This week I have been thinking about how to boil down the core concepts of why web3 will assuredly be successful. It can quickly become a complex topic, one that many falsely perceive to understanding (stellar example of Dunning-Kruger). The potential here remains an open question. Participation systems don’t have an existing killer app to point to; they are just forming now. There are many takes on web version breakdowns. My spin on this centers on business value: (|| means ‘logical or’ here)

Web1: Monoliths Business value → payments || identity || ownership || logic || finance || effort

Sellers service a specific vertical that it serves, without much reliance on third parties. Buyers need to have many unique suppliers to accomplish meaningful tasks

Web2: Connectors Business value → (payments ←API→ finance) || (identity ←API→ ownership) || logic || effort

Sellers serve needs by providing services that are bundles of many other services, often enhanced by niche additions. Buyers need fewer vendors to accomplish valuable tasks. (Google, AWS, Twilio)

Web3: Participants Business value → {unified infrastructure} = ∑(payments+finance+identity+ownership+logic+effort)

Business can be performed within a closed system. Efficiency is the business value Shifting from web2 to web3 changes where value is captured. More accurately, this stops value from leaking out of a system, allowing it to flow back to members. It is important to note that web versions co-exist just fine. AWS is not going to be made irrelevant by web3 anytime soon.

Web1 won by taking the physical virtual. Web2 won by enabling web1 to scale through cloud computing. Web3 will win by fixing some intrinsic issues with web2. Characteristics

‘Alignment’

There are many, many people that exist today on the outside looking in. When stereotyping, these are the groups most advantaged by opening up economic systems. We are currently in the gold-rush days of building up web3 identities. Anyone can reinvent themselves as a string of numbers regardless of their literal background or geography. Your identity becomes what you have done and what you are currently doing. This type of incentive alignment is a dramatic shift away from our current certification systems and makes participation in common good enterprises much more maintainable. We will almost certainly see open-source projects move to be DAO-first operations in the next year. Banking and lending, public works, politics, shared spaces, specialist knowledge communities, and more will immediately benefit from changes to the legacy power dynamic.

Everyone is a freelancer, with equity

A core feature of DAOs is that they can reward participants for exactly what they do. This means that participants look much more like freelancers than salary workers. This lowers the bar for people to get involved and tends to benefit those that can produce output quickly. In a fast-changing environment, I will bet on flexibility over commitment every time. This also injects management overhead. Tracking the activity of thousands of contributors is a very hard problem. Tooling will have to be made to make this easier.

Many expert hands make light work

The promise of DAOs allows for flexible, unique combinations of very skilled individuals to make exceptional outputs. Talent attracts talent. The best DAOs will be very exclusive. Gating mechanisms will be of primary importance, encompassing proof of worth and artificially increasing scarcity (demand++). A person’s social media history, project history, github, newsletter archive, etc all have greater value in this new economy. Your personal, provable output will be more important than a previous employer’s brand name. Play-to-earn style token gates will be common in the future, in addition to simple buy-in gates.

Naturally Small

Most DAOs likely won’t – and shouldn’t– be massive. It is hard to keep large numbers of people aligned and engaged without strong leadership. The Dunbar number for the average DAO is likely in the low hundreds. I am hopeful that exclusive DAOs will make for more efficient projects. Many experts fail to finish projects fearing customer support, upkeep, or reputation harm. Instead of farming out these responsibilities to external vendors, DAOs will enable users at different skill levels to all participate.

Uber for X

It is always easiest to think in concrete example use cases.

  • Creative studios. Peaky work types can contribute as they can. Ideas can be rewarded separately from implementation.
  • Resource-bound groups. (such as for machine learning) Groups can apply for resources, instead of individuals.
  • Research groups. Papers, code, tests, and reviews can be shared amongst a community.
  • Marketplaces. Roll your own specialist Upwork, Etsy, ads, or private equity market.
  • Legacy forums. Most discussion groups are currently basic chats. DAOs will give more people the power to build involved platforms. Group buys, play-to-earn, incentivized sharing.
  • Social causes. Organize events, beach cleanups, farming, etc.
  • Single-mission groups. People of a like mind can organize around a single idea, such as buying Twitter.

This just causes more problems…

DAOs introduce governance issues and financial concerns to otherwise stateless projects. The potential to create wealth attracts bad actors. Specific processes will be needed for organization formation, management, and voting.

What about taxes? Legal obligations? Lawsuits? IP ownership? There is little precedent in this decentralized world.

Creator tooling needed, badly

While I am still researching this area, it is clear that professional applications are needed before serious operations begin as DAOs. To get a picture of the current landscape have a look at DAO Masters. These were just some musing on Web3 and DAOs to get the creative juices flowing. There will be more in the future as I dive deeper into crafting systems to keep members engaged, earn payouts, and avoid timesinks. If you know someone interested in this topic feel free to share this newsletter.

Happy Friday,

-Tyler