The Social Token Paradox: Diminishing Returns to New Nodes
In the essay, Goldberg discusses what she calls the “Social Token Paradox” – a problem that arises within social tokens communities based on exclusivity. The challenge is that social tokens need to appreciate by including new members and yet these membership gated communities must keep their groups exclusive otherwise the social and utility value will decrease. Thus, the social token paradox is born.
Barring utility growth in other forms, exclusivity-based communities face the Social Token Paradox and are destined to repeat a vicious cycle:
Phase 1: An exclusivity-based community is build using a social token whereby membership requires possessing a certain number of tokens.
Phase 2: Early entrants to the group acquire tokens and therefore the token appreciates. New entrants also reinforce the idea that the group is exclusive and socially valuable and therefore the exclusivity increases for a time.
Phase 3: At some threshold (depending on the group) the continued growth of new members starts to decrease the social utility and exclusivity of the group. However, the token price rises as new members are forced to acquire tokens.
Phase 4: Ultimately new members are incentivized to recruit new members to ensure that the token appreciates. However, at a large enough size, new members result in diminishing returns for exclusivity value. At this point, the token appreciates and peaks at some member headcount.
Phase 5: Members sell the token for profit or because of decreased exclusivity/utility. Eventually, the community reaches some equilibrium before continuing the cycle again.
This paradox does not occur with non-membership-based tokens. For example, each new buyer of Bitcoin adds value – increases the scarcity – of Bitcoin and therefore all members are aligned. New nodes or members to the network increase the value of the network.
The Double Edge Sword of Exclusivity
Unfortunately, there are diminishing returns to growing an exclusive community. More people generally means less exclusivity and therefore less social value. Membership in exchange for monetary value is the most common form of exclusivity. Country clubs, events, and subscriptions are all forms of exchanging monetary value for exclusivity. Some aspects of membership are fleeting (e.g. events) while others are recurring (e.g. membership dues).
Financially-derived exclusivity or membership is a double edge sword – it will succumb to the social token paradox. It naturally limits the size and potential growth of a community.
Exclusivity as a value proposition will always exist but it doesn’t have to be wholly financially dependent.
Performance or Accomplishment Exclusivity
Accomplishment or performance is a socially valuable signal. Oftentimes performance can be vague to assess, however, Rabbithole has already started to create on-chain records for completing certain tasks. Additionally, membership can be given to individuals who have completed tasks in various DAO (e.g. bronze members, silver members, etc.) or previous voters. Tiered membership based on accomplishments or participation can bring together individuals from different communities into a single DAO or community. Imagine having some of the top contributors or voters from various DAOs all in one single DAO.
Time Exclusivity
Creating membership based on time can align long-term players and adds an element that cannot be gamed or financially purchased. Time membership can also be combined with accomplishments such as tasks that involved grinding away at some task for hours or weeks until it is achieved. This model can incentivize the development of communities that require significant effort to join.
Experience or Service Exclusivity
Shared experience unites various individuals whether it be fraternities, college students, people in the same geolocation, or otherwise. Experiences can also be cause-oriented such as charitable affiliates or event-oriented by requiring individuals to attend an artist’s concert before getting an NFT that provides access to their discord channel.
Final Thoughts on Exclusivity
This isn’t to say that financial exclusivity is negative – how people chose to allocate their capital whether it be on activities, memberships, or otherwise is all about tradeoffs. Exclusivity brings value to communities based on a shared purpose or goal. As social token communities seek to expand their networks, it will be vital to imagine ways to bring utility and value that aren’t only financial in nature.
