Exploring SocialFi: Who Will Lead the Next Social Revolution?

Author: @localcat15

Mentor: @CryptoScott_ETH

TL, DR

1. SocialFi is currently on the fringes of the crypto market, lacking a killer application.

2. SocialFi has advantages in protecting personal privacy and promoting the redistribution of traffic value.

3. Currently active SocialFi projects mainly fall into two categories: social protocols & graphs and social applications.

4. Future SocialFi projects need to lower the barriers to entry, incentivize quality content, and have great potential ahead.

1. Industry Overview

SocialFi is a collective term for projects that capture value from social networks using blockchain technology. In the Web3 world, various tools such as tokens and NFTs exist, allowing super individuals in social networks to theoretically monetize their abstract influence easily. Additionally, the high degree of anonymity in the Web3 world allows for a separation between online public traffic and offline private life, reducing the cost of becoming an internet opinion leader. These characteristics theoretically enable SocialFi projects to compete with traditional social media (although we have yet to see actual examples).

Currently, the market capitalization of SocialFi tokens is only 1.7 billion USD, accounting for about one-thousandth of the total cryptocurrency market cap, far below mainstream sectors like GameFi and NFTs, placing it in a marginalized position. Moreover, the SocialFi sector has yet to see a truly killer or dominant application and remains in its early stages. Given the strong monetization capabilities of social traffic in the Web2 world, we believe there is significant room for growth in SocialFi in the future.

1.1 Historical Development

As early as around 2017, a large number of SocialFi projects emerged in the market, such as Steem, Fire信, ONO, etc. However, at that time, the blockchain industry was not technologically mature, and the number of participating users was limited, leading to the failure of most of these projects.

In 2020, DeFi Summer attracted a large number of users and funds to the entire blockchain industry, and under this wave, sectors like GameFi and SocialFi began to sprout. In the explosive bull market at the end of 2021, another batch of SocialFi projects, such as CyberConnect, Galxe, Torum, and Deso, completed financing, many of which are still active in the public eye today. Therefore, 2021 can be regarded as the inaugural year of SocialFi.

In 2022, Zhao Changpeng predicted in Fortune magazine that SocialFi and GameFi would become the main driving forces for progress in the blockchain field in 2022. History did not unfold as he predicted, but some quality projects did emerge in the SocialFi sector, such as the ambitious Web3 social protocol service layer Lens Protocol and the Lens-based application Phaver.

In August 2023, Friend.tech successfully broke out with a new SocialFi model reminiscent of Ponzi schemes and "土狗" (a term for low-quality projects), attracting a number of Twitter influencers and even OnlyFans creators to join. The protocol fees surged to third place within 24 hours, only behind Ethereum and Lido. However, due to its rudimentary token economics, the trading volume of its Keys has significantly declined, and the project's delay in token airdrops has gradually eroded user patience.

Data Source: Dune

1.2 Market Size

Undoubtedly, the broad social sector has a market size in the trillions. Even if we limit the user base to the Web3 community, the market prospects are still vast. However, the Web3 community currently primarily uses traditional social software like Twitter, Telegram, and WeChat, where the scale effect is particularly pronounced: even if better solutions emerge, the inertia formed by existing social networks will keep users on the original platforms, and migrating to new platforms will face significant resistance.

Overall, the low market capitalization of SocialFi at 1.7 billion USD starkly contrasts with the vast profit margins of traditional social platforms, and we can expect the arrival of a singularity in SocialFi in the future.

2. Industry Landscape

2.1 Social Protocols & Graph Layer

Social protocols are somewhat similar to concepts like ID cards, phone numbers, and QQ numbers in the Web2 world. They effectively aggregate users' social relationships, and projects at the application layer can directly inherit the established social relationships from the social protocols without needing to rebuild them in new scenarios.

2.1.1 Lens Protocol

Lens Protocol is a distinctive project at the protocol layer, with its core concept being to NFT-ize personal profiles, follows, collections, and other concepts using ERC-721, thereby endowing them with financial attributes. This process effectively materializes the value captured from social activities, granting full ownership to creators and allowing circulation across different dapps, fully embodying the native Web3 spirit of respecting data value.

Lens also boasts impressive user data: in just one year since its launch, it has nearly 370,000 users, and daily active users are steadily increasing. Lens completed a $15 million financing round in June 2023, with Web2 social giant Tencent participating.

Lens Daily Active User Data, Source: Dune

2.1.2 Farcaster

Farcaster is one of the hottest social protocols in 2023, with even Vitalik himself deeply involved in using and promoting the protocol. The data structure of the Farcaster protocol is divided into three layers: the first layer is user identity, stored on blockchains like ETH and OP; the second layer consists of various data generated during user social interactions, which are not on-chain but stored in a server network formed by Hubs nodes; the third layer is the application layer, developed by projects within the ecosystem. Compared to Lens, Farcaster sacrifices a degree of decentralization to focus more on replicating the smooth functionalities of traditional social media.

Farcaster just opened to the public in October 2023 and has already gained 210,000 users in just a few months, achieving remarkable results, mainly due to the breakout effect brought by its ecosystem project Warpcast, which we will introduce later.

Farcaster User Data, Source: Dune

Farcaster Architecture Diagram, Source: Official Documentation

2.1.3 CyberConnect

CyberConnect (CC) is currently one of the projects with the most users in the social graph sector, with nearly 1.3 million users holding profile NFTs. The core concept and vision of CC are similar to Lens, both aiming to NFT-ize user profiles and link corresponding social data to the NFTs. The difference is that CC does not NFT-ize actions like follows and collections, meaning users do not need to pay gas fees for these actions, significantly lowering customer acquisition costs. Additionally, compared to Lens, which is deployed on Polygon and constrained by the Polygon user environment, CC's multi-chain deployment gives it a certain advantage.

Since 2023, CC has experienced explosive user growth (which is certainly related to its airdrop expectations), but its user growth has stagnated since June.

CC New User Data, Source: Dune

2.2 Application Layer

The application layer of SocialFi encompasses a wide range of areas, including various streaming content platforms, share-to-earn, personal token issuance platforms, etc. At the current stage, creating more grounded projects and attracting more users is an urgent issue that SocialFi needs to address, making innovation at the application layer a top priority.

2.2.1 Friend.tech

Friend.tech allows users to purchase "shares" of KOLs on the platform using ETH, with the value of these shares being proportional to the square of the number of shares sold. After purchasing a "share," users gain the right to communicate directly with the KOL and can sell their shares for profit. Additionally, Friend.tech distributes points to actively participating users, attracting them with the potential for future airdrops.

Undoubtedly, the current economic model of Friend.tech is destined to be unsustainable because it cannot retain users through long-term quality content output to achieve profitability, nor can it meet advertisers' exposure needs. However, this low-barrier, promotion-driven customer acquisition method is worth learning from for other SocialFi projects. If Friend.tech can learn from certain meme tokens and build an ecosystem and improve value capture promptly after gaining traffic, it might have a chance for revival, but currently, the likelihood seems low.

Friend.tech Share Price Growth Illustration

2.2.2 Phaver

Phaver is a social platform based on Lens and is currently the largest application in the Lens ecosystem. Its core idea is to allow users to truly own their social assets. Users can stake tokens on content they consider high-quality, and the more people stake on a piece of content, the higher its perceived quality, allowing both creators and users who stake tokens to earn corresponding rewards. Additionally, users can accumulate on-chain reputation by completing tasks, thereby increasing their points.

However, to prevent a flood of bots engaging in ineffective interactions, Phaver has also innovated a tiered system, requiring users to complete email verification, purchase NFTs, or stake governance tokens to qualify for exchanging points for governance tokens.

Through these mechanisms, Phaver incentivizes contributions to both publishing and discovering quality content, effectively achieving value capture.

In its two years since launch, Phaver has accumulated over 120k wallet connections and has 30-40k daily active users. Furthermore, as a multi-chain application, Phaver will soon integrate the Farcaster protocol and issue governance tokens, making it a strong competitor to Warpcast.

2.2.3 Warpcast

Warpcast is the flagship project of the Farcaster ecosystem, with an interface and usage method that closely replicate traditional social platforms, providing users with an extremely smooth experience, which has led it to be dubbed "the Twitter of the Web3 world." In addition, Warpcast will also issue tokens and NFTs, among other Web3-specific elements, natively built into the app, significantly lowering the barriers for users to participate in on-chain asset speculation. This design has sparked a wave of FOMO among the user base, even giving rise to high-market-value meme tokens like $Degen.

Currently, the main purpose for users entering Warpcast is still to seek fortune, and after the short-term wealth effect dissipates, whether it can truly replace Twitter as a new online home for Crypto Degens remains to be seen.

$Degen Token Price Situation, Snapshot Date: 2024/3/5

2.3 Project Overview

We have briefly organized the projects within the sector as follows:

3. Industry Growth Drivers

3.1 Growing Demand for Personal Privacy and Freedom of Speech

In recent years, a large number of Weibo and Twitter users have flocked to the "decentralized social platform" Mastodon. Mastodon is not a blockchain project; it operates on a federated model with multiple servers. Different server operators can establish vastly different rules (for example, some servers allow articles of thousands of words, while others require users to limit their articles to 500 words), very similar to different states in the United States, where users can freely choose to join different servers and abide by local codes of conduct.

Strictly speaking, Mastodon is not strictly decentralized; server "governors" can still arbitrarily ban individual accounts (but you can still choose to join other states). Mastodon has reached millions of monthly active users, which no SocialFi project can compare to, but it also indicates that truly decentralized SocialFi still has significant growth potential in the future.

Whether it is the increasingly severe censorship in the Chinese community or the various issues arising on Twitter, these factors are prompting people to think about how to defend personal privacy and freedom of speech on social platforms, which presents an opportunity for sectors like SocialFi. In the near future, we may have the chance to see projects in the SocialFi sector that match or even surpass Mastodon.

3.2 Redistribution of Traffic Value is the Core Competitiveness of SocialFi

Just as DeFi constitutes a challenge to traditional banking and exchanges, the ultimate goal of SocialFi is to disrupt the existing social platforms' monopoly on traffic value. In today's internet, countless wealth myths have emerged from the booming short video wave, but in this process, platforms like ByteDance and Tencent have taken away the majority of the traffic value, while the creators and consumers involved lack effective countermeasures. Projects like Phaver attempt to change this distribution of interests, allowing the value of traffic to be genuinely captured by creators and consumers.

4. Conclusion and Outlook

Compared to Web2 social platforms, SocialFi has inherent advantages in privacy protection and data value distribution. However, the high barriers to using blockchain applications, with just the step of creating a wallet being a hurdle for most users, remain a challenge.

In the future, SocialFi projects should lower their stance, thinking about how to spread decentralized social interactions to a larger group while applying new technologies. On one hand, they need to optimize operational processes, reduce user learning costs, and enhance user experience; on the other hand, they should effectively utilize the unique token mechanisms of Web3 to incentivize quality content and quality creators, achieving long-term user retention and positive feedback loops.