What is a Profit Sharing Community?
Profit sharing communities are a totally new business model for Web 3.0 — how can using them benefit founders, developers and users?
Since the Arweave mainnet launched in June 2018, network usage has grown exponentially. From hosting over 300 sites and apps to saving culturally and historically important data in an immutable Library of Alexandria, Arweave’s dynamic community is constantly expanding. This summer, growth accelerated even more with the launch of profit sharing tokens in June, and profit sharing communities in August.
Profit sharing communities (PSCs) are an innovative business model for the decentralized web, offering sustainable incentives for founders, developers, community contributors and users alike.
The past month has seen an explosion of growth in PSCs: 15 major new communities have launched; nine projects are in talks with world-leading venture capital funds; seven projects are finalizing their first fundraising rounds; and over 25 new, fully-funded contribution opportunities have been posted by projects looking for assistance.
What Are Profit Sharing Communities?
Profit sharing communities are a new, fairer structure for web startups made possible by the unique affordances of the Arweave protocol. These communities give founders more control and flexibility over their projects, while granting contributors to those projects more power.
In a traditional startup, employees own equity that is unlikely to become liquid any time soon, does not grant governance rights (these are reserved for board members) and almost never issues dividends.
By contrast, all profit sharing community contributors earn tokens that give them fair governance rights, instant liquidity and access to micro-dividends generated by usage of apps. You can discover the wide range of communities launched so far on communityXYZ, the profit sharing community hub.
Read on to learn exactly how Arweave’s core features enable permanent data storage, and how this in turn powers the profit sharing community ecosystem.
What Is Arweave and the Permaweb?
Arweave is the network that powers the permaweb. With Arweave, you can pay once and store data forever. Two unique mechanisms make this possible: proof-of-access, and the data storage endowment.
In order to compete to mine a block, a miner must prove that they have access to a randomly selected byte from a previous block of stored data. To do this, the miner must produce the chunk containing the selected byte, plus a proof demonstrating that the chunk is in the appropriate position in the blockweave. Miners are therefore incentivized to store as many unique blocks as possible, ensuring that data is widely replicated.
The Data Storage Endowment
When you pay to store data on Arweave, you pay upfront for 200 years of storage. This sounds like it should be expensive, but data storage is so cheap that storing a megabyte for 200 years with Arweave only costs $0.005. It is so inexpensive because the cost of storing data continually decreases due to various improvements in technological innovations. Arweave’s data storage endowment mechanism utilizes this fact to provide affordable, permanent storage. As the cost of storage declines over time, interest is earned on the initial upfront payment in the form of additional storage purchasing power.
The rate of storage cost decline over the last 50 years has been on average 30.5% per year. However, the Arweave network uses an extremely conservative estimate for the decaying cost of storage, assuming a decline of 0.5% per year. This ensures with an exceptionally high degree of probability that there will always be funds available to pay for the storage of data. You can read more about storage endowment here.
Together, these mechanisms allow anyone to store data on the Arweave network permanently. As well as providing a verifiable, immutable record of important historical or cultural data, there are additional benefits to using the permaweb.
For app developers, using the permaweb means a published web app requires zero ongoing maintenance and incurs no additional costs after it is deployed. For users, this means that the Arweave apps you use (and all previous versions of these apps) will always be accessible. If a website or app embeds intrusive advertising or releases a new version which collects your data to sell to third parties, you can simply continue using the previous version of the app.
What Are Profit Sharing Tokens?
Profit-sharing tokens (PSTs) allow people who build websites and apps to earn money easily and flexibly. PSTs are a novel way of incentivizing and rewarding both permaweb app founders and external contributors to a project.
When building a PST app, the developer adds a mechanism that sends small tips in AR, Arweave’s native token, to PST holders every time a user interacts with the app in a way that generates a transaction on the Arweave network. Tips are automatically distributed to PST holders in proportion to their relative PST holdings. So, if a given app has two founders who each hold 50% of the app’s PSTs, each founder will receive 50% of the user tips from the app.
Developers can determine the size of tips when building the app. Tips are often micropayments for interactions, such as sending a message or posting a status update. PSC creators can also designate larger tips for significant interactions, like pressing a donation button or trading a large quantity of tokens on an exchange. Tips can be a fixed fee for a given interaction or a percentage of the interaction’s value — the PSC creator has control over their own business model. As the app’s user base grows and more people interact with the app, individual tips can add up over time to become a significant source of revenue to sustain a founder, builder or team.
Founders or other PST holders can sell their tokens on a PST exchange such as Verto, which allows them to access the app’s potential future profits immediately.
How Do Profit Sharing Communities Work?
Profit sharing communities (PSCs) go a step further in providing sustainable economics for apps, integrating a decentralized autonomous organization (DAO) governance structure with profit sharing token technology.
Voting power in PSCs is determined both by how many of the community’s PSTs a person holds and for how long they are willing to hold (lock) these tokens. Specifically, voting power is calculated as lock time multiplied by token quantity. This mechanism ensures that even smaller token holders have an influence on how their community functions — if they commit to holding their PSTs for long enough, they can have just as much power as the big holders in that community.
Profit sharing communities allow PST holders to vote to mint more PSTs. For example, members of a profit sharing community can vote to mint PSTs as a reward for those who contribute to a community’s success in any number of ways. This, combined with the tip distribution mechanism of PSTs themselves and PSC’s governance capabilities, results in a combination that empowers and incentivizes PSC members while affording them greater control over a community’s development.
Founders of apps can benefit greatly from the profit sharing community model, especially in comparison to the traditional startup model of fundraising by selling equity. Equity-based fundraising is stressful, time consuming and typically means company founders must sacrifice ownership in exchange for capital at unfavorable terms and in rigid, scheduled rounds.
However, with PSCs, founders can decide on their own terms and their own timeline, as well as how much ownership they wish to exchange for meaningful contributions to their app and its community. Founders can choose to keep holding their remaining tokens and accrue profits from tips over time. Or, as the tokens are liquid, founders can sell or convert them to other currencies on an exchange. This allows founders the flexibility to sell any quantity of tokens to access those potential future profits immediately, in line with market conditions.
Contributors can help communities in endless ways, from making improvements to a permaweb app, to aiding in marketing efforts, all while receiving PSTs in return. With PSCs, contributors directly own and control portions of the communities that they aid through their PST holdings, and can either continue to hold or sell their PSTs. Consequently, they are not tied to specific bosses, projects or contractual terms, and can assist as many communities as they like at any time. This provides contributors with flexibility, while also allowing them to accumulate revenue-generating ownership stakes in projects they care about.
You can check out some of the current contribution opportunities available on communityXYZ, Arweave’s profit sharing community hub.
End users also benefit from the novel features of profit sharing communities. They can buy PSTs from their favorite communities, allowing them to support these projects while also receiving a portion of the PSC’s tips over time. Users can also be spared from invasive advertising and the covert harvesting and selling of their data, as app creators now have viable methods of alternative revenue generation.
In conclusion, profit sharing communities provide a wide array of benefits to founders, contributors and end users alike.