AMPLIFY  VOL. 35, NO. 10
  

In the span of just six years, the once-nascent concept of the decentralized autonomous organization (DAO) has grown into a rich tapestry of fluid organizations and token-powered communities.¹ Today, DAO governance is considered to be a new universal primitive for value generation and capture across digital markets and industries. The thinking is that, in all instances in which value is generated by networks of prosumers and consumers, a DAO model has the potential to reallocate value capture to the network.

To date, several DAOs manage multi-billion-dollar treasuries and, at the time of this writing, collectively administer more than US $55 billion within decentralized financial (DeFi) applications² controlled via token-weighted voting.³ The sheer size and volume of the cashflows generated by these organizations offer the promise of rapid future growth, a point noted by venture capitalists who, seemingly undeterred by price volatility, continue pouring money into the rapidly growing industry.

Although we are just six years into the making of these new vehicles for human organization, early ventures lay out a pattern of innovation that, if managed correctly, may have fundamental implications for the way business is conducted in the 21st century.

Despite high hopes for the disruptive potential of these concepts and technologies, participating in a DAO is far from easy. Hopeful contributors often find themselves dissuaded by technical challenges while onboarding the DAO alongside steep financial barriers to entry.⁴ In practice, DAO governance happens through three channels: (1) governance forums where proposals are submitted and discussed, (2) a voting tool where proposals are voted on by holders of governance tokens, and/or (3) weekly or monthly stakeholder Zoom calls that are recorded and uploaded to YouTube for playback.

Although these communication channels have been successful in facilitating the first generation of DAO governance, it is not immediately obvious how these ad hoc attempts at asynchronous coordination will scale to the next million stakeholders.

We believe that Web3 social media will serve as an accelerant for innovation in DAO governance by introducing the concept of co-ownership to digital economies. This will promote a new level of accessibility for decentralized technologies, unlocking new commercial incentives and driving adoption among creators and consumers.

Transitioning from Creator to Ownership Economies

The concept of Web3 social media is best understood in the context of the ownership economy, a tongue-in-cheek reference to the now prolific “creator economies” promoted by intermediary platforms such as Facebook, Uber, and Airbnb.

The rapid growth of the creator economy in the past decade has become an incredible business model, with some observers projecting the market size of content production and consumption to grow beyond $100 billion in 2022,⁵ the lion’s share of which is distributed on YouTube, Instagram, and TikTok.

The emergence of the creator economy proved what was once believed to be infeasible. There now exists a substantial market for peer-to-peer-based production and consumption of entertainment and educational content, primarily driven by photo- and video-based content produced entirely by amateurs.⁶ The creator economy is a multi-lateral marketplace, but the service providers hosting and serving the content enforce a strict consumer-platform and producer-platform model. In doing so, the platform retains all rights to monetize, distribute, or censor content shown to consumers. Since the data is stored on the providers’ servers, it effectively becomes their property. Although ostensibly common sense, these privileges have proven highly efficient for extracting rent from organic interactions between producers and consumers of content on the Internet.

As has been shown on countless occasions, the commercial incentive for rational intermediaries is maximizing return on attention. This is achieved by sandwiching content between microtargeted ads served up by algorithms trained to elicit basic human emotions: fear, anger, and outrage. Simply put, in any organic network in which rational intermediaries extract rent by matching supply and demand, the logical incentive is to drive growth and retention by deploying increasingly subtle attempts of psychological manipulation.

Executives argue that users are free to “vote with their feet” and seek out more benevolent platforms, but few ever do.⁷ The sole reason for the stickiness of social platforms is not, as has been suggested, behavioral, but simply a result of the appropriation of the social graph, which denotes the total set of relationships between users.

A social graph is a massive diagram denoting the set of all relationships between classes of objects, such as individuals, groups, organizations, and businesses. For content producers, the social graph directly determines the commercial viability of their business, as the algorithm selects a subset of connected users to which content is distributed. Because content producers are unable to recreate their social graph on other platforms, making the move is nearly impossible.

Enter Web3 social media. Projects like Lens Protocol seek to move the formation of social graphs from a siloed environment to the transparent environment of the blockchain database.⁸ Lens itself is not a social media platform; it’s an infrastructure that other product and service providers can view and use in their curation, distribution, and moderation of content. Lens computes the social graph by generating an interlinked network of non-fungible tokens (NFTs) containing the logic for all profiles, posts, and followers. 

Because NFTs are smart contracts, they live in the transparent and deterministic environment offered by the blockchain. When a user conducts a standard action, such as publishing a post or following a content producer, a transaction is submitted to the network and recorded on the blockchain.

The entire social graph containing the history of all profiles, their posts, links to content, and followers is stored in the blockchain database and is thus accessible to anyone with an Internet connection.

In the case of Lens, publications are posted directly to a user’s Profile NFT and contain links that point to content stored externally, either on decentralized storage or on typical server infrastructure. Lens also allows users to create NFTs from content for resale and to control who can comment or reshare a given publication.

Rather than maintaining their own social graph in a private database, Web3 social media platforms simply read the social graph from the blockchain database and offer novel algorithms for content curation and moderation. Since the social graph is public, any user with a Lens handle can move their content and subscribers onto a more suitable platform, effectively breaking the power social media platforms currently derive from managing centralized server infrastructure.

This introduces the incentive for competition among Web3 social media platforms. In the race to produce the most popular product, Web3 social media platforms will be forced to become DAOs themselves, as this will enable them to entice creators and consumers of content with token-based incentives, granting them co-ownership of the platforms in the process.

How Will Web3 Social Media Drive Innovation in DAO Governance?

Although the still-abstract concept of Web3 social media may not immediately appear relevant for the current generation of DAOs, we believe this tooling will emerge as a force multiplier for the growth of token-powered organizations. We think Web3 social media will:

1. Promote accessibility in the decentralized technology stack

2. Bring commercial incentives for value capture to the forefront

3. Create a new standard for identity on the blockchain

First, the concept of social media delineates an entirely new set of requirements for the decentralized technology stack, for which a commercial incentive is not yet present. Although most DeFi users and stakeholders in existing DAOs may find the mandatory signing actions required in allocating funds or voting for proposals cumbersome, signing actions are sensible at a fundamental level and mimic the behavioral patterns required to move funds in traditional banking.

This will never be the case for Web3 social. The current state of Web3 social solutions still requires frequent signing operations, but the drive to introduce keyless signing will create a new level of usability for decentralized technologies. Coupled with the release of smartphones that can store and secure private keys and new techniques for comfortable and easy key recovery, DAOs will become far more accessible to the average user. There are several emerging solutions to private key encryption and social recovery on the market today, and drivers to reduce requirements for signing operations further will multiply as demand accelerates.

Second, as the obstacles related to private key generation and storage are mitigated, the commercial incentives for content producers will become increasingly relevant. Not only will content producers on Web3 own their content, data, and followers, but they may derive a far better negotiation position from their ability to move to an alternative platform. This will return negotiation power to content producers, as Web3 social media platforms will compete to attract the most popular personalities by offering token-based incentives alongside larger cuts of advertising revenues.

This development will attract first movers, to whom the commercial incentives of owning their content while becoming an early token holder in the DAO managing the platform will appear extremely attractive.  

Similarly, consumers will be able to leverage their resources by selecting what advertisements they are exposed to and the extent to which advertisements can be targeted to their specific profile. Calculating the average revenue generated per user on leading social media platforms today provides a sorry indication of how advertisers price consumer attention, but the introduction of a bilateral model for advertisement is likely to increase both the price and returns for targeted advertisements (and opens the door to new commercial models on which Web3 social media platforms may seek to compete).

On one hand, a platform may look to create a high-quality supply of content by offering token-based incentives for creators, allowing users to opt in for selected advertisements. If consumers are empowered to select categories of advertisements they are willing to consider, advertisers will be incentivized to pay far higher rates for what are, essentially, qualified sales leads. As there are no intermediaries extracting rent from the transaction, the total time spent browsing social media may become redundant, creating a tacit incentive for quality over quantity in the moderation of content and advertisement. On the other hand, platforms may push to create new demand by attracting users with token-based incentives for time spent consuming content and watching ads.

In both cases, the DAOs forming to govern these platforms will grow as a consequence of their ability to successfully create value by matching demand- and supply-side incentives, without extracting rent.

Third, the presence of a verifiable social history is a powerful enabler for the notion of identity in token-powered decision making. By referring to the existence of a vast network of followers and connections, some of whom will have a verifiable physical presence, proving your abilities and commitment as a newcomer in an existing or young DAO becomes significantly easier.

The existence of verifiable reputation extends beyond the use of DAO reputation into the notion of credit scoring for protocol users, which may unlock new areas of risk management for DeFi applications, as lending protocols may accept risk on individuals with a long-standing social presence across multiple communities.⁹

One might even imagine a future in which DAOs compete to attract talent and users across verticals by appealing directly to users with an extensive on-chain social history of interacting with a variety of communities and producing content and proposals. The concept of “user acquisition” may take a literal turn, as DAOs compete by rapidly delegating ownership to passionate prosumers in the race to remain relevant.

The Implications for Organizational Practice

Much as every organization is a digital organization today, the future will see nearly every company on earth interface with a blockchain-based solution at some point in their value chain.

How can today’s digital organizations level the momentum for growth and capture value in a future in which digital value creation will become increasingly disintermediated?

The process of defining a Web3 strategy ought to start with the recognition that Web3 is, by definition, oligopolistic. Low barriers to entry and nearly nonexistent consumer switching costs have created a highly competitive environment in which an upper segment of successful organizations commands market power, while a long tail of smaller competitors imitate the first movers. The tense level of competition in Web3 continues to yield new, creative competitive dynamics, with competitors often using token-based incentives to drain users from larger competitors.

Consequently, attempts at generating value through classic lock-in effects are likely to fail, as defensibility and pricing power are challenging to maintain when users can simply move their business with the click of a button.

In stark contrast to the blitzscaling mentality popularized by venture capitalists of the noughties, success in Web3 is won either by adding real value through incremental innovation of existing services or by creating brand new categories. In simple terms, you are better off growing the pie than attempting to steal your neighbor’s slice.

Will DAO Governance Rise to Meet the Challenges in Web3 Social Media?

Social applications differ widely from financial applications in the degree to which they touch our lives. As such, the notion of Web3 social media introduces a set of novel challenges for decentralized communities, which have not yet surfaced in first-generation DAOs.

First, the notion of a transparent social graph runs counter to our core intuition for privacy. This will likely introduce challenges from proponents of the existing legislation and consensus on privacy and the right to be forgotten. Although data on external services may in some cases be removed, leaving only a link behind, a trace of the publication will be permanently enshrined in the blockchain ledger.

Second, the problem of content moderation is increasingly relevant in a world where censorship and deplatforming will do little but reduce the reach of an individual within the scope of a single platform. This underscores the ethical question of the legitimacy of censorship and the role of the digital public square in civil society.

Unfortunately, the ethical question of censorship becomes intrinsically entwined with the existence and pervasiveness of fake news or, even worse, repulsive and illegal content in the context of the immutability of the blockchain database. These issues require new thinking about the limitations of DAO governance within the context of content moderation. Can a DAO be tasked with defining guidelines for online discourse?¹⁰ Can it be charged with cultivating and stimulating healthy dialogue in online communities? If so, how do we define legitimacy in this context? To what extent should this decision be made by a decentralized committee of peers,¹¹ and how do we source a truly representative set of stakeholders from a diverse group of representatives? 

These are challenging questions requiring multidisciplinary contributions from those in social sciences and humanities. Whether or not there are scalable, robust solutions to these problems remains to be seen.

References

¹    Schirrmacher, Nina-Birte, Johannes Rude Jensen, and Michel Avital. “Token-Centric Work Practices in Fluid Organizations: The Cases of Yearn and MakerDAO.” Proceedings of the 42nd International Conference on Information Systems (ICIS). Association for Information Systems, 2021.

²    DeFiLlama website, 2022.

³    Tsoukalas, Gerry, and Brett Hemenway Falk. “Token-Weighted Crowdsourcing.” Management Science, Vol. 66, No. 9, September 2020.

⁴    Jensen, Johannes Rude, Victor von Wachter, and Omri Ross. “How Decentralized Is the Governance of Blockchain-Based Finance: Empirical Evidence from Four Governance Token Distributions.” Cornell University, 2 February 2021.

⁵    “Content Creator Economy Growth and Other Statistics Report.” VdoCipher, 20 August 2022.

⁶    Rishika, Rishika, et al. “The Effect of Customers’ Social Media Participation on Customer Visit Frequency and Profitability: An Empirical Investigation.” Information Systems Research, Vol. 24, No. 1, March 2013.

⁷    Hu, Lixia, et al. “Understanding Followers’ Stickiness to Digital Influencers: The Effect of Psychological Responses.” International Journal of Information Management, Vol. 54, October 2020.

⁸    Lens Protocol website, 2022.

⁹    Jensen, Johannes Rude, Victor von Wachter, and Omri Ross. “An Introduction to Decentralized Finance (DeFi).” Complex Systems Informatics and Modeling Quarterly, Vol. 26, No. 150, March/April 2021.

¹⁰  “A New Era for Open, Decentralized Content Moderation in Web3.” Lens Protocol, 23 September 2022.

¹¹   Axelsen, Henrik, Johannes Rude Jensen, and Omri Ross. “When Is a DAO Decentralized?” Complex Systems Informatics and Modeling Quarterly, Vol. 31, No. 176, June/July 2022.