This Thesis was created by André J Guardia, rising senior at Illinois Institute of Technology. I’m a Dorm Room Fund BIT Fellow, Republic VFA and GenZ Scout. This thesis was created during the Summer of 2022 for my Internship @Decasonic.

DAOs are the next level of internet native communities due to their ability to re-align incentives, foster healthier interactions and solve the cold-start problem that has plagued multiple DeSo platforms to date.

DAOs have excelled at for the crypto-native niche of the market. To be a true supply-side bullet for disruption, we need the value proposition of this technology to be recognized by the masses.

There is a lot of work ahead for this value proposition to be adopted by the masses. There is thus great opportunity to invest in Social DAO governance tokens, as these communities will only grow in both membership numbers and treasuries.

Will DAOs be the next iteration of social media?

This report is an early attempt at answering that question. If you’re interested in learning more about DAOs and all things web3, don’t hesitate to connect with me on Twitter @andrguardia

• Blockchain technology offers a re-alignment of incentives for both users and creators. This seems to be a supply-side bullet, that holds the potential to disrupt centralized social media giants, if done properly.

• To this day, DAOs have proven effective at re-organizing and enforcing community incentives for the crypto-native niche of the market

• The value proposition of this technology to be recognized by the masses, for all niches.

• There are significant challenges associated with doing that such as: reaching new users, voter participation, poor infrastructure, recruitment and retention risks, complex governance structures and legal compliance.

• Centralized Social Media: According to DailyTimes, a centralized network architechture is developed around a single server that handles all the major processing. Therefore we can define centralized social media (CeSo Media) as social media platforms whose network architechture is developed around a single, centralized server. Examples of this type of platform include: Facebook, Twitter, YouTube, Reddit, Discord, etc…

• Decentralized Social Media: According to Tulane University, Decentralized social networks operate on independently run servers, rather than on a centralized server owned by a business. Mastodon is one example of a decentralized social network. It is based on open-source software and functions a lot like Twitter.

“DAO (pronounced dow) is a new kind of organizational structure, built with blockchain technology, that is often described as a sort of crypto co-op. (Or, alternatively, as a “financial flash mob” or a “group chat with a bank account.”)” - New York Times

DAO stands for Decentralized Autonomous Organization. As such, it is the blockchain equivalent of a company, which is formed around a vision and mission, has key activities to perform and employs peers to complete said activities. DAOs are formed by groups of individuals rallied around a common goal, and powered by the innovation of smart contracts.

Before we understand the real meaning of what DAOs can do for Venture Capital, we must understand the technology behind them. Let’s break down the definitions:

Blockchain: “a type of shared database that differs from a typical database in the way that it stores information; blockchains store data in blocks that are then linked together via cryptography.” -Investopedia

Ethereum Blockchain: “At its core, Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, ether, or ETH. Ethereum can be used by anyone to create any secured digital technology they can think of. It has a token designed for use in the blockchain network, but it can also be used by participants as a method to pay for work done on the blockchain.” -Investopedia

Smart Contracts: “programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss.” -IBM

Governance Token: ”Governance tokens are the first cryptocurrencies to represent voting on a blockchain by distributing the power of making major platform decisions from a centralized structure to an entire community. This is because token holders are not only users, but also owners of the protocol.” -Decrypt

• Here’s the basics:

  • The rules for the functioning of DAOs are coded into a smart contracts, often deployed on the Ethereum Blockchain.

  • DAOs members communicate through invite-only chats on centralized platforms like Discord and Telegram.

  • When an individual purchases a governance token for a particular DAO, their liquidity is rewarded with voting rights in key decisions the DAO must partake in.

  • The members then enforce their voting rights through the governance token on platforms like Snapshot.

In order to properly understand the motivations behind the development of this thesis it is important to understand the benefits and drawbacks of both Centralized and Decentralized social media offerings. Below we will begin by covering centralized social networks.

According to Pew Research Center, the benefits associated with CeSo Media are:

• Ease of use, high interactivity (FB, IG, WA, SNAP)

• Instant access to online learning resources (YouTube)

• Highly efficient tool for content marketers

• Allowed for the birth of the creator economy

• They are very well established, with a handful of companies holding all of the market share in this sector.

• Due to network effects, CeSo media companies are difficult to replace. If your friends are all in a network, what incentive is there to switch?

“Centralized social media platforms are unfair to community members and content creators” -Yung Beef (Content Lead and Community Manager at Subsocial), CoinTelegraph

Common problems with CeSo Media (Centralized Social Media) include:

• Algorithmic bias and transparency concerns:

  • Shady algorithms control what we see

  • Algorithms can be know to cause bias, racism and polarization, MIT Sloan

• Lack of customization

• Lack of Competition. EU with Digital Markets Acts aims to break FB’s monopoly on social media, MIT Sloan

• Censorship: One party holds power over the network. There is proof users have been shadow banned and full on banned

• Risk of large scale hacks and data privacy concerns

  • In 2019 around 300 million users had their phone numbers and names leaked by a Facebook vulnerability

• Broken Monetization Model: According to Filecoin

  “Piggybacking off good content is ads and algorithms that target prospective buyers. The system results in influencers making a fraction of the ad revenue that the company collects despite being 100% responsible for the content.”

• Improved monetization dynamics

  • DeSo media companies have the potential to be game changers for content creators.

  • This becomes evident when looking at the 45% claim on ad revenue YouTube takes from its creators.

  • Powered by blockchain technology, content creators can now monetize 100% of their creations through micro transactions (tips), NFT sales, royalty payments and tokenized ticket sales.

• Increased Security:

  • By using multiple independent servers chances of Single Point Of Failure (SPOF) attacks are minimized. In addition to this, the decentralized nature of the network implies the users need not identify themselves

• Increased user control:

  • Given the negative track record centralized social media platforms have around user data management, decentralized social media promise to give users absolute control over their personal information and interactions

• Censorship Resistance:

  • The biggest value proposition for decentralized social media platforms is their censorship resistance, there are two main reasons why DeSo Media networks are censorship resistent:

    • The interests of one ruling party are

The value proposition for decentralized social media networks is strong, but if history shows anything, this has not been enough to disrupt giants the likes of Facebook, YouTube or Snapchat. Here’s why:

According to CoinTelegraph, decentralized social networks are not a new concept. They are just not popular, and there is a plethora of reasons for that:

• Massive content moderation concerns: censorship resistant networks struggle heavily with moderating content. If content is left unmoderated, bad actors can easily use the network to spread misinformation, hate speech, propaganda and illegal content.

• Fake identities: Even with on-platform votes to take down content, DeSo Platforms are plagued by bots, which can effectively influence the masses and their governance votes.

• Lack of Mass Adoption

  • Given Mastodon was founded in the year 2000, and it has approximately 4.4 million users at the time of writing this, it is obvious mass adoption is yet to happen for DeSo platforms.

• Corrupt governance: in favor of certain groups enforced through democratic-esque voteing systems.

• Vulnerability Risks: According to CoinMarketCap, decentralized social networks are very vulnerable to 51% attacks. This is a type of attack where a user rents enough computing power to operate 51% of the network and edit data as they please. This is a compelling risk associated with DeSo platforms

The issues with DeSo platforms go deeper than merely content moderation and corrupt governance. They are plagued by the following interactivity issues

1. Lack of central discovery system: There isn’t a central website to access, the network is just comprised of hundreds of communities

2. Poor UI Design: User interface sucks

3. Cold Start problem means a lot of these platforms are dead on arrival.

4. Intellectual Property: In a decentralized social network, who is liable for copyright law infringements? The nodes hosting the content? The author? These questions still remain unanswered.

The key trends currently disrupting social media are presented below:

• Increase in user awareness over the importance of privacy, Blockchain Convention

• Data brokerage industry makes over $250Bn every year, Blockchain Convention

• Adults mostly use Facebook and Youtube, characterized by longer video formats

• Kids and Teenagers consistently use Snapchat, Instagram and Tiktok, Lifespan

• 97% of 13-17yr olds use at least one of these major platforms, Lifespan

• Average teen ages 13-18 spends 9 hours on Social Media daily, Lifespan

• Average kid ages 8-12 spends 6 hours on Social Media daily, Lifespan

“…Amid these concerns, a Pew Research Center survey conducted in June finds that roughly three-quarters of U.S. adults say it is very (37%) or somewhat (36%) likely that social media sites intentionally censor political viewpoints that they find objectionable. Just 25% believe this is not likely the case.” - Pew Research Center

“The lack of transparency around the program, as with past TikTok efforts, has led to theories and speculation. Three creators who spoke with WIRED say they noticed their views drop after they joined the fund, and they wondered whether TikTok was intentionally limiting their reach to cap how much they could earn. Two of them have since opted out of the program entirely”. - Wired

The key trends for disruption presented above outline both the main issues with centralized social media and the key adoption numbers. Adoption and usage numbers for social media amongst the 8-12 and 12-18 demographics are staggering to say the least. These new generations (me included) grew using social media, it is second nature to us.

But despite adoption numbers being at a 97% for at least one major platform amongst 13-17 yr olds, the trends above indicate a significant increase in awareness around the failures of CeSo in managing private user data as well as censoring certain types of content in an impartial way. These trends show that even though the adoption is high, the users are starting to realize that these platforms are far from perfect.

But if Decentralized Social Media (as was covered in the Background section of this report) has the potential to address most of these problems, why has it not been widely adopted in the last decade?

This line of thought takes us to the next component of this report, what is missing from decentralized social media platforms in order to have a real chance of disrupting the giants? In this section, we will explore this question.

According to MUO, the key reasons decentralized social media has failed to disrupt the establishment are:

• Decentralization is alien to most users

• These platforms are not user friendly, they are too complex to use

• Most people aren’t aware of how CeSo Media handles user data and censors users.

How could DeSo Platforms succeed?

1. According to an article by Filecoin, the key to succeeding in disrupting established social media players lies in directly targeting influencers. There are two main reasons for this:

   1. They control many eyes, a mass exodus can happen if the influencer is convinced to switch

   2. Influencers can only manage so much, they have social media managers. Small influencers don’t have enough money to do this, and are therefore good targets for a massive switching campaign.

2. Re-thinking of reward criteria needs to happen in order to truly create a monetization model that is competitive with advertisements. The article proposes a change in reward criteria to retroactive public funding. Certificates of impact are an interesting way to do this.

   A certificate of impact is a certificate that tracks all changes to a particular piece of media. This way nested royalties can be set up. An example of how this might work is: a user creates an NFT for a short 10 second video. The video goes viral, users pay micro-transactions to remix it, using nested NFTs all edits are added to the NFTs certificate of changes (impact).

The introduction of both of these strategies can prove effective at growing decentralized social media platforms, but as will be seen below, that is not nearly enough to disrupt the deeply entrenched network effects of centralized social media offerings.

• According to Harvard Business Review, disrupting a social media giant is no easy feat. When previously faced with disruption Facebook has been fast to acquire its competition.

  • We can point to the example of Instagram (disruption from photo sharing)

  • We can also point to WhatsApp (disruption from message sharing).

  • According to the author, these disruptions have risen from user demand, a demand-side disruption. Facebook has previously used strategic acquisitions to dodge any demand-sided disruption bullets.

  • But what about supply-side disruptions?

  A supply-side disruption is a type of disruption where a new advance in technology allows for a better way of providing value compared to older technologies. This type of disruption is equal for everyone, not for a particular niche.

• A clear example of a supply-sided disruption is Facebook’s reaction to the introduction to mobile. The author points out that Facebook already dodged a supply-side bullet when switching their platforming to mobile. Nowadays, most of their ad revenue comes from the mobile business. The way CeSo Media accomodates to supply-sided bullets is through pivoting and product development. This line of thought begs the question:

In order to truly disrupt CeSo Media platforms, a three-part strategy needs to be employed:

1. Target Influencers: In order to disrupt the network effects of incumbent CeSo Platforms, there needs to be a massive user exodus. This can be initiated by providing great incentives for content creators to change platforms.

2. Better User Experience: Creation of a central discovery system and improved UI design

3. Re-design reward criteria and monetization for both creators and users

Are advances in blockchain technology (specially DAOs) likely to follow on this process towards disruption? Do these technological advances represent supply-sided bullets?

“On a crypto-first social media system, groups would be cryptographically moderated and geared and geared towards common goals” - Filecoin

”DAOs unite people with common ideas and purposes related to social or political activities into groups with active communities, either on a local or national level.” - XDAO

A Social DAO represents a group of individuals with a strong focus on building a central network of contributors with shared interests. The main selling point of Social DAOs is the network, its social element. They are profoundly different from Decentralized Social Media platforms and Centralized Social Media platforms. Social DAOs most closely resemble Facebook groups, or even subreddits. There are handful of key differences between these and DAOs:

1. Token-gated communities: access to most Social DAOs involves the purchase of a token as an entry requirement. Some DAOs also include an application process and community vote to onboard new members (these are on the more selective end of the spectrum)

2. Aligned economic incentives: when the token is purchased a new member acquires a stake in the DAOs treasury, which gives them voting rights. Voting is used to align the economic incentives of the collective, contrary to what you would see in a conventional Facebook group.

3. Economic incentives can be used to foster healthy interactions: Good behavior can be rewarded through the minting of tokens, whereas bad behaviors are punished by burning of tokens or voting members out. This creates an economic incentive to share truthful, legally compliant content with the Network. This is a novel form of content moderation.

4. Incentives for content providers are created through tokens. Blockchain technology has the potential to create novel monetization dynamics for content creators that maximize their revenue potential (NFT sales, micro-transactions, nested royalties), Blockchain Council (Link).

5. DAOs are social by nature: the birth of a new DAO is analogous to the creation of a new group on Facebook, but with the stark difference of aligned economic incentives enforced through smart contracts.

6. Solving the Cold Start problem: Big part of the reason established CeSo platforms are hard to disrupt is because of the cold start problem. If your friends are all in one network, what is the incentive to switch? DAOs can provide a solution to this problem through a combination of targeting influencers to create mass exodus into their platforms plus rewarding early members of the community in the form of tokens, which appreciate in value as the Social DAO gains popularity, and allow for increased voting power within the organization.

DAOs are the next level of internet native communities due to their ability to re-align incentives, foster healthier interactions and solve the cold-start problem that has plagued multiple DeSo platforms to date. DAOs have excelled at for the crypto-native niche of the market.

To be a true supply-side bullet for disruption, we need the value proposition of this technology to be recognized by the masses. There is a lot of work ahead for this value proposition to be adopted by the masses.

There is thus great opportunity to invest in Social DAO governance tokens, as these communities will only grow in both membership numbers and treasuries.

There are clear issues with DAOs that need to be resolved before they are a supply-side bullet. These issues are presented below:

• Reaching new users: Given the token-based incentive model characteristic of DAOs, this inevitably makes them engage only with the most engaged users/followers of a particular topic. This means that there is a gap in the model for the discovery of new DAOs, reaching new users and expanding to the general masses. This risk of mass adoption is the biggest challenge Social DAOs will have as a platform moving forward.

• Voter Participation: DAO voter turnout is one of the biggest challenges DAOs experience moving forward. Due to the design of flat governance structures not all users have the bandwidth to comprehensively evaluate every single proposal, which results in a small percentage of members voting on important topics for the DAOs survival and growth.

• Poor infrastructure: According to Signvm, given the decentralized nature of DAOs, they often lack the right tools to engage with their communities in an efficient manner. Many DAOs have to design their tools and infrastructure. There is a lot of work to be done with existing infrastructure providers. Solutions are starting to take shape in the form of: SyndicateDAO, Snapvote, Aragon, DAOstack and DAOhaus

• Recruitment and Retention Risk: there is great issue with proper recruitment practices. DAOs must find ways to ensure and enforece proper recruitment objectives are met, so the right peers join the community. The successful DAOs of the future will manage this risk by imposing well-designed, balanced recruitment and incentive models. This must be done to ensure the most active peers are the ones being rewarded the most, thus increasing retention.

• Complex DAO Governance Schemes: there is great risk of overcomplication in organizational structures. According to Layer3, as DAOs scale, their governance structures are getting increasingly complex. This is a factor that, in conjunction with poor infrastructure, will significantly hinder the growth of the Investment DAO sector.

According to Statista, Facebook’s user growth throughout the period of 2004-2012 presented a CAGR of 116.75%. Growing from 1M in the year 2004 to 6M in 2005. Thus representing a YoY growth of 500% over its first year. This can be directly contrasted with the data presented by DeepDAO, where DAO membership grew from 13,000 Members (January 2021) to 1,600,000 Members (Jan 2022). Thus representing a YoY growth of 13,000%. Given the social networking effects associated with DAOs, how they have the potential to become the next iteration of groups on social media we can estimate that DAO adoption is comparable to that of social media platforms in the early 2000s.

In our projection, we shall assume three cases:

• Optimistic: 1.5x Facebook’s First Decade User CAGR: 175.25%

• Base: Same as Facebook’s First Decade User CAGR: 116.75%

• Pessimistic: 0.67x Facebook’s First Decade User CAGR: 77.83%

As can be seen from the table above, we can make the following predictions:

• Optimistic: DAO Membership reaches exponential mass adoption and will account for 1.9Bn users by the year 2030.

  • This is a likely scenario if DAO tooling/governance issues are directly addressed and regulatory concerns are addressed on all jusrisdictions.

• Base: DAO Membership reaches semi-exponential adoption and will account for 360M users by the year 2030.

  • This is a likely scenario if DAO tooling/governance issues are directly addressed and regulatory concerns are addressed on the most popular jusrisdictions.

• Pessimistic: DAO Membership does not reach mass adoption and will account for 90M users by the year 2030.

  • This is a likely scenario if DAO tooling/governance issues are not addressed and regulations remain uncertain.

Now that we’ve estimated user growth rates for the DAO space, we need to find the average contribution. This average contribution will be calculated by averaging the top 3 Social DAOs contributions per community member.

Even though this number is far from perfect, it allows us to get an estimate of the LTV of a singular DAO member, which allows us to get a ballpark number of how big of a market opportunity Social DAOs represent. For this estimation of the average contribution per member, we looked at the FWB DAO, Developer DAO and BAYC.

Top Social DAOs and Entry Fee: FWB DAO ($75), Developer DAO ($388), BAYC ($124.21). We compute the average LTV per member: $195.73

Developer DAO | This DAO is a collective of web3 developers on a mission to onboard new devs into web3 while offering monetary incentive for members to earn as they build for the collective. | Members: 6,400

FWB | FWB is a collective of creators, operators and independent thinkers that came together to develop deep connections and conversations around web3 and its future. | Members: 14,110

Event DAO | Event DAO is a DAO focused on bringing the world's largest events, concerts by decentralizing decision-making, voting and event profits with the Community. | Members: 31,445

Krause House | Krause House is a DAO created to collectively buy, own, operate and earn from the first DAO-managed NBA team. Recently they announced the first ever Physical NFT basketball court. | Members: 4,708

BAYC | The Bored Ape Yacht Club is a collection of 10,000 generative ape images that allow the owners unique access to their select community of ape owners. They are a high-reputation club for web3: “A limited NFT collection where the token itself doubles as your membership to a swamp club for apes. The club is open! Ape in with us.” | Members: 82,438

DAODAO | DAODAO is a DAO discovery and operations platform that allows its users to follow both people and DAOs, while also creating content within each each DAO in a similar way to that of twitter spaces. DAODAO is profiling itself as a DAO of DAOs (hence the name), a decentralized platform that aggregates DAOs as if they were Facebook groups. | Members: 1,517

• Facebook - Minds, Diaspora, MeWe, Steemit, BitCloud, Mastodon

• Youtube - Minds, LBRY, D.tube, Peertube, Theta

• Reddit - Aether, Steemit

• Instagram - Karma

• Whatsapp - Signal

• Spotify - Audius

• Medium - Read.cash

Centralized Social Media platforms dominate

1. Pros: ease of use, high interactivity, efficient content marketing, have strong network effects.

2. Cons: algorithmic bias, lack of customization, lack of competition, censorship, data security risks, broken monetization model, spread of misinformation and fake identities.

Decentralized Social Media platforms have and will continue to fail

1. Pros: improved monetization dynamics, increased security, increased user control, censorship resistance

2. Cons: lack of content moderation, fake identities, lack of mass adoption, corrupt governance, vulnerability risks. There is additional emphasis on their interactivity issues: lack of a central discovery system, poor UI, cold start problem, IP concerns

What trends are driving behavior?

• Increase in user awareness over the importance of privacy, Blockchain Convention

• Data brokerage industry makes over $250Bn every year, Blockchain Convention

• Adults mostly use Facebook and Youtube, characterized by longer video formats

• Kids and Teenagers consistently use Snapchat, Instagram and Tiktok, Lifespan

• 97% of 13-17yr olds use at least one of these major platforms, Lifespan

• Average teen ages 13-18 spends 9 hours on Social Media daily, Lifespan

• Average kid ages 8-12 spends 6 hours on Social Media daily, Lifespan

How to disrupt web2 CeSo?

1. Target Influencers

2. Better User Experience

3. Re-align incentives

Landscape

Top Social DAOs analyzed: Developer DAO, Event DAO, FWB DAO, Krause House DAO and DAODAO.

Out of these, DAODAO really stands out as the perfect combination of decentralized social media and DAOs by providing a centralized discovery platform in tandem with operational tooling and DAO creation.

There is a lot of work ahead for this value proposition to be adopted by the masses. It is up to us to determine what a DAO powered social media sector will look like.

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This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on this site constitutes a solicitation, recommendation, endorsement, or offer by me or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

Decentralized social media: The next big thing in crypto? - Cointelegraph Magazine

Decentralized social networks sound great. Too bad they'll never work. - MIT Media Lab

What Is Decentralized Social Media?

Decentralized Social Media | CoinMarketCap

Decentralized Social Media Platforms Aren't New, They Just Aren't Popular

The Future of Decentralized Social Media

The Future of Social Media is Decentralized - European Blockchain Convention

Is the Future of Social Media Decentralized?

Decentralized Social Media - The Next Big Thing in Blockchain

Decentralized Social Networks: What You Need to Know.

Why decentralization is the future for social media - Decrypt

Pros and Cons of Social Media

Social media is broken. A new report offers 25 ways to fix it | MIT Sloan

Social DAOs: An Essential Guide

DAOs: Social networks that can rewire the world

Beginner's Guide to Social DAOs and How To Join Them | CoinMarketCap

The Future of DAOs in the Social Media Ecosystem: Detailed Guide -

Living It Up: Your Guide to Social DAOs 🍾

Social DAOs: do they work?

Why DAOs Will Change Social Media as We Know It - Polygon | Blog

DAODAO can be the next Social Network

Facing Down Big Tech: How Blockchain Social Media Will Topple Zuckerberg - Cointelegraph Magazine

Social Networks Are the Next Big Decentralization Opportunity

How blockchain can transform social media

Social Networking - Worldwide | Statista Market Forecast

From MIT social media summit, 5 trends experts are watching | MIT Sloan

Most Americans Think Social Media Sites Censor Political Viewpoints

This Thesis was created by André J Guardia, rising senior at Illinois Institute of Technology. I’m a Dorm Room Fund BIT Fellow, Republic VFA and GenZ Scout. This thesis was created during the Summer of 2022 for my Internship @Decasonic.

DAOs are the next level of internet native communities due to their ability to re-align incentives, foster healthier interactions and solve the cold-start problem that has plagued multiple DeSo platforms to date.

DAOs have excelled at for the crypto-native niche of the market. To be a true supply-side bullet for disruption, we need the value proposition of this technology to be recognized by the masses.

There is a lot of work ahead for this value proposition to be adopted by the masses. There is thus great opportunity to invest in Social DAO governance tokens, as these communities will only grow in both membership numbers and treasuries.

Will DAOs be the next iteration of social media?

This report is an early attempt at answering that question. If you’re interested in learning more about DAOs and all things web3, don’t hesitate to connect with me on Twitter @andrguardia

• Blockchain technology offers a re-alignment of incentives for both users and creators. This seems to be a supply-side bullet, that holds the potential to disrupt centralized social media giants, if done properly.

• To this day, DAOs have proven effective at re-organizing and enforcing community incentives for the crypto-native niche of the market

• The value proposition of this technology to be recognized by the masses, for all niches.

• There are significant challenges associated with doing that such as: reaching new users, voter participation, poor infrastructure, recruitment and retention risks, complex governance structures and legal compliance.

• Centralized Social Media: According to DailyTimes, a centralized network architechture is developed around a single server that handles all the major processing. Therefore we can define centralized social media (CeSo Media) as social media platforms whose network architechture is developed around a single, centralized server. Examples of this type of platform include: Facebook, Twitter, YouTube, Reddit, Discord, etc…

• Decentralized Social Media: According to Tulane University, Decentralized social networks operate on independently run servers, rather than on a centralized server owned by a business. Mastodon is one example of a decentralized social network. It is based on open-source software and functions a lot like Twitter.

“DAO (pronounced dow) is a new kind of organizational structure, built with blockchain technology, that is often described as a sort of crypto co-op. (Or, alternatively, as a “financial flash mob” or a “group chat with a bank account.”)” - New York Times

DAO stands for Decentralized Autonomous Organization. As such, it is the blockchain equivalent of a company, which is formed around a vision and mission, has key activities to perform and employs peers to complete said activities. DAOs are formed by groups of individuals rallied around a common goal, and powered by the innovation of smart contracts.

Before we understand the real meaning of what DAOs can do for Venture Capital, we must understand the technology behind them. Let’s break down the definitions:

Blockchain: “a type of shared database that differs from a typical database in the way that it stores information; blockchains store data in blocks that are then linked together via cryptography.” -Investopedia

Ethereum Blockchain: “At its core, Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, ether, or ETH. Ethereum can be used by anyone to create any secured digital technology they can think of. It has a token designed for use in the blockchain network, but it can also be used by participants as a method to pay for work done on the blockchain.” -Investopedia

Smart Contracts: “programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss.” -IBM

Governance Token: ”Governance tokens are the first cryptocurrencies to represent voting on a blockchain by distributing the power of making major platform decisions from a centralized structure to an entire community. This is because token holders are not only users, but also owners of the protocol.” -Decrypt

• Here’s the basics:

  • The rules for the functioning of DAOs are coded into a smart contracts, often deployed on the Ethereum Blockchain.

  • DAOs members communicate through invite-only chats on centralized platforms like Discord and Telegram.

  • When an individual purchases a governance token for a particular DAO, their liquidity is rewarded with voting rights in key decisions the DAO must partake in.

  • The members then enforce their voting rights through the governance token on platforms like Snapshot.

In order to properly understand the motivations behind the development of this thesis it is important to understand the benefits and drawbacks of both Centralized and Decentralized social media offerings. Below we will begin by covering centralized social networks.

According to Pew Research Center, the benefits associated with CeSo Media are:

• Ease of use, high interactivity (FB, IG, WA, SNAP)

• Instant access to online learning resources (YouTube)

• Highly efficient tool for content marketers

• Allowed for the birth of the creator economy

• They are very well established, with a handful of companies holding all of the market share in this sector.

• Due to network effects, CeSo media companies are difficult to replace. If your friends are all in a network, what incentive is there to switch?

“Centralized social media platforms are unfair to community members and content creators” -Yung Beef (Content Lead and Community Manager at Subsocial), CoinTelegraph

Common problems with CeSo Media (Centralized Social Media) include:

• Algorithmic bias and transparency concerns:

  • Shady algorithms control what we see

  • Algorithms can be know to cause bias, racism and polarization, MIT Sloan

• Lack of customization

• Lack of Competition. EU with Digital Markets Acts aims to break FB’s monopoly on social media, MIT Sloan

• Censorship: One party holds power over the network. There is proof users have been shadow banned and full on banned

• Risk of large scale hacks and data privacy concerns

  • In 2019 around 300 million users had their phone numbers and names leaked by a Facebook vulnerability

• Broken Monetization Model: According to Filecoin

  “Piggybacking off good content is ads and algorithms that target prospective buyers. The system results in influencers making a fraction of the ad revenue that the company collects despite being 100% responsible for the content.”

• Improved monetization dynamics

  • DeSo media companies have the potential to be game changers for content creators.

  • This becomes evident when looking at the 45% claim on ad revenue YouTube takes from its creators.

  • Powered by blockchain technology, content creators can now monetize 100% of their creations through micro transactions (tips), NFT sales, royalty payments and tokenized ticket sales.

• Increased Security:

  • By using multiple independent servers chances of Single Point Of Failure (SPOF) attacks are minimized. In addition to this, the decentralized nature of the network implies the users need not identify themselves

• Increased user control:

  • Given the negative track record centralized social media platforms have around user data management, decentralized social media promise to give users absolute control over their personal information and interactions

• Censorship Resistance:

  • The biggest value proposition for decentralized social media platforms is their censorship resistance, there are two main reasons why DeSo Media networks are censorship resistent:

    • The interests of one ruling party are

The value proposition for decentralized social media networks is strong, but if history shows anything, this has not been enough to disrupt giants the likes of Facebook, YouTube or Snapchat. Here’s why:

According to CoinTelegraph, decentralized social networks are not a new concept. They are just not popular, and there is a plethora of reasons for that:

• Massive content moderation concerns: censorship resistant networks struggle heavily with moderating content. If content is left unmoderated, bad actors can easily use the network to spread misinformation, hate speech, propaganda and illegal content.

• Fake identities: Even with on-platform votes to take down content, DeSo Platforms are plagued by bots, which can effectively influence the masses and their governance votes.

• Lack of Mass Adoption

  • Given Mastodon was founded in the year 2000, and it has approximately 4.4 million users at the time of writing this, it is obvious mass adoption is yet to happen for DeSo platforms.

• Corrupt governance: in favor of certain groups enforced through democratic-esque voteing systems.

• Vulnerability Risks: According to CoinMarketCap, decentralized social networks are very vulnerable to 51% attacks. This is a type of attack where a user rents enough computing power to operate 51% of the network and edit data as they please. This is a compelling risk associated with DeSo platforms

The issues with DeSo platforms go deeper than merely content moderation and corrupt governance. They are plagued by the following interactivity issues

1. Lack of central discovery system: There isn’t a central website to access, the network is just comprised of hundreds of communities

2. Poor UI Design: User interface sucks

3. Cold Start problem means a lot of these platforms are dead on arrival.

4. Intellectual Property: In a decentralized social network, who is liable for copyright law infringements? The nodes hosting the content? The author? These questions still remain unanswered.

The key trends currently disrupting social media are presented below:

• Increase in user awareness over the importance of privacy, Blockchain Convention

• Data brokerage industry makes over $250Bn every year, Blockchain Convention

• Adults mostly use Facebook and Youtube, characterized by longer video formats

• Kids and Teenagers consistently use Snapchat, Instagram and Tiktok, Lifespan

• 97% of 13-17yr olds use at least one of these major platforms, Lifespan

• Average teen ages 13-18 spends 9 hours on Social Media daily, Lifespan

• Average kid ages 8-12 spends 6 hours on Social Media daily, Lifespan

“…Amid these concerns, a Pew Research Center survey conducted in June finds that roughly three-quarters of U.S. adults say it is very (37%) or somewhat (36%) likely that social media sites intentionally censor political viewpoints that they find objectionable. Just 25% believe this is not likely the case.” - Pew Research Center

“The lack of transparency around the program, as with past TikTok efforts, has led to theories and speculation. Three creators who spoke with WIRED say they noticed their views drop after they joined the fund, and they wondered whether TikTok was intentionally limiting their reach to cap how much they could earn. Two of them have since opted out of the program entirely”. - Wired

The key trends for disruption presented above outline both the main issues with centralized social media and the key adoption numbers. Adoption and usage numbers for social media amongst the 8-12 and 12-18 demographics are staggering to say the least. These new generations (me included) grew using social media, it is second nature to us.

But despite adoption numbers being at a 97% for at least one major platform amongst 13-17 yr olds, the trends above indicate a significant increase in awareness around the failures of CeSo in managing private user data as well as censoring certain types of content in an impartial way. These trends show that even though the adoption is high, the users are starting to realize that these platforms are far from perfect.

But if Decentralized Social Media (as was covered in the Background section of this report) has the potential to address most of these problems, why has it not been widely adopted in the last decade?

This line of thought takes us to the next component of this report, what is missing from decentralized social media platforms in order to have a real chance of disrupting the giants? In this section, we will explore this question.

According to MUO, the key reasons decentralized social media has failed to disrupt the establishment are:

• Decentralization is alien to most users

• These platforms are not user friendly, they are too complex to use

• Most people aren’t aware of how CeSo Media handles user data and censors users.

How could DeSo Platforms succeed?

1. According to an article by Filecoin, the key to succeeding in disrupting established social media players lies in directly targeting influencers. There are two main reasons for this:

   1. They control many eyes, a mass exodus can happen if the influencer is convinced to switch

   2. Influencers can only manage so much, they have social media managers. Small influencers don’t have enough money to do this, and are therefore good targets for a massive switching campaign.

2. Re-thinking of reward criteria needs to happen in order to truly create a monetization model that is competitive with advertisements. The article proposes a change in reward criteria to retroactive public funding. Certificates of impact are an interesting way to do this.

   A certificate of impact is a certificate that tracks all changes to a particular piece of media. This way nested royalties can be set up. An example of how this might work is: a user creates an NFT for a short 10 second video. The video goes viral, users pay micro-transactions to remix it, using nested NFTs all edits are added to the NFTs certificate of changes (impact).

The introduction of both of these strategies can prove effective at growing decentralized social media platforms, but as will be seen below, that is not nearly enough to disrupt the deeply entrenched network effects of centralized social media offerings.

• According to Harvard Business Review, disrupting a social media giant is no easy feat. When previously faced with disruption Facebook has been fast to acquire its competition.

  • We can point to the example of Instagram (disruption from photo sharing)

  • We can also point to WhatsApp (disruption from message sharing).

  • According to the author, these disruptions have risen from user demand, a demand-side disruption. Facebook has previously used strategic acquisitions to dodge any demand-sided disruption bullets.

  • But what about supply-side disruptions?

  A supply-side disruption is a type of disruption where a new advance in technology allows for a better way of providing value compared to older technologies. This type of disruption is equal for everyone, not for a particular niche.

• A clear example of a supply-sided disruption is Facebook’s reaction to the introduction to mobile. The author points out that Facebook already dodged a supply-side bullet when switching their platforming to mobile. Nowadays, most of their ad revenue comes from the mobile business. The way CeSo Media accomodates to supply-sided bullets is through pivoting and product development. This line of thought begs the question:

In order to truly disrupt CeSo Media platforms, a three-part strategy needs to be employed:

1. Target Influencers: In order to disrupt the network effects of incumbent CeSo Platforms, there needs to be a massive user exodus. This can be initiated by providing great incentives for content creators to change platforms.

2. Better User Experience: Creation of a central discovery system and improved UI design

3. Re-design reward criteria and monetization for both creators and users

Are advances in blockchain technology (specially DAOs) likely to follow on this process towards disruption? Do these technological advances represent supply-sided bullets?

“On a crypto-first social media system, groups would be cryptographically moderated and geared and geared towards common goals” - Filecoin

”DAOs unite people with common ideas and purposes related to social or political activities into groups with active communities, either on a local or national level.” - XDAO

A Social DAO represents a group of individuals with a strong focus on building a central network of contributors with shared interests. The main selling point of Social DAOs is the network, its social element. They are profoundly different from Decentralized Social Media platforms and Centralized Social Media platforms. Social DAOs most closely resemble Facebook groups, or even subreddits. There are handful of key differences between these and DAOs:

1. Token-gated communities: access to most Social DAOs involves the purchase of a token as an entry requirement. Some DAOs also include an application process and community vote to onboard new members (these are on the more selective end of the spectrum)

2. Aligned economic incentives: when the token is purchased a new member acquires a stake in the DAOs treasury, which gives them voting rights. Voting is used to align the economic incentives of the collective, contrary to what you would see in a conventional Facebook group.

3. Economic incentives can be used to foster healthy interactions: Good behavior can be rewarded through the minting of tokens, whereas bad behaviors are punished by burning of tokens or voting members out. This creates an economic incentive to share truthful, legally compliant content with the Network. This is a novel form of content moderation.

4. Incentives for content providers are created through tokens. Blockchain technology has the potential to create novel monetization dynamics for content creators that maximize their revenue potential (NFT sales, micro-transactions, nested royalties), Blockchain Council (Link).

5. DAOs are social by nature: the birth of a new DAO is analogous to the creation of a new group on Facebook, but with the stark difference of aligned economic incentives enforced through smart contracts.

6. Solving the Cold Start problem: Big part of the reason established CeSo platforms are hard to disrupt is because of the cold start problem. If your friends are all in one network, what is the incentive to switch? DAOs can provide a solution to this problem through a combination of targeting influencers to create mass exodus into their platforms plus rewarding early members of the community in the form of tokens, which appreciate in value as the Social DAO gains popularity, and allow for increased voting power within the organization.

DAOs are the next level of internet native communities due to their ability to re-align incentives, foster healthier interactions and solve the cold-start problem that has plagued multiple DeSo platforms to date. DAOs have excelled at for the crypto-native niche of the market.

To be a true supply-side bullet for disruption, we need the value proposition of this technology to be recognized by the masses. There is a lot of work ahead for this value proposition to be adopted by the masses.

There is thus great opportunity to invest in Social DAO governance tokens, as these communities will only grow in both membership numbers and treasuries.

There are clear issues with DAOs that need to be resolved before they are a supply-side bullet. These issues are presented below:

• Reaching new users: Given the token-based incentive model characteristic of DAOs, this inevitably makes them engage only with the most engaged users/followers of a particular topic. This means that there is a gap in the model for the discovery of new DAOs, reaching new users and expanding to the general masses. This risk of mass adoption is the biggest challenge Social DAOs will have as a platform moving forward.

• Voter Participation: DAO voter turnout is one of the biggest challenges DAOs experience moving forward. Due to the design of flat governance structures not all users have the bandwidth to comprehensively evaluate every single proposal, which results in a small percentage of members voting on important topics for the DAOs survival and growth.

• Poor infrastructure: According to Signvm, given the decentralized nature of DAOs, they often lack the right tools to engage with their communities in an efficient manner. Many DAOs have to design their tools and infrastructure. There is a lot of work to be done with existing infrastructure providers. Solutions are starting to take shape in the form of: SyndicateDAO, Snapvote, Aragon, DAOstack and DAOhaus

• Recruitment and Retention Risk: there is great issue with proper recruitment practices. DAOs must find ways to ensure and enforece proper recruitment objectives are met, so the right peers join the community. The successful DAOs of the future will manage this risk by imposing well-designed, balanced recruitment and incentive models. This must be done to ensure the most active peers are the ones being rewarded the most, thus increasing retention.

• Complex DAO Governance Schemes: there is great risk of overcomplication in organizational structures. According to Layer3, as DAOs scale, their governance structures are getting increasingly complex. This is a factor that, in conjunction with poor infrastructure, will significantly hinder the growth of the Investment DAO sector.

According to Statista, Facebook’s user growth throughout the period of 2004-2012 presented a CAGR of 116.75%. Growing from 1M in the year 2004 to 6M in 2005. Thus representing a YoY growth of 500% over its first year. This can be directly contrasted with the data presented by DeepDAO, where DAO membership grew from 13,000 Members (January 2021) to 1,600,000 Members (Jan 2022). Thus representing a YoY growth of 13,000%. Given the social networking effects associated with DAOs, how they have the potential to become the next iteration of groups on social media we can estimate that DAO adoption is comparable to that of social media platforms in the early 2000s.

In our projection, we shall assume three cases:

• Optimistic: 1.5x Facebook’s First Decade User CAGR: 175.25%

• Base: Same as Facebook’s First Decade User CAGR: 116.75%

• Pessimistic: 0.67x Facebook’s First Decade User CAGR: 77.83%

As can be seen from the table above, we can make the following predictions:

• Optimistic: DAO Membership reaches exponential mass adoption and will account for 1.9Bn users by the year 2030.

  • This is a likely scenario if DAO tooling/governance issues are directly addressed and regulatory concerns are addressed on all jusrisdictions.

• Base: DAO Membership reaches semi-exponential adoption and will account for 360M users by the year 2030.

  • This is a likely scenario if DAO tooling/governance issues are directly addressed and regulatory concerns are addressed on the most popular jusrisdictions.

• Pessimistic: DAO Membership does not reach mass adoption and will account for 90M users by the year 2030.

  • This is a likely scenario if DAO tooling/governance issues are not addressed and regulations remain uncertain.

Now that we’ve estimated user growth rates for the DAO space, we need to find the average contribution. This average contribution will be calculated by averaging the top 3 Social DAOs contributions per community member.

Even though this number is far from perfect, it allows us to get an estimate of the LTV of a singular DAO member, which allows us to get a ballpark number of how big of a market opportunity Social DAOs represent. For this estimation of the average contribution per member, we looked at the FWB DAO, Developer DAO and BAYC.

Top Social DAOs and Entry Fee: FWB DAO ($75), Developer DAO ($388), BAYC ($124.21). We compute the average LTV per member: $195.73

Developer DAO | This DAO is a collective of web3 developers on a mission to onboard new devs into web3 while offering monetary incentive for members to earn as they build for the collective. | Members: 6,400

FWB | FWB is a collective of creators, operators and independent thinkers that came together to develop deep connections and conversations around web3 and its future. | Members: 14,110

Event DAO | Event DAO is a DAO focused on bringing the world's largest events, concerts by decentralizing decision-making, voting and event profits with the Community. | Members: 31,445

Krause House | Krause House is a DAO created to collectively buy, own, operate and earn from the first DAO-managed NBA team. Recently they announced the first ever Physical NFT basketball court. | Members: 4,708

BAYC | The Bored Ape Yacht Club is a collection of 10,000 generative ape images that allow the owners unique access to their select community of ape owners. They are a high-reputation club for web3: “A limited NFT collection where the token itself doubles as your membership to a swamp club for apes. The club is open! Ape in with us.” | Members: 82,438

DAODAO | DAODAO is a DAO discovery and operations platform that allows its users to follow both people and DAOs, while also creating content within each each DAO in a similar way to that of twitter spaces. DAODAO is profiling itself as a DAO of DAOs (hence the name), a decentralized platform that aggregates DAOs as if they were Facebook groups. | Members: 1,517

• Facebook - Minds, Diaspora, MeWe, Steemit, BitCloud, Mastodon

• Youtube - Minds, LBRY, D.tube, Peertube, Theta

• Reddit - Aether, Steemit

• Instagram - Karma

• Whatsapp - Signal

• Spotify - Audius

• Medium - Read.cash

Centralized Social Media platforms dominate

1. Pros: ease of use, high interactivity, efficient content marketing, have strong network effects.

2. Cons: algorithmic bias, lack of customization, lack of competition, censorship, data security risks, broken monetization model, spread of misinformation and fake identities.

Decentralized Social Media platforms have and will continue to fail

1. Pros: improved monetization dynamics, increased security, increased user control, censorship resistance

2. Cons: lack of content moderation, fake identities, lack of mass adoption, corrupt governance, vulnerability risks. There is additional emphasis on their interactivity issues: lack of a central discovery system, poor UI, cold start problem, IP concerns

What trends are driving behavior?

• Increase in user awareness over the importance of privacy, Blockchain Convention

• Data brokerage industry makes over $250Bn every year, Blockchain Convention

• Adults mostly use Facebook and Youtube, characterized by longer video formats

• Kids and Teenagers consistently use Snapchat, Instagram and Tiktok, Lifespan

• 97% of 13-17yr olds use at least one of these major platforms, Lifespan

• Average teen ages 13-18 spends 9 hours on Social Media daily, Lifespan

• Average kid ages 8-12 spends 6 hours on Social Media daily, Lifespan

How to disrupt web2 CeSo?

1. Target Influencers

2. Better User Experience

3. Re-align incentives

Landscape

Top Social DAOs analyzed: Developer DAO, Event DAO, FWB DAO, Krause House DAO and DAODAO.

Out of these, DAODAO really stands out as the perfect combination of decentralized social media and DAOs by providing a centralized discovery platform in tandem with operational tooling and DAO creation.

There is a lot of work ahead for this value proposition to be adopted by the masses. It is up to us to determine what a DAO powered social media sector will look like.

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Decentralized social media: The next big thing in crypto? - Cointelegraph Magazine

Decentralized social networks sound great. Too bad they'll never work. - MIT Media Lab

What Is Decentralized Social Media?

Decentralized Social Media | CoinMarketCap

Decentralized Social Media Platforms Aren't New, They Just Aren't Popular

The Future of Decentralized Social Media

The Future of Social Media is Decentralized - European Blockchain Convention

Is the Future of Social Media Decentralized?

Decentralized Social Media - The Next Big Thing in Blockchain

Decentralized Social Networks: What You Need to Know.

Why decentralization is the future for social media - Decrypt

Pros and Cons of Social Media

Social media is broken. A new report offers 25 ways to fix it | MIT Sloan

Social DAOs: An Essential Guide

DAOs: Social networks that can rewire the world

Beginner's Guide to Social DAOs and How To Join Them | CoinMarketCap

The Future of DAOs in the Social Media Ecosystem: Detailed Guide -

Living It Up: Your Guide to Social DAOs 🍾

Social DAOs: do they work?

Why DAOs Will Change Social Media as We Know It - Polygon | Blog

DAODAO can be the next Social Network

Facing Down Big Tech: How Blockchain Social Media Will Topple Zuckerberg - Cointelegraph Magazine

Social Networks Are the Next Big Decentralization Opportunity

How blockchain can transform social media

Social Networking - Worldwide | Statista Market Forecast

From MIT social media summit, 5 trends experts are watching | MIT Sloan

Most Americans Think Social Media Sites Censor Political Viewpoints