NFTs & DAOs: And their role in efficient community-based economies

What do NFT, communities, and voting have to do with the cradle of efficient governance models for decentralized projects?

What do a 14-year-old kid, a potentially life-threatening medical procedure, and DAOs have in common?

Blockchain technology came to disintermediate relations of individuals and groups through a technology capable of decentralizing “trust”. DAOs are the next step in this evolution and require a deep understanding of the project´s communities to avoid disastrous management failures.

Introduction: The Community-based Economy and Why it Matters for Web 3.0

Blockchain tech has enabled community-based economies to thrive fully. It not only seamlessly interconnects ecosystem stakeholders, allowing value to be efficiently generated and distributed among stakeholders but also permits a bottom-up approach, with the community being part of the decision-making process, driving the project in a collaborative approach through decentralized governance.

The community-based economy not only means selling or creating products or services within a community. It can also include creator economies or community gatherings around key personalities of interest while providing experiences and other social bounding-related actions in so-called “SIM DAOs.”

Connecting the community through a flywheel of value generation and seamless & trustless distribution is one of the main ethos of Web 3.0. The lack of a central player can facilitate a more efficient process.

Until now, we’ve seen some first attempts to explore the trustless connections that blockchains provide, for example, a creator economy where a content creator can efficiently collect value from his work without intermediaries. Or DAOs exploring work relations with governance mechanisms using tokens as a medium of community expression and decision-making.

However, leading more complex initiatives with a rich relationship among all community stakeholders in such a decentralized manner is easier said than done. Although we are still in the very early stages of this revolution, so far, decentralized autonomous organizations, known as DAOs, have been fairly successful in cases of limited governance complexity. For example, deciding how to allocate capital for investments (e.g. Constitution DAO) efficiently.

As DAO initiatives attempted to recreate more complex structures and implement distributed governance, it became clear that we still have several limitations and pain points to address to move such a concept from a pure ideological dream to a practical reality. The pain points DAOs will face will be similar to other community-based economies, which will attempt to accrue contributors’ value and their valuable share in the economy.

Decentralized Governance: Why we failed so far, and what needs to be addressed

Would you like a critical medical procedure applied to you as part of a “medical DAO” you’re part of to be decided by a 14-year-old kid just because he/she has tokens for voting? I presume not, really, right?

Decentralization alone won’t make a community start efficiently managing the project´s challenges, making the right decisions, or allocating value to its community members efficiently. An ineffective governance model and execution can lead to disastrous decisions by community members without the proper tooling, motivation, or preparation to be part of those decisions and activities.

Nowadays, it’s still very common to see governance models based on pure token value holding or token value holding plus holding time. Practical experience says it is a very simplistic metric with a limited capacity to tackle or reproduce community members’ diverse levels of skills, competence, and commitment to its ecosystem.

On top of that, current airdrop models don’t help align incentives among community stakeholders and the project’s objectives. Often, airdrops and simple token governance models drive a voting power held by those who vote for financial gain without any long-term commitment to either the project or the community’s values and vision. Aside from that, current airdrop rules can suffer sybil attacks, leading to an unfair token concentration to specific players who don’t necessarily align with the project´s values.

So what primary pain points need to be addressed for effective decentralized governance and fruitful DAO collaboration?

• Know your community: Without fully understanding the different characteristics of the community and how each of its stakeholders participates in value generation, it is impossible to implement a system that allows the community to sit in the driver’s seat and be successful.
• Communication: How to efficiently establish a communication plan and properly propagate decisions and actions

Among those pain points, a poor understanding of community characteristics is the most critical limiting factor. It leads to poor human resources allocation within the project. Consequently, in the case of the community-based economy, it can also lead to unfair and inefficient value distribution.

Badges using blockchain: How can they be used to bring effective governance toward decentralized projects?

An ecosystem can only have its community interacting and engaging meaningfully if the stakeholders within the community can identify each other. While signaling their belonging to the community through a shared identity, they also need to be able to express their individual contribution (skill, competence) and sub-values to the group.

The Optimism Collective recently announced an initiative in line with this philosophy: Community members can mint NFTs representing their user identity within the community. Why does this matter? It’s the first step towards a methodology to deeply understand community roles and how each member sees themselves in those roles. Here the avatars highlight belonging to the collective and alignment with its values. Through customization, members can signal beliefs, values, and identity within this shared framework.

Moreover, such systems can evolve to help measure the impact of members in different roles, thus opening the doors for a very rich understanding of members, project vision, and project realization. Ensuring that relevant contributors assume appropriate roles in decentralized governance is crucial to its success. This helps prevent issues such as community members making decisions on topics beyond their current expertise, tools, skills, and knowledge, which can lead to ineffective or counterproductive contributions.

What are the technical challenges?

Projects must translate all the new rich sets of community attributes, skills and other human aspects that make up a community into sophisticated logic that will rule the project´s governance model. The community member’s skills can lead to more refined decision-making about members’ participation on specific committees or workgroups, and specific voting rights and other more evolved governance tools required to achieve a higher order of efficiency.

Such a translation is inherent to each community’s characteristics, and how much crafting will take place can significantly impact how the community evolves over time. A clear understanding of the community’s dynamics and goals is paramount for a design that properly supports the intended direction.

That applies to projects through a decentralization process or a community around a creator´s economy, where the creator realizes that only capturing value from a community is not sustainable in the long run and creates a fly-wheel of value exchange within the community. Allocating resources efficiently based on different contributor’s profiles is the only way to keep the ecosystem “ecologically” sustainable.

How Cartesi can help to address this challenge

A robust badge system, using, for example, a diverse set of NFTs reflecting skills and knowledge from community members, necessitates substantial computational capabilities within the DAO tooling. This is pivotal for effectively harnessing the inherent flexibility within the DAO’s structure, decision-making processes, voting workflows, and mechanisms for accountability and potential penalties (slash models).

To seamlessly translate these intricate aspects of the DAO’s functionality into executable code on the blockchain, considerable computational power and a more versatile programmability environment are indispensable. This is precisely where the innovation of Cartesi shines. Through its specialized application-specific rollup architecture, it delivers an immense computational enhancement when juxtaposed with the capabilities of the Ethereum network.

Notably, this heightened performance doesn’t come at the expense of security guarantees, owing to Cartesi’s dynamic dispute resolution framework. Additionally, Cartesi’s VM (Virtual Machine), rooted in the RISC-V LINUX foundation, presents a noteworthy advancement in programmability.

This stands in stark contrast to the alternative approaches involving disparate programming languages or the integration of existing and stable libraries. This innovative VM empowers the creation of intricate code required to fully exploit the spectrum of possibilities offered by the Badge System, which hinges on an elaborate array of NFTs.

What’s more, Cartesi’s sophisticated logic extends its support to dynamic NFT creation. This evolution over time, guided by specific criteria, aligns seamlessly with the need for badges that evolve alongside the contributions and impacts of the community members, adding even further flexibility to the DAO tooling systems.

Conclusion

Nowadays, most DAO governance models are set to fail or, in the best scenario, lead to inefficient governance models impacting the project´s capability to amplify its community contributors synergistically.

The path to decentralizing projects or properly creating a sustainable community-based economy is in its infancy. Currently, communities and projects are navigating unchartered waters and building their playbooks as they move forward. But one aspect seems to be the key to unlocking the secret sauce: A deep understanding of community values, skills, reputation and willingness to contribute is paramount in not only fostering a vibrant community but also making sure the right community profile will be allowed to engage in critical discussions, groups or initiatives within the project as well receive the value accrued by the ecosystem, together with the right tooling to create rich and complex codes that will leverage all these richness into governance onchain coding.