Are Communities Just Exit Liquidity?

TLDR: yes, but not in a bad way, inherently.

‘Community’ can range in its definitions, but for all intents and purposes here it will be described as a collection of people across different mediums associated with one entity.

Why is Web3, in particular projects with tokens, so focused on community?

There are three main reasons. One cynical, one logical, and one optimistic.

Reason 1: buy pressure

So, to start, who are community members? They’re people that will buy a token once it’s launched. They will trade it, hold it, use it.

Is that why there is such a big focus on community from the perspective of Web3 projects and even investors? Well, short answer – yes. The community is the key buy pressure metric because of the aforementioned fact.

But is that a bad thing? No.

Investors are needed to get a project off the ground, and the community are the people that will be utilising the token and the product/service the project offers. So for the tokens to transfer from the investors to the public isn’t a bad thing inherently. In fact it's necessary, given that tokens are often needed to utilise the product / service or participate in extracurricular activities like governance or staking.

Let's look at it from another angle.

During the 2017-2018 ICO era when projects were selling directly to users, there were so many scams and so much of retail was burned that the regulators had to step in. Retail users have no experience conducting due diligence; they also couldn’t if they wanted to, given that no company would share private information publicly.

Retail took all the risk.

Now, the industry utilises traditional fundraising methodologies, where investing firms or experienced / accredited investors invest at the seed, private, and other rounds prior to the tokens going public.

Investors are the ones taking on all the risk. They invest to take the project off the ground and get it ready for public use.

This is exactly how it works in the traditional stock market – when a company IPOs (initial public offering – sells equity to the public), the investors are able to cash out (although depending on the contract, they could sometimes also cash out during other fundraising rounds). Retail are once again the exit liquidity.

It isn’t a bad thing.

All the term “exit liquidity” means is “buyers”. The same way investors are exit liquidity for the founders, is the same way retail are exit liquidity for investors, and the same way later retail is exit liquidity for initial retail. When you list a used item on eBay, the buyer is your exit liquidity.

Therefore, having a community is guaranteeing investors that there will be people to buy their allocation. This makes them more likely to invest, and this means that the project that you’re a community member of is more likely to actually launch and be a good product.

The problem

The problem is bad tokenomics that facilitate dumping – i.e. predatory tokenomics that benefit investors at the price of the retail users who don’t know any better.

For example, setting initial market caps (i.e. liquidity) to be as low as possible so that the buy pressure from the community will shoot the token price up, combined with giving investors short vesting schedules with a relatively high unlock at TGE = dump central.

Here’s the above explained in simple terms:

• If the liquidity (i.e. how many tokens are available for purchase) is low, then as soon as a lot of people come to buy the token, the algorithms on exchanges will make the price go up. If the supply is low and demand is high, the price goes up. So, the lower you make the supply, the greater the price impact will be.

• Now, imagine the amount of tokens that the investors get once the token goes live is very high. This means that the investors are able to cash out some of their investment right from the get-go at the inflated token price to retail who don’t know the real value of the token.

The reason this is bad for retail is because the real value of the tokens could be $1 per token, but the lack of liquidity on launch could shoot the token price up to $10, where the investors start to sell the token to match the retail that’s still buying.

Now, retail buy the token at $10. Then, they’re left to hold a token that will keep sliding down to its actual value.

However, when the tokenomics are designed properly, then investors selling their tokens for the community to buy up isn’t bad; it’s how startups work.

Shock factor

Nonetheless, even with predatory tokenomics, don’t be disheartened. The community isn’t seen as consumers by the projects and investors alone – that’s also how most of the community members themselves see it.

As a fellow community member, you may be disgusted to be called a consumer but look around – a good chunk of the people around you are there to speculate: the greater the engagement, the greater the perceived value of the project and the token by extension. They’ll even engage themselves, consciously or subconsciously, to further solidify the idea of a strong community that will HODL.

Let’s look at airdrops data for instance. Most people participate in airdrops (engage on social media, interact with the beta product, etc.) for the sake of getting the token to sell it.

Look at Uniswap.

Source: https://dune.com/blog/uni-airdrop-analysis

That’s the case with nearly every airdrop. Sure, there are benefits to airdrops, but fundamentally people mainly engage with the project to get a pay out. Same with whitelists. Same with investors.

That’s life.

But it’s not all gloom and doom.

Reason 2: decentralisation and DAOs

On top of the above, a logistical point arises. Web3 wants to separate itself from the system. We went from decentralised global currency (Bitcoin), to decentralised everything.

Whether decentralisation is necessary or good is a topic for another blog piece, coming soon. But for now, let’s assume it is.

The way to achieve decentralisation whilst also allowing for the project to be improved is by allowing the users themselves to enact changes and control the direction. But a project cannot start out decentralised.

You need someone to build it.

And these people need to be paid. The same way that the people who built Bitcoin still own just under 1M Bitcoins.

Well, on second thought, even if they’re not paid you still need someone to build it, which means you can’t start off decentralised. That would require loads of random people to think of the same idea at the same time and start coding different parts of the same thing together without knowing each other, to then launch it at the same time and somehow get the pieces to come together like magnets.

Moreover, often for the founders to be able to build something investment is required. Hence, prior to public launch, the investors and the founding team are technically the owners of the project. Then, once the project launches, the transition from team & investor ownership to retail ownership starts to occur via the sale of the tokens.

This is the same as traditional finance.

The founders start off with 100% equity, then keep selling bits of equity to investors, then eventually the company ends up with a board of directors – a sort of representative democracy. Of course getting thousands of stock holders to vote on things is impossible, however, with tokens this is a possibility.

For this, obviously there needs to be a community of people to become the owners and governors of the protocol.

The way to build something decentralised is as follows: founders put in the effort, investors invest, and then both parties transition ownership of the complete product to the community that will govern its future via mechanisms like DAOs.

Sure, they can build the project and then simply directly list the token in a liquidity pool on an exchange to let the community buy it from the exchange, but of course getting paid for the months to years of effort and risk is only fair.

So, they sell their token allocations to retail.

Logistics.

Reason 3: be a part of something bigger

Last but certainly not least, there is a great reason for Web3 to have communities:

The feeling of belonging.

When you’re neglected by the current financial system – banks not allowing you to use your own money, banks not allowing you to even have an account, your country’s income disparity keeps widening – and a new technology comes along to wave a flag of hope, shouting, “We don’t need to use this system!”, I’d be damned if I didn’t feel enthusiastic about it too.

I’d go to my family, my friends, my colleagues, and tell them, “Guys, we can now send money to our grandparents abroad without the 5-day delay and massive fees!”

They’ll respond, “It’s all a scam. It’s all fake internet money.”

And I’ll sit there, looking at my HSBC bank account with fake internet money inside of it, and think, “I wish I had someone to share my excitement with.”

We are social animals at the end of the day.

My point is that these community chats and Discord servers and groups facilitate people’s well-being in a world that picks up the idea of cryptocurrency and uses it to wipe their shoes.

We like to speak with like-minded individuals.

And when it comes to our investments, be that of time or money, it feels even greater to speak to like-minded individuals that are similarly invested into the things we are.

Facebook has over 70 million groups.

People like to socialise and be a part of something.

There is no reason why every entity shouldn’t have a community. Be that for the purpose of connection, or for customer support.

Conclusion

We live in a positive-sum world where someone doesn’t have to win at the cost of someone else. Hence, ‘exit liquidity’ is a synonym for ‘new investor’.

We also live in a world where it’s possible to decentralise a company’s ownership and operations. Thus, ‘exit liquidity’ is also a synonym for ‘new owner’