Web3 Foundations (Part 2) — The Social Experiment: Community Currencies and Governance

“We are moving from money we understand to money that understands us”. Wendy Grossman [1]

Background

This article follows from Part 1, introducing the concepts of trust, money and the blockchain. In summary: money and credit are psychological constructs [2]; trust is defined as a confident vulnerability [3]; and blockchain technology’s salient feature is transacting with digital assets reliably and efficiently across borders, without intermediaries. Furthermore, several questions were posed about trust in DAOs using a community currency vis a vis governments using fiat currency. This article will explore the role of NFTs and smart contracts in a Web3 economy in responding to the questions raised in Part 1.

The scope of content varies from blockchain fundamentals to the governance of web3 communities and DAO currencies. If you are new to the subject matter, take your time and digest the material at a comfortable pace. There are many references to provide you with further material to support your understanding including links to videos and podcasts. Should you feel comfortable with the basics, feel free to skip the introductory material.

TLDR

I revisit the blockchain and advance the discussion about tokens and smart contracts by defining the terms and explaining their use in the context of a Web3 economy (aka ownership economy). The role of a community currency, treasury, application of NFTs, and smart contracts are explored in the context of the Social Bees University DAO. Considering how these elements interact, there a resemblance between DAOs and nation-states. The organizational models of DAO can be applied to govern a town, municipality, or an internet country or network state.

The economics of a DAO’s token, aka tokenomics, has elements of monetary and fiscal policies used by nation-states in managing fiat currency. The article concludes with thoughts on governance, exploring the notion of trust in the systems we create. While a DAO uses a trustless protocol that enforces algorithmic consensus for transactions, there is a need to cultivate social consensus that manifests in trust of the community further enabling the DAO to follow through on its raison d’être.

Introduction: revisiting the blockchain and understanding Smart Contracts and NFTs.

Permissionless and public blockchain technologies are essentially consensus protocols in which anyone can participate in the maintenance of a digital ledger of transactions involving digital assets. The network’s native tokens are labeled as coins and these cryptocurrencies are used to reward participation, incentivize good behavior, and facilitate the transfer of assets. Cryptographic technology ensures security and pseudo-anonymity, while the open/public nature of the digital ledger and participation offers transparency and immutability. The Peer-to-Peer (P2P) nature of the network coupled with further computer science technology obviates the need for intermediaries, thereby creating an opportunity to transact with less friction and more reliability compared to extant procedures developed by “centralized institutions” (e.g. banks). In essence, creating a trust architecture [3].

Consider the possibilities, for example:

• Remittances can be made across continents without banks or intermediaries such as Western Union — transactions that take several days and relatively exorbitant fees; or,
• DeFi protocols facilitate the exchange of cryptocurrencies while offering those who stake capital in a liquidity pool, a reward that is often better than the interest rates offered by banks.

Transactions on the blockchain are executed by “smart contracts”, the term attributed to Nick Szabo, where terms of an agreement are represented by computer code that is automatically executed when the contract terms are met. On the Ethereum Virtual Machine (Ethereum blockchain or EVM), contracts are programmable accounts. Other accounts (programmable and non-programmable) transact with smart contracts by executing functions of the smart contract. Furthermore, smart contracts can define rules and automatically enforce them by code. Smart contracts cannot be deleted by default, and interactions are irreversible [7]

Non-Fungible Tokens (NFTs) are digital assets that are unique (cannot be readily exchanged like dollar bills), and perpetually remain “whole”; they cannot be disbursed in fractional amounts. Consider a ticket for admitting an adult person to a concert It cannot split into three smaller pieces for admitting three children. It may, however, be transferred from one adult to another, where the perceived value of holding said ticket may change, for example should the concert sell out and the demand for admission exceeds the available space.

In the context of the Social Bees University (SBU) Decentralized Autonomous Organization (DAO), governance and use of the funds in the treasury are transactions facilitated by smart contracts running on the EVM. Membership to the DAO is open to anyone that has a BEES NFT in their wallet. The NFT may have been obtained as a gift, original mint, purchased on the auction or secondary sale on the market (e.g. OpenSea). The NFT entitles the owner to participate in the governance of the DAO and rewards of the token economy developed therein. All BEES are (a) entitled to a vote, (b) the annual yield of BHNY tokens as a proportion of market cap, (c) have traits that make them unique and rare, and (d) are paired with an EmpowerMint NFT that will be accessible in the future, (e) Queen, Princess and Alpha BEES have additional privileges. Further details about the points are documented here.

Alternatively, fungible tokens (tokens that are interchangeable), may be transacted in fractional amounts. Consider the US dollar, a token representing legal tender by Fiat, is fractionalized to the penny. The dollar facilitates the exchange of goods and services. It works well for transactions, when the value remains stable, e.g. the price of my cup of coffee does change from one minute to the next. Similarly, fungible token can serve a variety of purposes including the currency of a community. Consider for example, BHNY tokens that are the currency of the SBU DAO, created on the EVM. It is a “fungible token”, following the ERC-20 specifications, as such it can be fractionalized into smaller denominations.

Social governance of a DAO is a crucial element and an essential dimension of the organization, as it serves to direct and manage the activities — arguably in alignment with the goals / objectives / mission / purpose of said organization. As the Mayflower Compact (1620), US Declaration of Independence (1776) and Constitution (1787) are elements that inform the social experiment known as “the United States of America”, the twenty-seven amendments (most recent one ratified in 1992) demonstrate that social governance is a work in progress. For DAOs, the manifestation rules of law as code is a relatively new concept and is expected to evolve over the course of the DAO’s history.

The remainder of this article will explore how do smart contracts, fungible tokens and NFTs support a community operating in a Web3 economy. Notions of money and trust in a DAO will be examined and juxtaposed with that of a government of nation state using a fiat currency. Let us begin with community money and explore notions of trust.

Web3 aka the creator / owner economy addressing the “original sin” of the internet

Li Jin has written extensively about the Web3 economy. Her material was referenced in my article about the SBU DAO and Web3 economy, where ownership of creative content is the salient feature of a Web3 economy. Chris Dixon refers to this as the third incarnation of the internet where we are experiencing the “democratization of ownership”, addressing the “original sin” of the internet i.e. Web1, where the mechanisms for monetization was not seamlessly incorporated into that first incarnation, resulting in the establishment of mega-tech and centralized entities that monopolize content and exploit creatives through mechanisms characteristic in Web2.

In a recent newsletter (Sep 16, 2022), Jin explains how the creator playbook has changed wherein the role of token distribution is introduced and jumpstarts the formation of a community.

• The Web2 process starts with creating content, then building an audience, followed by the monetization of that content as the business is managed and further developed.
• In the Web3 approach, tokens are issued to members of a supportive community aka “the audience”, that audience is then activated, followed by the (co-) creation of content while the business is managed and further developed.

Tokens offer the audience a supplemental source of financial utility that will change over time as the application utility develops. Consequently, tokens serve a variety of purposes, initially offering the opportunity to crowdsource liquidity that leads to co-creative collaborative approaches in content development.

In describing the “owner economy”, Li Jin identifies five salient points in the thesis about the economy, enumerated as follows:

1. The owner economy is growing. Crypto tokens rather than equity is the basis, noting that 4/26/2022 CoinMarketCap reported that market cap of 19k tokens is $1.76 trillion (compare to $100 trillion for global stock markets);
2. Growth can be jumpstarted by user ownership (via tokens). Sustainability however, is more challenging. Compare Coinbase (centralized exchange) to Uniswap (decentralized exchange);
3. Loyalty can be boosted through token distribution. Yet tokenomics is in its infancy and the implications of incentives are mixed;
4. Richer ecosystems are the benefits of user ownership. Intellectual property can be leveraged in new ways; and,
5. Project ownership is accelerated including opportunities to participate in value creation.

My experience with the community that what would become the SBU DAO, began with opportunities to participate in a variety of DeFi protocols. It was a catalyst to pique my interest and embark on the journey down the blockchain technology rabbit hole. In due course, the community would develop asset-backed NFTs — portable receipts of staked amounts in various DeFi projects. The minting of the BEES NFT would eventually emerge after considerable thought in what it should represent: ownership and participation in an organization aimed at empowering others based on the ethos of being good stewards of information and putting principles before profits. This is a departure from many of DeFi and ICO projects attempting to leverage the hype in crypto, where the NFT was created first and the utility or strategy would follow, though often not.

As such, I have observed how a community has evolved: (a) centered on a grand plan of establishing a billion dollar fund, (b) diverse membership manifested through ownership of NFTs, © algorithmically coordinated through smart contracts that represent the DAO constitution, and (d) the BHNY token serving as a community currency, accumulating in a community treasury and supported by DeFi protocols to ensure a sustainable currency. It’s remarkable that such technology is available at our disposal and offers great promise in the years ahead. What can you do with a DAO with a community currency?

Currencies — Fiat v Community-based, this is just the start of something bigger

“… we will have multiple monies that embody different values, and in a world of shared ledgers and ‘smart contracts’ it might well mean a type of money that won’t allow you to use it unless you have a track record of upholding its values!” David Birch [5]

Who will create the money of the future? Central and commercial banks do this today with fiat currency, in a manner (e.g. fractional reserves) that has resulted in economic systems with a skewed distribution of wealth and a gap that is growing through inflation. The government, through fiscal policy and in collaboration with central and commercial banks, “prints” money through fractional reserve banking. Ideally, borrowing from the future, this manufacturing of money features prominently is our socio-economic development, a targeted at credible real-world projects involving the development of infrastructure and job creation. Alternatively, it is questionable and unethical if the funds are directed towards investment in derivatives and padding bank balance sheets, where greed and moral hazard are at play.

The narrative on the technology of money in steeped in the rhetoric of those few who control it and wish to retain power. “Protecting themselves will always come first” [6]. As citizens of a nation-state, we are faced with the following challenges:

• principal agent dilemma: are our elected officials working in the best interests of the constituents [7]? It is apparent from an abundant number of cases, that many operate with a conflict of interest that benefits them and not the communities they represent; and,
• moral hazard: are those in control, and have a fiduciary responsibility, undertaking unacceptable risks through speculation of funds belonging to others; consider how central banks operate beyond public scrutiny and government oversight [6].

In the 2008 financial crisis and what ensued, we witnessed both elements at play through the collusion and incestuous behavior between leaders and influencers, followed by a narrative to support the policies undertaken [6]. Undoubtedly, citizens have had enough of this reckless and unethical behavior and have sought to find alternative solutions; is the timing of Bitcoin a coincidence?

In exploring the future of money, Birch notes that the advent of Bitcoin suggests that it is intrinsic to the technology in use, whereas fiat currencies are synonymous with the interests of nation-states [5]. Yet, the nation-state is just another variation of a community, and as Yuval Harari [2] notes, it is a psychological construct around particular narratives or myths. Citizens of the state have developed notions of identity (reflected in cultural values) and corresponding behavior around icons (flags, emblems, etc.) established within artificial boundaries (state, union). It reflects a sense of bonding and trust. Is this any different for a community represented through a DAO? Aren’t Web3 communities just variations of an internet tribe?

Just as the currency of a nation-state are driven the economic activity incentivized the by monetary and fiscal policies of the state, Birch further notes that community currencies may embody values (e.g. environmental policies) that are important to the community and therefore drive usage. The community will rally around the icons and values of the community. Unlike a nation-state, that grants permission (think citizenship requirements) to participate, anyone with the community’s tokens (NFT) in their wallet is considered a participant.

In his thesis about the Network state, Balaji Srinivasan explores the notion of a “Cloud Country” where members are ideologically aligned but geographically decentralized. Balaji’s thesis is premised on stacking technologies as witnessed today by the manifestation of billion-dollar currencies (e.g. BTC, ETH), million-person online communities (e.g. Facebook), architecting buildings in virtual reality (e.g. the wild). Such momentum can result in clusters of land in the real world (IRL) with the leverage of significant resources (rivaling small nation-states) where it could demand recognition from existing sovereigns. Along these lines, we see the Afropolitian who aim to create a digital nation or internet country of the future to enable all Africans to build abundant lives.

Be it a municipality, township, network state, the economic activities are facilitated through tokens that serve as community currencies. Blockchain technology has enabled it, and Web3 communities are being built around it. So now we have a community and a currency, what’s next? and can nation-states have their version of a digital currency?

Birch (in 2014) noted that technology can lead to Central Bank Digital Currencies (CBDCs) — another variation of digital tokens. “Digital Fiat is central bank granting universal, electronic, 24/7, national-currency-denominated and interest-bearing access to its balance sheet” [5]. As this a system that is managed centrally it is the antithesis of what lead to the establishment of Bitcoin, as it smacks of notions of control through social credit systems and surveillance capitalism by the state. Though proponents of CBDCs will claim that it will lead to greater financial inclusion and efficient transactions etc., as noted in Kenya’s CBDC paper available here. While CBDCs and cryptocurrencies may have a shared history, as explained in this video they are different animals altogether. A more recent video about the pending launch of the Euro CBDC further addresses rhetoric of the European Central Bank (ECB).

Considering the track record of those in authority of the monetary and fiscal polies of the nation-state, I may wish to consider alternatives, perhaps participating with a like-minded community that I can trust.

Governance — manifesting social trust in communities

Without such human-based governance and dispute resolution mechanisms, smart contracts on the blockchain will sometimes execute in ways that are inconsistent with the desire of the parties. Kevin Werbach [3]

The design of all artificial systems, mechanical, financial, or otherwise are regulated to prevent unscrupulous behavior and protecting the victims should those systems fail. The nature of our financial transactions through banks are regulated by institutional policies and protected by the rule of law and the manifestation of leviathan trust [3]. Should something go wrong, there is a course of action — albeit bureaucratic and inefficient at times.

Corruptible institutional systems can be influenced to modify regulations. A century ago, the Federal Reserve and the system of Central Banks were created with good intentions to support and sustain the economic growth in the US. The repeal of the Glass-Steagall act in 1999 [6] was tantamount to removing the safety mechanisms, and invariably led to the 2008 financial crisis. Citizens’ trust in financial systems and economic affairs of the nation-state, that are governed by our elected officials was broached.

Technology is neutral; how it is applied lead to perceptions of good or evil. Enter the human condition of greed, fear of missing out (FOMO) and fear uncertainty and doubt (FUD) are alive and well in Web3 (as in many human endeavors). There are numerous cases demonstrating questionable behavior — failed Initial Coin Offerings (ICOs); DeFi and NFT projects with little or no yield; and, projects with unsustainable tokenomics. Currently, the technology has not reached adoption, and given the lack of regulation, who should be held accountable? How do mange?

Those familiar with TheDAO (2016) can appreciate the quote above. An actor, albeit behaving in accordance with the code — but arguably not in the spirt nor the intention of the code — was able to help themselves to a significant portion (approximately $50 million at that time) of assets that belonged to the DAO. While code may be law, it may not be the best one [3].

Through social consensus of TheDAO, a hard fork of the Ethereum network was undertaken where transaction were undone, and a new chain was established. Demonstration that transactions on blockchain may not be as immutable as you may have been led to believe [3]. Hence, the use of a trustless protocol (i.e. permissionless, public blockchain with PoW consensus protocol just like that of Bitcoin) suggests there is a need of trust; trust in the community to do the “right” thing.

There is no one-size-fits-all that applies to DAOs. Each one has its unique characteristics and governance mechanisms. The Bitcoin network as a DAO, has demonstrated a novel concept of creating value by incentivizing a tribe of anonymous actors [7]. its’ Proof-of-Work consensus protocol has yet to be hacked. A variation of the technology led to the EVM, that is programmable, facilitating the creation of sophisticated organizational system and purpose-driven tokens. These systems are created by humans and therefore, vulnerable.

TheDAO addressed its’ dark night of the soul with a hard fork by trusting in the social consensus of the community, a human solution to an oversight in human development — not AI fixing code. Undoubtedly, the learning from this, the developer community shall improve the tools (oversight mechanism) to ensure such mistakes are not repeated. It’s a work in progress.

My limited experience (two years) with DAOs, particularly the SBU, gives me great hope. The promise of the technology coupled with the human spirit gets me very excited as I explore opportunities to develop solutions to a variety of social injustices I have witnessed around the world. It’s not about the prevalent and seductive narrative concerned with pumping your bags and going to the moon.

These are early days, and I am finding my place in this new world as I presume are many others. For the community, we are finding our balance as a newly born on-chain DAO. My trust in SBU community has been fostered through a variety of experiences, namely: (a) participation in innumerable Zoom calls — not practically sustainable as the community grew — then switched to Discord, (b) adherence to the underlying principles manifested through selfless hands-on-assistance in getting myself and others on board, (c) appreciating the innovative development of DeFi protocols and how that can lead to passive income, (d) observing how the whales in the community burned BHNY tokens to ensure future support to the community currency, (e) the diversity membership and the ability to mobilize talent and resources to manage the community on Discord, facilitate two conferences, create 800 hours of YouTube content, and host sixty (60) days of continuous twitter space, and last but not least, (f) a reminder to have fun on this journey of creating generational wealth.

In the twenty-five years that I have been involved with the social governance of volunteer-based civil society organizations (on five continents), I have observed how individuals who serve by giving of their time and knowledge to empower the community, have in turn empowered themselves. The institutions are a vehicle to facilitate engagement and become a catalyst for personal transformation while improving the quality of life of the community. There is however, one caveat: personal participation is a requisite element.

Those who wish to serve but are unable to give a sustained voluntary commitment (typically one to three years) in a leadership position on a council/board/committee, can apply their skills in projects of fixed duration (days, weeks and months as necessary) e.g. natural disaster or education specialists facilitating workshops in remote villages while simultaneously building local capacity. If necessary, stipends (rent, travel, meals) are offered for their services. How is this be replicated in a DAO?

Variations of this model are can be seen in Web3. While the ongoing administration and management of the SBU DAO community is undertaken by the voluntary efforts by members, there will be a need to engage individuals to apply their special talents, skills, and subject matter knowledge for a project. To this end, the SBU Lab was created and made accountable to the SBU DAO. A member of the Lab is issued a “worker bee” NFT and is compensated with BHNY, the community currency, for services rendered. All transactions being facilitated on the blockchain through smart contracts ensures transparency. The proposals to pursue a project and engage paid resources are to be made by members of the community. This is formally administered transparently on-chain, however, likely as the culmination of raising awareness through off-chain discussions, AMAs (ask-me-anything) etc. prior to being put to a vote.

As such the DAO is this new incarnation of that organizational structure that serves as the vehicle to empower ourselves to empower others. Trust is developed as the community goes from strength to strength in successive steps. We are only limited by our imagination and willingness to participate. Long live the social experiment!

References:

[1] Wendy Grossman’s piece on net.wars blog 2014, URL: https://www.pelicancrossing.net/netwars/2014/03/a_money_that_understands_us.html

[2] Sapiens: A Brief History of Humankind, and Homo Deus: A Brief History of Tomorrow SEE ALSO Harari, Yuval N (2014) “Sapiens: a brief history of humankind” Canada: Random House. Chapter 10 “The Scent of Money” describes the evolution of money from a historical perspective, while chapter 16 “The Capitalist Greed” explores the role of credit in economic development.

[3] Werbach, K (2018) “The blockchain and the new architecture of trust” Cambridge, MA: MIT Press. Chapter 1 “The Trust Challenge” defines notions of trust and identifies the four types of trust architecture. Chapter 4 on “Why Blockchain” examines salient features of blockchain technology. See book recommendation.

[4] The Ownership Economy 2022 — Variant Team. April 28, 2022

[5] Birch, D (2017) “Before Babylon Beyond Bitcoin”. London, UK: London Publishing Partnership. Discussion on digital fiat in https://www.dgwbirch.com/words/books/before-babylon-beyond-bitco.html. See my book recommendation.

[6] Prins, N (2018) “Collusion: How Central Bankers Rigged the World”, Berlin, Germany: Nation Books— see the section on Shifting monetary systems: developed to developing nations. Consider watching this video.

[7] Voshmgir, S (2019) “Token Economy: How the Web3 reinvents the Internet” Berlin, Germany: Token Kitchen. See book recommendation.

Acknowledgements:

I am grateful to my colleagues from the SBU DAO, in particular AustinM2 and

Vince Wicker

, for their constructive feedback and editorial markups.