Community ownership is a self-fulfilling prophecy

And why most DAOs don't have tokens

Most topics — especially in crypto — get more intuitive as you go deeper. But after talking to more than a hundred founders over the past year, I can tell you that community ownership has the opposite trajectory. People intuitively understand why they might want community ownership, but get lost in the complexity of how to actually make it work. So what keeps them from getting the support and insight they need to make it happen? 

I recently talked to a founder investing a huge amount of time and money into a complex structure including multiple legal entities and a token, set up so they can safely and legally distribute some form of ownership in their project to people all over the world. When I asked if they had been public with their intention, even at a high level, he said he was still waiting to figure out all of the specifics — a process he estimated would take another year. And when I asked him what he sees as the biggest risk, he said it is that they won’t be able to build enough momentum in their community to have the resources to figure it out.

That founder, and many others, intuitively feel community ownership is the right way to grow and create something of real value for the world, but need growth and real value in order to actually implement it. They’re stuck in a classic chicken and egg problem.

There are times for secrecy, but I believe, and will argue here, that the simplest solution to the chicken and egg of community ownership is transparency and trust, because community ownership is a self-fulfilling prophecy. If we can’t yet have those conversations in public, we need to create more spaces and communities where they can happen. And, although perhaps it has been obvious from day one, this is also the beginning of our own process of building thoughtfully in public towards community ownership for Backdrop Labs and Horizon.

The pieces of this post flow together, but if you’d like to skip ahead to different sections I’ll cover:

• Why community ownership is good for business, and for society

• Why most DAOs don’t have tokens

• Why trust is scarce and social contracts are more enforceable than you think

• Why this is so hard to get right, and a call to join in if you want to get into the weeds

Why community ownership matters

If community ownership is complicated and difficult, the first obvious question is “why would anyone do it?” To oversimplify things a bit, there are two reasons: 

• (It’s a competitive advantage) As the cost of creation goes to zero, the scarce resource for many projects is a highly engaged community.

• (It’s good for you) Ownership, especially of value created via community, makes people happy and fulfilled.

Let’s unpack both.

Why community ownership is good for business

If you’ve been on Twitter recently, you’ve seen a lot of AI generated images and a lot of tweets like this one:

Peter Yang @petergyang

The internet reduced distribution costs to 0 AI could do the same for creation

Like self-driving cars, the AI meme will take way longer to totally transform our lives than it feels as the first major breakthroughs arrive, but the cost of creation is already trending towards zero in a hurry. So if people can’t build competitive advantages based on their production or distribution infrastructure, what’s left? 

The answer is why “community” has exploded as a role in all tech companies (not just web3), and why legacy media giants are getting disrupted by 17 year old TikTok creators — the scarce resource of the future is a highly engaged community of fans/developers/evangelists. And I think it’s fairly obvious that building better tools to give those fans/developers/evangelists ownership over the value they create will be important, even if there’s a huge variety in what that “ownership” entails.

Toby Shorin puts this beautifully in “Life After Lifestyle,” a recent essay I assume will quickly become canon for this transition:

We are transitioning out of the era of Lifestyle, and into an era where the production of culture is valued—both subjectively and financially—on its own terms. From an era where brands are designed to sell products to an era where brands are designed to be culture, to transform lives, to instill beliefs.

The ways in which ownership will be used to create culture are more diverse than we can possibly imagine, but clearly the lines between creator and consumer will continue to blur. If the era of the clean split between factory owners, factory workers, and consumers started dying with the advent of the stock option in 1957, we may live to see its last breath. Perhaps it’s no surprise that we associate Silicon Valley with the phrase “work-life balance” given the way shared ownership in something with the potential for transformative outcomes can blur those lines in dangerous ways if not implemented correctly. But “work-life balance” has always been a highly unsatisfying phrase, as if they are on separate sides of a scale, cleanly divided, rather than fully and often beautifully interwoven. Which brings us to…

Why community ownership is good for you

The question that keeps me up at night is not whether the transition to community ownership will happen — I’m quite sure it will — but whether it will be good for us. I am biased because I left academia to work for small startups where we have shared ownership over what we create, and work has never truly felt like work since. But for why community ownership is good for society as a whole I often look to Alred Adler, the other famous early 1900s Austrian psychologist and the father of the school of Individual Psychology:

And since true happiness is inseparable from the feeling of giving, it is clear that a social person is much closer to happiness than the isolated person striving for superiority…This sense of belonging that cannot be denied anyone, against which there are no arguments, can only be won by being involved, by cooperating, and experiencing, and by being useful to others. Out of this emerges a lasting, genuine feeling of worthiness.

To Adler and disciples of individual psychology, community feeling is the meaning of life. Essentially, we are happy when we feel a sense of community, which we achieve by giving, being involved, cooperating, experiencing, and being useful to others. Is shared ownership of the result of this involvement and cooperation necessary? No. Does it make a huge difference and incentivize much more community production in the world? Obviously. For more on Adler and community feeling, see the book “The Courage to Be Disliked” —  an effort to describe Adlerian psychology via a dialogue between a student and a teacher. 

If you are working in web3, you feel this intuitively. The honest reason it’s so fun to work in web3 is mostly because it attracts people who are generally community oriented and want to build and share things with their friends. That energy is what has gotten us this far, and it’s what will continue to push the space through however many build and bust cycles it takes to build a new foundation for digital ownership at scale.

Why most DAOs don’t have tokens

If you do a casual Twitter search, you’ll find that most DAOs don’t have tokens. I’ve learned this from building Backdrop — most of the organizations that come to us asking to be in the network don’t have tokens yet, and are hoping to use Backdrop to build the momentum they need to get there. So what’s going on here? Why do these teams call themselves a DAO when they clearly aren’t decentralized or autonomous?

Vitalik rightly pointed out that there will likely only be a small number of “true” DAOs, but that they will be incredibly important. He notes that the vast majority of crypto organizations will be “contractual second-order” organizations, aka ones that aren’t governed entirely through code and still require humans to enforce contracts. In other words they may use tokens for various things, and be fairly decentralized and digital-first and so on, but structurally they won’t be so radically different from the C Corps, LLCs, co-ops and the like we have today. One way I look at it is that the move to digital space will dramatically change the balance of these organizations — towards way flatter structures, more co-op type models, etc —in addition to adding a few totally new organizational models like DAOs.

Armed with this information, what should we do with the “DAOs” on Twitter with no tokens? We could, as many people have done, bash them and tell them to call themselves “contractual second-order organizations” or “digital organizations.” But this is missing a key point, which is that those labels carry absolutely none of the idealism and values of DAOs towards community and “as-decentralized-as-currently-viable” type progressive decentralization. You don’t see all companies putting “LLC” in their Twitter bio, because it tells people nothing about what their organization values. And let’s be honest, most “proper DAOs” that Vitalik mentions and even Ethereum itself are still working towards true decentralization, so “DAO” is an aspiration, not a current state.

Believe me the point of this article isn’t to get into the DAO naming debate, but what these “aspirational DAOs” realize is the power of social contracts in community building (something I wrote more about in “Tokens of Appreciating Appreciation”), and how much easier it is to launch social contracts than it is to launch smart contracts on a blockchain. Adopting the term “DAO” is signing a social contract, one that is actually more binding than you might think. I’m sure if we had other more precise aspirational terms for different forms of flat structures and community ownership, organizations would happily adopt them, but until then I have zero blame for people that fly the DAO flag because they want to build something that finds a way for a community to capture and coordinate the value they create in the project.

Trust is the scarce resource online

The simple reason the social contract of community ownership is more binding than you might think is because if the most valuable thing you are building is community, any loss of trust will most often be fatal to the project.

In “Coase’s Penguin is Learning to Fly,” one of the first posts I wrote on web3, I cited both Ben Thompson and Vitalik, who seem to agree that legitimacy is the scarce resource in building value online. This is why communities are so valuable — trust and social consensus scale exponentially with the size of communities, given all of the relationships that are possible between the different members. That makes communities much more valuable than audiences, where the only relationship of trust is between the audience member and the creator or project. 

Their deeply interlinked nature also gives communities another ability, which is that they can lose trust with the original creator or project and still be incredibly valuable themselves. Think about it — if an audience stops caring about a creator, it loses its energy source. But if a community is rallied around a mission, loss of trust in the leader is simply cause for an uprising. So communities can giveth and they can taketh away, especially if those communities have the ability to coordinate on their own (via tokens, or otherwise). Unions, for example, are communities that developed the tools to coordinate outside of their place of origin and are primarily acting to check or counterbalance misaligned incentives of those origin organizations.

Long story short, if you say “we want to build something that moves towards community-ownership, and we need your help to do that” you are entering into a social contract that will create a huge amount of pressure to continue down that path. You still have to figure out the specifics of the mechanism, but pulling the rug out on your intentions is no longer an option. We’ve all seen this many times so far in web3 and I think we can agree all parties come out pretty damaged.

Nobody said this was going to be easy

The path to community ownership is incredibly complicated, expensive, and scary at the moment. Part of wanting to build a durable form of digital community ownership is building something durable. This means creating systems that balance efficiency with decentralization, boldness with safety for their members.

The good news is that there is a huge amount of work going into this - everything from ways for ‘traditional’ companies to tokenize securities, to new legal entities for DAOs. Not to mention all of the tooling and knowledge sharing into how to actually get work done in projects that are more and more community owned. It’s exciting, inspiring, and moving fast — a great time to get involved. 

I want to emphasize that the problem space for community ownership is not only web3 – web3 is just one subset of that space. When founders gift equity via boring ol’ documents to advisors and early adopters, they are implementing community ownership. When they crowdfund on Republic or Stonks, they are implementing community ownership. When they create ESOPs and other employee-centric structures, they are implementing community ownership. If we only see community ownership as a fully decentralized project with a token, we do ourselves a huge disservice and ignore decades of precedence and learning. Tokens are awesome and I believe nearly all forms of ownership will become digitally native over the coming decades, but clearly it’s going to be a messy mix along the way.

Friends of mine have spent close to $200k and many months on creating a token in a way that is thoughtful and legally compliant. Others have said “fuck it” and minted a token knowing they are putting themselves and their community at risk. If we ask any new project that wants to be community owned to go down one of those two paths, we will never scale community ownership to the level we believe is possible.

The social contract a community-powered project enters into when it clearly defines its intentions for community ownership is a self fulfilling prophecy. We need to create more of those contracts if we want to launch a million more community-owned projects. This is why we launched Horizon, a network for people to find, support, and launch their own projects that are on the path to community ownership. We want to help to continue to pave the way for this transition to healthy and powerful community ownership, for ourselves and for others. The network is invite-only as we build the right foundations, but if you’re passionate about this topic and would like to join already but don’t have access, you can apply here and we will follow up.

Perhaps this is obvious, but this is basically my entire focus at the moment. I’d love to work with anyone who is also spending time, building, investing, or thinking of how we create more community ownership and community feeling in the world. I’m facilitating a small group of 5-10 founders, operators, and experts that want to really get into the weeds on this topic — if that sounds like you or someone you know, please reach out. I’m on Twitter here. And I hope to share another piece soon on our current thinking around community ownership for Backdrop and Horizon, and the support we feel we need to make that happen.

Big thanks to Caryn, Denny, Carlos, Davey, and Popp for the edits/feedback on my thinking here, and as always to Rapha and our team whose thoughts are now fully inextricable from mine.