Dilutive DAOs: Building a Community in Perpetuity

Crypto has a fixed-supply problem. We’re obsessed with assets which can’t be diluted.

It makes sense - the original reason why Satoshi invented blockchains was to have an asset which couldn’t be diluted the same way fiat currencies have. The novelty of this digital scarcity has led to the exponential price growth for Bitcoin, and since then we’ve seen thousands of tokens launching with similar scarcity, in the hopes that it would spur their own appreciation in the market.

Bitcoin across time
Bitcoin across time

The difficulty with fixed supply tokens, an issue which some critics have pointed out exists even in Bitcoin’s own emission schedule, is that eventually there won’t be enough new coins being minted to continue sustaining the network in perpetuity. Only time will tell how Bitcoin’s story unfolds, but for now we can still evaluate the shortcomings of fixed-supply models for other types of projects, in particular for digital communities.

Communities In Time

The first, and probably the most important point that I’ll reinforce in this post is that communities exist across time. They are the opposite of static - they are a unique form of living organism, sustained via the collective energy and attention that its members put into it.

The Orbit model of communities helps us imagine a community as a solar system, where individual members within a community as celestial bodies moving in orbit around a heavy star. Some will remain at the edges in perpetuity, others will oscillate based on their unique trajectories. We can visualize these community orbits the same way that our planets orbit the sun over time, creating spirals as they grow and invite new members to join them.

Community orbits across time
Community orbits across time

When we look back in time, we see that the most successful communities are the ones which have persisted for the longest — evolving and responding to their unique environments to continue creating value for their members.

Communities are easy to launch, but they are much harder to sustain for extended periods of time. Therefore, any token model used for community ownership must acknowledge and attempt to solve this challenge of perpetual existence.

Fixed-Supply Tokens In Communities

Having witnessed a myriad of digital communities using fixed-supply tokens, the feedback we constantly hear from community organizers is that they’re too rigid. With a fixed supply token, the margin for error is exceedingly thin — make a mistake and you might have to fork the token or migrate to an entirely new token just to fix it.

Typically, the most common mistake we witness is community leaders giving away too much ownership too early. This usually isn’t clear at the outset, and it sometimes takes years for these issues to reveal themselves (when the rewards for new contributors are orders of magnitude smaller than they were in the beginning).

These waning incentives are important because we know that communities are people-businesses, and require continued torch-carrying in order to remain alive. For projects which are the opposite of a digital community (ie like a technology product) then it might make sense to distribute a majority of ownership to the people who build in the beginning, and then have small amounts going to the maintenance of the product. The same is not possible for communities however, which rarely scale without human effort.

Finally, things get especially tricky due to the free-rider problem, where someone can own a given % of the community in perpetuity, without having to contribute anything towards its perpetual operations.

Recognizing that a dilutive token model might be a better fit for communities, we must then ask...

Are infinitely diluting tokens any better?

The short answer is sort of, but not really.

The major issue which begins to arise when communities use infinitely diluting tokens is that it’s quite hard to price anything— should a task deserve 1 token or 100 tokens or 1000 as a reward? Participants will also continuously struggle on the receiving end of these rewards, unless they can have some way to convert their token balance to a % of the whole — they need a predictable denominator.

Ultimately, the only other way to determine a price is by simply having the token be publicly tradable. While some communities may desire to have their ownership be purchasable by anyone in the public, we believe that we need alternatives for communities who don’t want their success to be at the mercy of the market.

How should we determine the limit on new dilution?

We can answer this question by starting with a number of core principles: we know that communities exist across time, we know that they have churn, and we know that they go through cycles where collective attention rises and falls altogether.

If we return to our original metaphor of a community as a spiral across time, and we consider the total value of a community to be the sum of its value across time, then we can imagine that the spiral can be sliced like a cucumber into discrete periods, each slice containing a subset of the total “community time”.

Slices of community time
Slices of community time

In a simple example of this model, a community could automatically create 1,000,000 shares of “community time” each month, which would be given out to any individuals who contribute in that specific month.

In this way, the community can dynamically respond to changes within the organization or in its environment by shifting where newly minted shares are going, each period making its best approximation towards a maximally fair distribution schedule for community ownership. This is important as we know that communities often operate with imperfect information, and need to be able to respond to new information.

Should the dilution limit change over time?

As mentioned above, we know that communities go through cycles — sometimes productivity and attention are high, at other times things wane. Should the community’s dilution reflect these changes? To answer this question, we’ll consider two specific (and critical) moments in a community’s journey — when value creation is at a low point, and when it’s at a high point.

Community cycles over time
Community cycles over time

At a low point, a community is struggling to keep members paying attention and working together. Productivity slows, and being part of the community doesn’t feel cool anymore. The community’s goal is to counteract this feeling, and to reverse the trend. Let’s imagine that while all of this is happening, the community starts creating fewer new shares to reward to new members.

Down only
Down only

The community would become extremely susceptible to death spirals, where fewer rewards lead to fewer individuals participating, causing an even greater slow-down in rewards. In theory, we might want relative rewards to be greater during these small-value-creation months, and smaller during big months.

Looking at the opposite however, having the dilution decrease during big months begins to once again seem like a bad idea. Imagine the community is flourishing, membership is growing and the group’s productivity is skyrocketing. At this moment, the community starts minting fewer tokens to reward to members, essentially thwarting the potential growth of the community. This is once again the opposite of what we want.

So, if we know that we can’t decrease dilution during good months or bad months, then we have no choice but to keep dilution constant across time (lest the community’s dilution increases forever, leading us back to the same issues we encountered when dealing with the infinitely diluting tokens).

Natural Modulation of Relative Rewards

If we separate the newly diluted tokens into pools, each of which is split among the people who are actively contributing, then individuals will automatically earn more shares during low-attention months relative to high-attention months. Individual rewards will naturally respond to the number of people earning from that pool, since there would be fewer contributors to split the constant number of newly minted shares.

Relative rewards increase
Relative rewards increase

This natural modulation solves a key issue in community lifecycles, ramping up incentives naturally to respond to waning attention, helping to keep the community alive when it needs it the most.

At Myco, we imagine pools to be the easiest and fairest way for communities to determine how ownership is distributed: for any given month, divide up the 1M new tokens into different pools corresponding to different value-generating activities that the community wants to incentivize.

We imagine launching pools for different roles, where the pool gets split evenly among active members in that role (ex. 10% of new dilution goes into a pool for Treasurers, split evenly among the 3/5 treasurers who were active that month). Pools can also be created for discretionary spending, which can accumulate month over month. Finally, we also see value in creating pools for different applications or distribution methods, such as pools for individuals who post in a social space, pools for bounties, or pools for referral rewards.

This means that in any given month, the community can “step on the gas pedal” on any one of its functional groups or activities by increasing the size of that pool relative to the others, encouraging their members to direct their attention to those activities to increase the ownership they’re earning.

Combining all of this

To summarize, what we’ve ended up with is a new model for community tokens which is extremely simple: a community creates 1M new shares every month, and gives them out to anyone who contributes in that month.

The benefits of this mechanism are that it:

  • recognizes that communities sometimes make mistakes
  • incentivizes people to keep the community alive in perpetuity
  • dilutes contributors who are dormant or whose contributions wane
  • provides a predictable dilution schedule
  • allows for periodic reward recalculations
  • responds to waning attention via increased relative rewards

While we’re still early in exploring this new subdomain of token models, we feel excited that the future of sustainable community building lies in dilutive token models. We expect that new issues will almost certainly arise within this new model, but we’re excited to continue iterating on them with the help of our early community.

If you’re interested in helping us build communities on Myco using this model, DM @markbeylin on Twitter — we’re always looking for new contributors to help us tend to our virtual garden.

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