Thanks to monty, this post came together through discussions with him and his feedback

Overview

Social Token gated membership communities have been popping up more and more over the past few months. The creator economy is buzzing about them.

Some examples are:

• NELK Metacard
• Poolsuite FM
• FWB
• Rally social token communities
• NFT Communities

These communities work as follows:

1. A fungible or non-fungible token is created to abstractly represent the community (this is the “social token”).
2. By holding a certain number of these tokens, you become a member.
3. By being a member, you are entitled to certain benefits and services.

This is all very cool and exciting, but unfortunately the model has some fundamental flaws. First we define how membership works.

Properties of Membership

Membership in a community can be seen as a service exchange with two types of participants. The organizers of the community (the sellers), and the members of the community (the buyers).

In general membership-based communities operate as follows:

1. Members incur recurring costs to join and remain members of the community. This cost serves the purpose of both:

   • signifying a commitment to the community
   • funding the community treasury (this can be abstract and refer to funding the treasury in a non-monetary way like doing a favor for the community, but typically the cost is monetary)

2. The organizers of the community use the treasury funds to provide value to the community (this can include paying salaries)

Members join and remain because they expect to derive more value from being a part of the community than they incur fees for remaining a part of it.

Going forward we refer to memberships based around recurring payments as subscription membership models, and memberships based around one time payments as OTP (one-time payment) membership models.

Membership in Crypto Today

For simplicity we stick with membership revolving around non-fungible tokens, but the same principles apply to fungible tokens.

Applying these properties to the model of token gated communities described above, we see that the cost incurred to become a member is the locking up of funds into an NFT and it follows an OTP membership model.

I say “locking up of funds” rather than “purchasing”, because the NFT is resellable. This means that the cost is really only the opportunity cost of the money you use to acquire the NFT, and the risk of the NFT depreciating in value.

This is where problems start to appear. As a member you have just incurred a one time cost, and in return you are expecting the benefits of the corresponding services to go out to infinity.

This is inherently unsustainable. You can’t pay a one-time fee and expect infinite services.

Digression: Comparison To Software Business Models

Let’s take a moment to see how this played out with software. Initially, software like Microsoft Word was purchasable for a one-time fee. The thinking was that once you purchase the software, you have the right to use it forever. The problem is that in this situation, nobody wins. The customer gets ownership of software with no right to feature updates or bug fixes, and the developers are out of a job.

The switch to a subscription business model fixed both of these issues: developers get paid to keep improving the software, and customers get access to the most up to date software.

Applying this analysis to OTP membership communities as they stand today, things are looking even bleaker.

1. Not only is there a single upfront cost, but a continuous service is expected from the organizers of the community. They have to keep organizing events, stay active in the Discord, keep producing content, all without recurring revenue. When selling software there are no expectations of continuous effort after selling it for a one time cost.

2. The cost that members incur to join the community is resellable. Users can become members, enjoy the benefits for a year, and then resell the membership rights at no nominal cost (assuming the market is constant). This has hugely negative effects on the revenue of the community organizers. You can’t resell software after you purchase it.

3. The economies of scale are not as favorable to creators as they are to software developers. Software developers can write the code once and subsequently distribute it to as many people as possible. For membership organizers, it becomes more and more difficult to organize the community as it grows in size and in-person events become O(n) times more expensive.

If software saw huge benefits from switching to a subscription model, then membership communities will have significantly more to gain!

Digression: Comparison to Shareholder Models

This OTP membership model can be better described by understanding it as a business model which provides services to people for free if and only if they are investors in the community, thereby lumping investors and members (buyers) into one bucket.

Considering the NFT collection as a representation of the market cap of the community, and NFT holders as investors in that community. Notice that you are then providing services exclusively to investors proportional to their investment.

It doesn’t make sense to tie these things so tightly together. Some people will want to sign up just for the benefits of the community, while others will want to purely invest in the community. Instead, allow people to take part in those actions independently from one another.

The problem of mixing these is that it results in directly tying the cost of membership to the value of the company. This enables the scenario of speculators driving up the price of membership without even being interested in the community while pricing out those who are actually interested. You can try to constantly adjust the cost of membership based on the value of the company, but this results in a poor UX for members who are constantly switching between qualifying and not qualifying for membership based on the changing requirements.

Note: There are two options for NFT based membership, infinite supply or fixed supply.

• If you allow for infinite mint you are screwing over investors at the benefit of customers because you impose a fixed ceiling price per “share” and potentially infinite inflation.
• If you limit the supply you are screwing over customers at the benefit of investors because customers quickly get priced out of the service they are willing to pay a fair price for.

In conclusion, enabling community investing is cool, but being an investor shouldn’t mean you receive services for free for the duration of your investment.

Addressing Counter Arguments

The cost of capital isn’t a one time cost, but rather a recurring one.

You can try and see the opportunity cost of capital as a recurring cost equivalent to paying the interest rate worth of the capital per year. Call it 5%, then the equivalent of a $30 per month membership fee would be buying tokens worth 30 * 12 * (1 / 0.05) = $7200. Good luck getting the same conversion rate for a $30 per month subscription as a $7200 down payment… Additionally, even if the math works out this way, the cultural expectations will be such that if you spend $7200 on tokens, you are going to expect a lot more in return than you would if you paid $30 per month. The creator will be forced to give in to these expectations, and will quickly run out of money. Realistically no membership organizers are going to invest it all and fund membership/events solely by taking interest off the top.

What about Royalty Fees?

As an attempt to generate recurring revenue, NFT collections have added royalty fees to secondary market sales. This means that every time an exchange takes place, the corresponding treasury will capture X% of the volume. The idea is that by taking a cut from every transaction on the secondary market you will be able to keep making money.

The problems with this are:

1. It introduces opposed interests between the community and their forms of revenue generation. To maximize revenue for the treasury you are incentivized to maximize the churning of membership (because that is when you collect fees). This conflicts with the desires of a healthy community that would rather minimize churn.

2. It isn’t a reliable form of revenue. It becomes very difficult to predict how much you are going to make month to month.

They seem to be working fine so far, what’s the catch?

The NFT membership community is a relatively new space. All of the NFT membership communities have appeared in just the past two years. This means that if the initial price was set such that it would pay for a 2+ year subscription, then all can appear good.

This is the case for many of these projects. The mint price was very high which has allowed for everything to run smoothly for a few years. Eventually, though, the time will come when the initial money raised will run out. You can think of this as an implied membership duration; eventually the service will be sunset or a new revenue stream will be introduced. The question is not if, but when.

So with all these problems, what are the merits?

The point of a liquid membership token is to enable a decentralized community whereby anybody can become a token holder and token holders are aligned with the success of the community. In general this is a great thing to enable because it aligns more people with the community’s interests and introduces a higher chance of the community’s success, but it doesn’t work out to give membership benefits for free to “investors”. (For protocol creators a liquid token is also nice for creating exit liquidity, but community tokens are unlikely to have a high enough market cap / enough liquidity to warrant this as a strong reason).

In an attempt to preserve the benefits of a liquid token while capturing the benefits of recurring revenue, we could require that investors pay subscription membership fees proportional to their investment and vice versa. This is an improvement, but still not ideal. You are reducing conversion for those who solely want to join the community and those who solely want to invest. (For crypto natives, this would be like if CRV didn’t just do a boost for veCRV holders, but required that you hold veCRV to provide liquidity.)

The next step up is to separate the two ideas. Allow people to pay subscription fees to become members of the community, and allow people to separately invest in the community. You lose pretty much none of the benefits of tokenizing the community, gain a ton, and can still provide benefits like discounts and exclusive deals to token holders. This brings us to the proposed solution.

The Solution

Okay so the current model isn’t going to work, what is the solution? Putting it all together:

• The focus should be on switching to identifying members as those paying a subscription-based membership fee, rather than as those who hold some “equity”.
• If you want you can separately introduce tokenization of the community itself which allows for investors to come in and for alignment of community member token holders with the success of the community. You can do things like offer subscription discounts or make the subscription available only to token holders, but they still have to pay a recurring fee.
• You can still launch NFTs with crazy speculated prices and one-time utility or significant status value separately from membership. These NFTs shouldn’t be expected to provide an ongoing service for holders. They have their one time use / stand on their own for status value.

These are ideas we are incorporating into Glow Creators, a platform providing web3 tools to creators, check us out (more info coming soon)!

Case Studies

Nelk Metacard

Nelk Metacard launched recently. They already had a $20 per month subscription available which enters you into giveaways for NELK merch, but not much more benefits than that.

The utility of the metacard is advertised as: “AS A COMPANY, THE FULL SEND GOAL IS TO LAUNCH MORE FULL SEND BRANDED VENTURES, WHICH INCLUDE LOUNGES, GYMS, FESTIVALS, CASINOS, RESTAURANTS AND MORE. FULL SEND IS GOING INTERNATIONAL.”

You can see that the size of the benefits are set to match the price people are paying for the NFT even if it is resellable and not actually costing the buyers that much (just the opportunity cost of their capital).

These benefits sound nice, but how are they going to continue to provide these benefits with a one-time membership? I don’t expect the fullsend nfts to go very well for this reason. They will need recurring revenue. They could have made the NFT last one year, but then would they have been able to gather this much hype? That question remains. The community already looks poorly on the execution of NFT launch.

My advice for them if they were to do it over again: If they are looking to rug their fans, then their approach is pretty good. If they are trying to offer real value, then:

• Launch the metacard NFT for yearly membership benefits
• Separately launch NFTs at ridiculously high values with one time very exclusive utility like being invited onto a YouTube video
• Potentially launch a token representing NELK as a company but not entitled to membership benefits (basically an unregulated IPO)

Blue Chip Social Tokens

• FWB
• BANK

Token prices have been falling for the past few months. Need to do more research on what it’s like to be a part of the community.

Blue Chip NFT

• Crypto Punks
• BAYC
• Galactic Punks

These collections may be able to survive off of royalty fees, but they are the rare exception. Most projects will not be able to gather nearly as much volume or market cap.

That being said, even if they will survive off of royalty fees I think they would be better off with a yearly membership fee for those who want to participate in things like in person events.

Co-ops

Some co-ops like REI operate as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise”.

How it works is that you can become a “lifetime member” of the REI co-op by buying in for $20, essentially becoming a shareholder. In return you are paid dividends and given access to discounts when shopping at REI.

That being said, you still have to pay for the things you buy from REI! REI doesn’t have a subscription membership option because that’s not their business model, but they still make recurring revenue from purchases of their products.

They operate similarly to the proposed solution whereby you can shop at REI without holding equity if you want to, but that holding equity gives you certain benefits when interacting with the co-op’s services (you still have to pay).

Name Systems

Name systems like DNS, ENS, and TNS operate by renting out the rights to domains. This may appear odd at first; why can’t you buy a domain and hold it forever?

It’s for the same reasons pointed out above. It takes on going work to manage the name system and keep it working right. A one time payment model is in nobody’s best interest.

Appendix

• Why is it that you can pay for tokens a single time, and then get access to voting rights forever (as long as you hold the token)? Because you are an equity holder. That actually makes sense. You aren’t expecting a service by voting, you are providing a service.
• Note on royalties. In the real world royalties refer to taking a cut for each item “minted”. There aren’t typically secondary markets. In the nft world, royalties refer to a cut for each exchange on secondary markets.
• Is there room for a ve model here? The point of ve is to protect a protocol from mercenaries. If your community is running into problems with mercenaries than this could be a good approach, but so far community mercenaries haven’t been an issue.
• How do creator social tokens compare to blue chip NFTs? At first glance they may appear different, but they follow a similar structure. Some people think of blue chip NFTs as standing for themselves, but it’s helpful to see them as representing the brand of the NFT collection. Cryptopunk NFTs represent the brand Cryptopunks; they don’t represent just the NFT collection. With this framework we see that creator social tokens represent their creator’s brand, and similarly blue chip NFTs represent their collection’s brand. The biggest difference is that for creator social tokens, a high token market cap won’t suddenly make you more successful in the real world. For NFT collections on the otherhand, a higher market cap more directly translates to success of the brand.
• The current OTP membership model could work if you treat it like a fixed time (1 year) membership but advertise it as an NFT that lasts forever. The idea is that you would release another NFT 1 year down the road which you need in order to get access to new benefits. This is similar to software companies releasing a new version of software which you have to purchase even if you own the previous version. The benefit is you arbitrage the buyers perception that the NFT will last forever even if in reality this isn’t the case. Sometimes this perception can be worth a lot of money, but in the long run this isn’t good for building trust with your community.
• Similarly to the previous point, if you expect to shut down the community in 5 years you can release a membership NFT and advertise it as lasting forever even though you know it will have 0 utility in 5 years.