Unlike writing code, building a community is difficult to codify. Community is soft and requires an understanding of the whims of people rather than algorithms and mathematical proofs. Many smart entrepreneurs and investors have entered the cryptocurrency space in the past 18 months with the mindset that writing better code (e.g., a “next-generation blockchain” with a superior consensus algorithm) can result in a successful cryptocurrency (see Dfinity, Thunder, Algorand, Coda and Oasis as examples of product-first approaches). This product-first mindset is consistent with the Silicon Valley mantra “if you build it, they will come.”

While it’s certainly possible that a product-first approach to a cryptocurrency will be successful, I believe community is the most important characteristic of any cryptocurrency and most projects are underestimating the importance of community. For founders who are building new cryptocurrencies, “if you build it in the open, they will help” may be a better mantra.

Company building and cryptocurrency building are different

When you’re building a traditional company, your users and your stakeholders are two distinct groups that care about different things: users want a great product and equity holders want good leadership, incentive alignment, governance and ultimately execution. You can get away with being laser-focused on building a great product for users; if the product is loved, the company can have massive success in spite of problems with leadership, ownership and incentive alignment, governance and execution (see Uber as a recent example). For companies, the users typically don’t care about things like who the creators are, how much equity the key stakeholders own, how distributed ownership is and how the team makes decisions and executes.

Cryptocurrencies are different in that users and stakeholders are one in the same. Users of cryptocurrencies actually care a lot about the leadership, ownership, governance and execution of the project because their financial incentives are tied to the use of the product. Given that cryptocurrencies are based on open-source code and switching costs are extremely low, cryptocurrencies are only as successful (and valuable) as the community that owns them and uses them. Case in point: there have been 97+ forks of the Bitcoin codebase, yet Bitcoin maintains a market value of $100B+, 10X+ the market value of all of the forks combined. It is the community of Bitcoin users that gives BTC its value.

The strength and size of the community determines how much value a cryptocurrency captures

There is no known formula that guarantees success in building a cryptocurrency community, but there are a variety of approaches that have worked well. The goal of this piece is to examine the key characteristics that have led to strong cryptocurrency communities.

Transparent, inclusive founding teams

Founding teams who are transparent and inclusive from the onset tend to be the most effective in building robust cryptocurrency communities.

Bitcoin is the best example of this. Bitcoin emerged from a cypherpunks email thread. Anyone interested in cryptography at the time could have been a part of that thread and engaged (see here for the initial thread in detail). Starting in the open with a niche community of early adopters who have a strong belief about something tends to be a good foundation for a cryptocurrency and it worked spectacularly for Satoshi.

Satoshi created Bitcointalk.org and was quite active on it, engaging with community members during the formative days of Bitcoin

Despite being pseudonymous, Satoshi was quite active in the Bitcointalk online forum which he/she founded to discuss Bitcoin(see here for forum activity). He/she built an early community by engaging with people who were interested and being open and transparent about his/her thought process and design decisions. Transparent leaders who are inclusive of other perspectives and balanced in their temperament have proven to be the best leaders of cryptocurrencies today.

There are a number of other cryptocurrency projects that have demonstrated the effectiveness of transparent, inclusive leadership. Ethereum and MakerDAO are two that come to mind (check out the Reddit engagement of Vitalik and Rune to get a feel for that). There are also counterexamples, like Ripple, which has bootstrapped a large community on the strength of a strong meme despite lacking a transparent, inclusive founding team.

Distributed ownership and clearly aligned incentives

Ownership and community are fundamentally linked. As humans, we tend to feel a deeper link to people we share ownership with. And we’re increasingly skeptical of exclusive communities where the incentives of insiders are not purely aligned with outsiders.

Satoshi understood the link between ownership and community when he/she launched Bitcoin and allowed anyone to participate as a miner to earn coins for work. Nakamoto Consensus and Bitcoin’s proof-of-work (PoW) mining immediately gave anyone with the appropriate amount of computing power the ability to participate in the network and earn coins. In the beginning, the amount of computing required was easily accessible to an average middle-class user (not optimally inclusive, but more inclusive than any financial asset that came before it). Today, Bitcoin mining isn’t as accessible to new users, which certainly could limit the future growth of the Bitcoin community.

Similar to Satoshi, Vitalik and the Ethereum Foundation recognized the importance of distributed coin ownership when launching Ethereum; anyone could participate in the coin offering from the beginning by contributing capital to the project. After the offering, Ethereum implemented its own PoW-based token distribution mechanism with long-term plans to ultimately transition to proof-of-stake. The Ethereum team’s emphasis on broad ownership and clearly aligned incentives was clear throughout the history of the project (Vitalik owning less than <1% of total ETH demonstrates that).

If you’re launching a cryptocurrency today, raising tens of millions in capital from an exclusive group of investors may actually hurt your chances of building a strong global community in the long run

Filecoin and Dfinity are both recent examples of projects that have raised hundreds of millions in private capital from a limited number of exclusive individuals/groups with minimal community engagement and ownership. It remains to be seen how these projects will play out and it’s possible that if the products they build are useful, the cryptocurrencies can still be massively successful. But by my estimation, their early approach to token ownership and incentives hurts their chances of having long-term success. In contrast, Tezos raised hundreds of millions in an uncapped token sale last year, open to the masses. They’ve since launched their mainnet and seem to have a strong community behind the project (see engagement on r/tezos and the baking ecosystem that has emerged).

Note: If you’re a US-based entrepreneur, there are challenges associated with maintaining compliance with SEC regulation and maintaining inclusive token ownership, though there are likely ways to do it that don’t alienate the broader community. 0x and BAT are two US-based teams that have done this relatively well. I hope to see continued experimentation here, with approaches like Livepeer’s MerkleMine, which gets the Livepeer token in the hands of people who have a minimum ETH balance without actually owning Livepeer’s native coin.

A good meme

A good meme has proven to be an incredibly effective way to build an initial community. The top 10 cryptocurrencies by market value all have strong memes: Bitcoin (digital gold), Ethereum (platform for innovation), Ripple (bank-to-bank payments), Bitcoin Cash (scalable payment network), EOS (next-gen platform for innovation), Stellar (next-gen bank-to-bank payments), Litecoin (digital silver), Tether (stablecoin), Cardano (next-gen platform for innovation) and Monero (privacy payments).

Launching a cryptocurrency that represents a good meme can be effective at bringing a community together in the short-term. The past few years have shown that good memes like “Ethereum of China” and “Ethereum of Korea” can create cryptocurrencies with billions of dollars in value without much substance underlying the meme. It’s more likely than not that memetic value is fleeting though and real product usage as money is necessary to justify billion dollar valuations for cryptocurrencies in the long-term (though that remains to be seen).

A useful tool that becomes a standard

While ignoring community early on is likely a bad approach, there is no doubt that building a product that people actually use is essential to building a successful cryptocurrency for the long-term. Bitcoin has emerged as a standard ledger to store and transfer value and Ethereum has emerged as a standard developer platform for building open, global financial applications. There is clear demand for those products now and there’s lots of challengers trying to build better products. The Bitcoin and Ethereum communities are quite robust around those standards though and it will be difficult for an incrementally better product alone to compete. But competitors that build a better product and a better community by implementing a more inclusive token distribution mechanism or better governance have more of a chance.

How might community ultimately impact the long-term value of a cryptocurrency?

For now, the realistic long-term real-world use case for all cryptocurrencies (outside of work tokens, which are a completely different category for a different day) is money (store of value, payments or both). Store of value and payment coins derive their value simply from supply and demand from their community of users/stakeholders.

Many argue that in the long run, people will converge to one store of value coin that has the best properties and a few payment coins at most. I believe that there is likely room for several of each, but regardless, the success of both use cases is dependent on a broad base of people from around the world believing in, holding and using your cryptocurrency. And your approach to community is just as important as your approach to product in gaining such a community.

Note: 1confirmation is an early stage venture fund that has positions in several projects discussed (see here for our complete portfolio). This is not investment advice.