Economic incentives will change the way we think about the word “community” in Web3.
By Joel John
Compiled by: Luffy, Foresight News
During the ICO boom of 2017, we saw on-chain communities explode. People sent ETH to Web3 projects in exchange for newly issued tokens. Financial primitives like tokens are powerful tools for building communities because they provide people with a shared purpose, goal, and interest. But a year later, when the price of these tokens dropped, the communities faltered. Now, we’re seeing this trend resurface in memes.
Three Eras of Web3 Incentives
Most airdrops in Web3 are just a mechanism to combine future incentives (tokens) with current community participation. If a token is attractive enough for users, a group of people will flock to it.
In 2020, as NFTs in games like Axie Infinity and NBA Topshot began to rally, the market recognized new primitives for building communities. Instead of issuing tokens, you can launch NFTs with a capped supply. As long as there is some form of scarcity, the value of the NFT will be higher.
Interest will once again unite the community and, in turn, value. Yuga Labs and Animoca Brands are two companies that have created billions of dollars in value through these primitives. Artists like Beeple have made life-changing fortunes through on-chain representations of art and content.
As tooling evolves in the Web3 industry, I believe the community will benefit by integrating NFTs and tokens into their workflows. Over the past few weeks, I’ve been exploring how this model might play out, and this post is my answer.
Community and scale
In a 2014 article, Ben Thomson debunked a great paradox facing newspaper publishers. They make the same amount of advertising revenue as they did in the 1950s. That’s because what they lose in local distribution (print media) they make up in global audience reach. The problem is that now every publisher on the internet has the same advantage.
Thomson points out a key problem with today’s Internet:
The Internet is a world of abundance, and there is a new power that matters: understanding that abundance, indexing it, finding the needle in the proverbial haystack. That power resides in Google’s hands. So while the audience advertisers crave is now dispersed across an infinite number of publishers, the readers they seek to reach must start in the same place — Google — and therefore, that’s where the ad dollars go.
You can see this changing in communities. In the 1900s, your grandfather might have attended a local church and had a favorite sports team and a favorite dinner date spot. By 2024, his Gen Z grandchildren might be active on 50 Discord servers, watch highlights on TikTok, and rarely leave the house for dinner.
We once formed our identities based on the tribe we belonged to. Today, we derive our identities from countless chats or Reddit subreddits, and the pixels on the screen now form the basis of our identities.
Newspapers, while earning more revenue, have less influence over where those funds go due to their reliance on Google. Communities have more members, but have less say over when they can participate due to platform dependency.
On Twitter, you can hope to reach 100,000 people with a single tweet, but you’ll be competing with a hundred other people for the same attention. On Telegram, you can run a large community and 50 other chat groups and use just as many pings. So while you’re now part of more communities, you’re less likely to feel drawn to any one of them. The internet gives you scale, but at the cost of fragmented attention.
Blockchains enable the flow of value between communities and members in a way that is not possible with today’s internet platforms. They can create open reputation graphs that anyone can participate in. This will be a key factor to keep in mind as Web3 native social networks emerge.
Let me explain. Today’s communities have a hard time identifying or incentivizing the most active members. The main incentive today is status or rank. This works when people work in close quarters, like in the military. But for pixels on the internet — like “mods” on Reddit — it doesn’t work that way. If these contributors were mapped on-chain, brands could start communities directly without going through a platform like Reddit or Google.
This may seem far-fetched, but I have certainly observed signs of this. In the last cycle (2021), audiences used NFTs to show that they were core believers. For example, you can mint NFTs of your favorite authors on Mirror.
Source: Tianqi on Dune
What if you could earn NFTs just for reading a piece of content? What if NFTs could be minted directly from a feed? Farcaster’s Frame has been asking this question to their approximately 400,000 users.
Feed connection chain
Frame allows users to perform on-chain activities (such as collecting NFTs) directly from the feed. Creators can subsidize minting activities. For example, I was reviewing some of our content using LensPost last week and noticed that it allows creators (like us) to pay transaction fees on-chain.
Previously, users had to go to a third-party platform to mint tokens. Even if creators subsidized it on Ethereum, the cost of scaling this model would be tens of thousands of dollars. Last week on Base, we spent about $5,000 to subsidize 10,000 minting events.
In other words, we can create a social graph of 10,000 people engaging with our content for less than 50 cents per user. Why is this important? Once users are engaging with your content through reliable on-chain proof (by holding NFTs or tokens), you can drive value to your audience in a variety of ways. Historically, this community connection has relied on platforms.
We could potentially move away from Telegram and lose the entire community there. You are no longer dependent on a single platform to engage with or provide value to your audience.
Why is this important? If your audience is mapped to wallet addresses, you can measure their skills and economic interactions. Granted, there are privacy implications with this approach, but it is a way to measure the value of your audience. Suddenly, you are no longer talking about the number of likes, views, or retweets, all of which can be gamified. You can meaningfully measure the balance of your audience, transaction frequency, and transaction size.
For micro-niche markets, this approach is a gold mine because:
You can objectively demonstrate community engagement.
You can verify that the community is participating by looking at the transaction history.
You can also see where else these members are transacting to build better brand partnerships.
But measuring the value of your audience in this way is a double-edged sword. On the one hand, you can find ways to incentivize community members: through (token) airdrops, or providing NFTs that access early products. On the other hand, it makes the product vulnerable to vampire attacks.
Communities must not only design ways to incentivize and attract users, but also build a culture that keeps users staying longer. Future community managers must design incentives (in the form of tokens, NFTs, or SBTs) and understand the dynamics of community members.
Note: I’m talking about the crypto-native community here. I doubt that financial incentives alone can convert members of one football club into die-hard fans of another.
What would that look like? To answer this question, I looked at the analytical data available on large NFT collections like Bored Ape Yacht Club. In the past, the best way to find the balance of assets in NFT-linked wallets was to query them on platforms like Dune. This has changed, and there are already solutions for observing wallet behavior.
The screenshot below from Bello gives a good breakdown of the type of information that emerges when building a community around on-chain primitives.
For example, the median net value of the Pudgy Penguin NFT holder’s wallet balance is about $171,000. They have been active for about two years on average. NFT holders tend to be most active on Fridays, and based on past on-chain behavior, the best option for an NFT released today is to price it at 0.231 ETH.
According to Bello, approximately 1.63% of BAYC holders are active on Lens, while 1.76% are active on Farcaster. Cumulatively, BAYC holders have made approximately 34,000 retweets on Farcaster. These are key data points that can be used to construct on-chain activity.
Don't get me wrong: Web2 has perfected the mechanisms for collecting user data over the last decade. What interests me is how to calculate the actual net worth of a community based on their on-chain behavior. Why does this matter for micro-niche markets? Suddenly you have a tool to break down the historical relationship between platforms, creators, and audiences.
Previously, you had to pay a platform like Meta or Google because they aggregated the channels through which you could engage with your audience. In my opinion, as protocols like Farcaster mature, this relationship is about to break down because data that has historically been in centralized databases will now be public.
We will soon be able to map out the most active users on-chain and be able to see users whose interests intersect. For example, today you can track a Bored Apes user who has completed over a hundred trades on Uniswap in the last month. As the community comes on-chain, it will be possible to search for players on Ronin Network who have read game theory articles from the creator of Farcaster.
Being able to mix and match interest segments between community members will lead to composable communities.
What does this mean for creators? Driphaus provides some clues. They organize active users on Solana and allow them to collect NFTs from their favorite artists. Instead of collecting rare NFTs with a limited supply, users on Drip typically collect unlimited NFTs. Users can "subscribe" to their favorite creators on DripHaus for $1. 30% of this is allocated to Driphaus, which brings considerable income to artists.
The chart below originally came from a Driphaus seed stage deck shared by Vibhu on Twitter. It does a good job analyzing the differences between content on platforms and on-chain.
Last month, 60% of creators on Driphaus earned more than $1,000. According to a tweet from Vibhu (founder of Drip), the average donation on Driphaus is $0.05. While microtransactions and NFT minting are interesting, what interests me more is how value flows back to users. For example, once an artist has a large enough audience base, they can whitelist the wallets of these audiences so that they can participate in the launch of new products as early as possible.
Or creators could try offering these users airdrops from brands they’ve partnered with. Pudgy Penguins’ recent surge is partly due to the airdrops its holders have received.
Dance with the creators
Driphaus is interesting because they enable creators to curate their communities with relatively little effort. Creators are becoming increasingly important in the context of growing communities because great content is where attention gathers on the internet today. We recognize each other through similarities in our favorite bands, writers, or movies.
Communities built using on-chain primitives are composable. This means that users can interact with each other and create value for the entire community. Today’s community interactions are largely top-down. That is, they require creators to constantly come up with new forms to provide value to the audience. But what if the audience themselves can coordinate on behalf of the creators?
At scale, it allows the community to actively participate in the creation of content.
This isn’t news, but I mention it now for a reason.
Like feeds on Farcaster, allowing for algorithmic discovery of on-chain content.
Primitives like soulbound tokens allow for a permanent record of user engagement.
Stepping back, you could create content and issue NFTs on Mirror in the past. But content discovery still relied on social graphs on third-party platforms like Twitter. Now, this shift comes from crypto-native audiences gathering on Web3 native social networks.
In turn, these feeds allow users to mint or donate directly without leaving the interface: a commercial interaction between creator and audience is possible at the click of a button.
Being able to pay creators isn’t powerful in and of itself. In 2019, you could tip creators as little as $0.10 on Medium. The difference is that now you can collect wallet details and create a new set of user experiences while letting algorithms enhance your content. In the past, you either had to rely on algorithms (on Twitter) or financial suites provided by platforms like Mirror. Today’s tools like Warpcast combine on-chain primitives with very large audience subsets. This means you can open up access to content to wallets with specific characteristics. For example, I might only want to publish a study to the top 1,000 wallets that interact with Uniswap.
Why is this important? Because as a creator, you need to know which audience you want to attract. Will a wallet with niche skills (such as building and running complex machine learning models on Numeraire) be more valuable than an early adopter of a niche token? If a creator has been writing about artificial intelligence, he might want to incentivize the former to be able to mint his own token.
In the past, niche communities were dark pools of attention. As a creator, you knew very little about the people who were engaging with your content. If you have a history of wallets, and those wallets have credentials in the form of SBT, you can prove your audience is more valuable with verifiable evidence.
An early version of this can be seen on YGG today. Players who play YGG-integrated games can earn Soul Bound tokens by completing Guild Advancement Programs (GAPs). Currently, about 220,000 holders have SBTs, which are used to mark their skill levels in games like Pixels Online and Axie Infinity. Why is this important? YGG has taken some of the earliest steps to create an open graph of a verifiable skilled user base.
Whenever a new game launches, they may target players who have spent countless hours coordinating resources and providing feedback, or risk being defrauded by anonymous wallets.
Beyond the community
What I’ve described so far is a vision of a future where niche communities built around verifiable identity and proof of engagement with creators will lead to better outcomes for everyone involved. This future may be here much sooner than we think, as newsfeeds like the one on Warpcast now allow you to mint on-chain primitives like NFTs.
But it's still about the relationship between creators and audiences. This vision has been reflected in the product.
For example, you can look at the historical behavior of Layer3's user base and the most used products. Third parties using Layer3 to drive users do not need to prove the proficiency of their users. You can simply check the user's wallet address and view their history. In fact, you can get a full list of its users and their on-chain handles using Airstack. Businesses trying to target these users don't even need to negotiate with Layer3. This is a huge value-add for Layer3 users. Once their reputation is established, any product can provide value to them without relying on Layer3.
At the same time, users have good reasons to remain loyal to Layer3 as it is the curation engine for discovering and sharing huge on-chain opportunities.
Similarly, Boost Protocol has created a permissionless protocol around users. Last month, they released a tool that checks users’ gas spending on chains like Optimism, Arbitrum, and Base, and allows users to mint passes. The passes are ranked based on the user’s gas spending. Boost Inbox is a tool that allows products to pinpoint users who have spent a specific amount of gas.
I think it’s not far-fetched for the protocol to have an additional layer of identity verification, much like Gitcoin’s upcoming Passport feature. As I write this, Boost Protocol has about $180,000 in its treasury and 47,000 Boost minted holders.
I think the arrival of commercial incentives will change the way we think about the word "community" in Web3. If you can verify the quality of the user base and their engagement, then the community that does well will gain value. We are probably a few quarters away from seeing fully on-chain media brands scale. Unlike traditional media networks, these media networks will be able to verifiably quantify how much economic activity their audience base is performing.
In an age of scarce attention, financial incentives will help engineers focus.
