A Deep Dive Into Profit Sharing Communities
A revolution has begun. Things are changing in the world of tech. And fast. One of the major changes we are witnessing right now is the move from a Web 2 structure to a Web 3 structure.
Web 3 offers decentralisation at its core. This is the premise on which innovation is gaining momentum. One major change that is on the horizon is the way that companies, organisations and small startups might function and conduct their business. The era of Profit Sharing Communities is upon us.
Profit Sharing Communities
A Profit Sharing Community (PSC) is like any other company except it is decentralised, open-sourced and built on the Permaweb using a smart contract. In the case of Arweave’s permaweb, this smart contract would be a Smartweave contract. A smart contract is the basis of a Decentralised App (dApp).
The benefits of such a business model are great for all individuals that are involved, from the founders and contributors and all the way to the users. Some might see this model as a better way to structure a company compared to the traditional models we have come to know.
Let’s take a look at three key benefits of a PSC.
Real Time Profit Sharing
All profits that are generated from the organisation’s dApp are distributed to holders of their so called Profit Sharing Tokens (PST).
The initial distribution of these tokens can be decided upon by the founders and placed in the smart contract. Further down the line the distribution of more tokens can be decided by the community itself. On top of this, users of the app can be rewarded in tokens for interacting with the app itself. In essence, the more Profit Sharing Tokens someone holds, the higher the percentage of the profit they get.
Every single time someone interacts with the dApp a fee is taken. This fee is then distributed accordingly to the token holders.
Let’s take for example the case where users are interacting with a decentralised social media dApp. Every time they would interact with the dApp this small fee would be paid as a type of dividend to the PST holders.
The fee is so small for the user that it seems insignificant and they don’t even realise they are paying much of a fee at all. However the accumulative amount of fees builds up quickly like this, and thus the profits would be easily visible to the token holders.
So holding these tokens and earning a percentage of the user fees works like yield. The more ownership you have of a token the more percentage of the yield you own. Your assets are now generating passive profit.
The way the old formula works is that all profits go to the company treasury. The company then can decide what they are going to spend that money on or invest it in.
Let’s move on to the second benefit.
Fairer Ownership of The Organisation to The People Involved
With legacy business models, founders and investors own most of the company. Early stage employees wouldn’t get a high percentage of ownership of the company.
In a PSC you can spread ownership of the organisation to every person that actively creates value for it. As mentioned above, you can reward the early users of the PSC’s dApp. Essentially this is like paying people for their time. The time they took to use your dApp.
This seems more than fair, seeing as Time is our most valuable asset.
Back to the example of the social media platform, early users of the platform that would create a post or upload a photo would be rewarded with some Profit Sharing Tokens. This would then mean that in the long run they would also be getting a percentage of the organisation’s profits, in the form of yield.
By rewarding all these early users in this way, you are giving them reason to use your dApp more, stick around longer and also invite more people to the platform. Due to network effect this would create an exponential growth in users.
The truth is that most of us like using apps others are using. It’s hard to imagine using a social media platform where you are the only user.
To dive deeper in to the technicals of how token distribution would work we can look to Astatine. Astatine is a project found on GitHub that uses a function to automatically distribute Profit Sharing Tokens to users according to the settings you provide it. It uses a decay calculator to generate a distribution plan for your PSC. Ideally, a PSC would want to distribute a decreasing amount of tokens over time to maintain a sustainable circulating supply of them.
So, early adopters are the ones that will be rewarded the most. And the true believers of a project, that stick around, will be able to ride the biggest growth of any successful PSC. A good way to do so would be through staking, which, in a way, brings us to our third point.
Better Governance
By holding these PSTs you also gain access to the governance of the PSC. Each holder of PSTs is granted voting rights for all decisions the PSC is faced with. Community members are able to put forth proposals for changes that could be made to the PSC and then holders would vote on this matter.
This system becomes even more fair when you add Commitment Time in to the voting formula. The way the voting power is determined is not only by the amount of tokens that one individual holds, but also by their level of commitment.
Here is the equation:
Voting power = Ownership * Commintment Time
The way commitment time is calculated is by the amount of time an individual is willing to lock up their tokens in the PSCs smart contract. This action is known as Staking.
Staking your tokens for a fixed amount of time means that you will not have access to these tokens for that amount of time. At the end of the staking period you will receive your tokens back. So in return for staking tokens, stakers get increased voting power.
Moreover, the fact that someone has their tokens locked up means that they are incentivised to practice good governance and make the best possible decisions for the future of the PSC. The future value of their tokens depends on it. So the true long term believers of a PSC will be highly rewarded.
Many communities are being created with such a structure. They can be seen here on community.xyz
Profit Sharing Startups
A spin off of PSCs are Profit Sharing Startups (PSS). Touched on briefly by Sam Williams, founder of Arweave, in a recent video on YouTube, a PSS shares all the similarities of its sister PSC with one small additional condition – all tokens generated by the PSS are non-transferable. New tokens can be minted to reward others, and tokens can also be burnt, but they can’t be sold or transferred.
By using this approach, the tokens act less like a traditional stock or security in the eyes of many regulators. This of course is highly dependant on each individual jurisdiction. So essentially, this would allow all the benefits of having a PSC, like the way in which governance works, without the headaches of regulations and involvement of regulatory bodies that could severely hinder the growth of the startup.
If the PSS proves to be successful, it could then clone itself and change its structure from a PSS to a PSC, allocating all tokens in the PSC the way they were allocated in the PSS.
Conclusion And The Future
Seeing many more companies and start-ups use the PSC model is most likely inevitable. Once more innovators, founders and entrepreneurs catch on to this business model we could see a big boom in mainstream adoption of PSCs.
But where can this revolution lead to? Might we see a future in which entire governments use this model to reward their citizens? Or maybe an island community decides to use this method combined with tourism, where all profits generated by tourists would be distributed back to the island’s citizens to cumulatively grow it.
Or maybe even a decentralised way for a commune to distribute their assets according to time invested in helping the commune, where time dedicated to it results in more governance.
Just some food for thought.
