DeFi + Creators = 🚀

Jan 19, 2023 8:01 PM

Written in partnership with Jonathan Glick

Thanks to the dominance of social platforms in modern communications, influencers and creators are now the defining marketing mechanism for all new projects, businesses, and cultural products. Across consumer, enterprise, or financial markets, any launch or growth plan that ignores the power of influential figures on social platforms is poorly conceived and will likely fail. This is because, in a hyper-connected world, creators are less broadcasting celebrities than the leaders of social communities. They are storytellers who, via symbol and narrative, can inspire their followers to action. We can see this community mobilization in consumer and political ecosystems. The same force is at work in financial markets (see: Tesla, Gamestop). And we’ll soon see influencers drive interest and adoption in every category, from SaaS businesses to biotech investments.

This dynamic is not entirely new. Tapping celebrities and creators as a means of validation is as old as industrial capitalism. But the scale and speed of feedback loops in the Internet Age have made the practice essential. Yet even with its torrid growth, the market for creators and influencers remains undervalued and therefore underdeveloped. Mechanisms for linking creators to a project, for rewarding their endorsement and engagement, are slow, clumsy, and arguably broken. Unable to match the ramping demand, traditional models are riddled with friction and mismatched incentives. The influence market is barely clearing. Immense value remains trapped. But decentralized finance, based on smart contracts and tokens, provides a better approach. By reducing transaction costs, improving information asymmetries and better aligning incentives, decentralized finance (DeFi) will unlock the creator economy. In turn, popular creators and social influencers will push crypto deeper into the mainstream. The effects of this combination will be far-reaching and unpredictable.

Today there are two primary means for compensating creators/influencers: equity and cash. For one-off deals, cash remains ‘king’ but this fails to create longer-term alignment. And many early projects do not have the cash. For equity, there are several problems. On the company side, it’s difficult to align incentives and reward performance that drives the company forward as opposed to gamed metrics. Creator performance is also tricky to predict. It’s not easy to know in advance when a creator will map well to a product and market. On their side, creators have tons of other offers to endorse all sorts of products and large demands on their time. It’s almost impossible for them to assess the value of a given company and challenging for them to hold equity with limited liquidity for a long time, especially if it requires exclusivity. To bridge these challenges, companies and creators try to negotiate some combination of equity incentives, cash, performance bonuses, even non-cash compensation such as a featured promotion for the creator in the product. But it’s hard to agree on a value and deal structure between company and influencer, and one or both sides are often disappointed. Even in success, it's almost impossible to scale the program.

To bring this to life, let’s say we want to launch a new product. Say it’s a tool to plan and visualize an interior design remodel. One of if not the most important factors for a successful launch will be spreading the message about our product and convincing potential users to try it. We know that people who are passionate about home decor, the most likely early adopters, learn about design products from influential designers and design-focused creators. But for all the reasons above, it’s difficult for us and the creators to come to terms.

Blockchain-based concepts known as decentralized finance (DeFi) provide a logical path through this problem. With smart contracts and tokens, you can provide value to creators that scale with their performance. Actual influence has a direct impact on compensation so it is easier to agree on value. You do not have to perfectly map contribution to compensation in advance. You allow the market to do it. And you don’t need deals, lock-up periods or even exclusivity. You just need to convince the influencer about the opportunity.

In our design software example, we would mint a token to provide the project’s early influencers and creators with inexpensive ‘currency’ in the project. The token would be spent to unlock key features, purchase in-app assets (an especially vivid piece of virtual furniture) or even impact the future design of the software. Tokens could be earned by providing value to the tool and the community, contributing processing power or additional code or content. As influencers and creators used the tool themselves and provided its utility to their followers, their followers could not only adopt the software, but if they like it, buy some of the tokens, causing them to rise in value. Each of these people in turn, if they believe in the project, has an interest in telling others about it. Token-holders could hold them if they believe the value will continue to rise, hedge by selling some, or buy more while the price is still cheap.

Through efficient liquidity mechanisms like these, DeFi will fuel further growth in the creator economy, allowing more people to earn a living as creators/influencers. This will definitely make the ‘rich richer,’ driving more wealth and sway to top creators: the Elon Musk effect. But with the scale of social networks, the growth of infrastructure-as-a-service platforms (like Stripe, Shopify, and AWS), and now finally with DeF’s smart contracts, creators of all sizes will have greater capabilities and incentives to launch and join all sorts of projects. And in turn, the creator and influencer economy will drive mass adoption for DeFi, forcing it to adapt to serve the mainstream. After all, turning ‘weird’ new technologies and concepts into ‘exciting’ behaviors and trends is what creators do best. The crypto UX, now impenetrably complex, will rapidly improve. Late adopters will become passionate enthusiasts. Even physical products will be tokenized and attract community affection. As of last Monday, tokens for Unisocks, a semiserious project from the folks at Uniswap, achieved a market capitalization of $20mm -- for 500 pairs of novelty socks.

Not every project will or should adopt this model. Some sectors and efforts will be best served by more centralized operations. There will be many flashes in the pan, many scams, and many schemes. Ponzi schemes are probable. Frauds and failures will be commonplace. But there will be also a countervailing force tamping down on overhyped projects. When influencers not only recommend products but are token-owners, when their followers buy not only the product but also the token, it raises the reputation risks. If someone shills and it sucks, buyers will blame the influencer.

So volatility will be the new norm as we transition. In some cases, this chaos will be fine, a harmless effect of speculation on an uncertain outcome or even a feature, drawing more interest to the project. In other instances, volatility will damage projects and communities. These are the inevitable effects of accelerating capital and attention flows. Democratizing finance, turbocharging community formation, and reducing the power of gatekeepers has real downsides. Regulators should and will step in to provide appropriate guardrails. Sometimes they will overreact and ban certain practices. But it won’t do much to stop the inevitable. DeFi-enabled influencer networks are too compelling, too ‘native’ to the nature of the Internet itself.

How far might this go? It’s tempting to imagine deep economic effects. As the market for creators grows, many workers might become more like project nomads than full-time employees. After all, successful creators, influencers and crypto projects already thrive in a context of post-employment free agency. Swarms of talent, community and capital already flock from project to project, and this has been true about open source for decades. Perhaps over time, as these projects become better funded and proven successful, the corporate world itself will be ‘eaten’ or at least transformed by this capital-charged collab culture. Companies and projects might become more like clouds, larger than ever before but with vaguer outlines, eroding the boundaries between employees, consultants, customers and investors. Index funds of project tokens, maybe selected and weighted by algorithms, could become a major factor in venture finance. Like creator fandom today, every ‘company’ or project will become more like a tribe, driven and defined by the stories and symbols linking its members together, led by those who best weave its narrative.

Creators and crypto will be a potent combination shaping our markets and society — for the better and for worse. We’ve long described capital flowing like water to find its level. In reality, our legal, employment, and other systems have meant it has flowed more like molasses. The DeFi-Creator economy will change that. There will be fewer gatekeepers across the economic and cultural landscape. VCs, other orthodox funding organizations, and traditional economic and cultural institutions will have less influence and power. Instead, talent and capital will coalesce around projects with promise, inspired by anyone who tells a truly compelling story.