chain data, as well as through a more robust DAO onboarding process that enables communities to better understand prospective members, their values, and their goals. This will come as a tectonic shift to decentralized organizations and communities over the next few months.

Once we solve the Social Token Paradox, capital will no longer be the primary status symbol in web3. Instead, status will be composed of how many communities you are a part of, or how many things you’ve done online. The more online history you have, the richer your own story is, and the more things you can be a part of in the future.

If we can democratize access to a veblen good, status becomes about being a part of something, rather than how much money you have. We already see this in products like Fractional and PartyBid, which enable collective ownership of highly sought-after NFTs, as well as in products like RabbitHole, which allow users to earn crypto by using the latest decentralized apps. In both cases, democratizing access to capital is the intermittent step to on-chain reputation. These are exciting proof points of changes to come. But we are only scratching the surface.

In the real world, when we look in the mirror, we can only see a small fraction of who we are. In the metaverse, we’ll be able to go a whole lot deeper. And it’s going to start with social tokens.

Thank you to Brian Flynn and Cooper Turley for their continued support and for informing my thinking on this piece.

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