Yesterday, (July 30th 2024) the SEC announced charges against BitClout (aka DeSo) founder Nader Al-Naji, which highlights the risks misbehavior through centralized protocols in #SocialFi. Similarly, the case around friend.tech, developed in August 2023 by anonymous developers 0xRacerAlt and shrimppepe, both of whom have controversial histories in the crypto community, underscores the need for better foundational protocols in the SocialFi space.
This article examines the challenges and flaws associated with decentralized social media platforms, such as DeSo and friend.tech, and argues that a solid foundational SocialFi infrastructure is unavoidable. Hence, an interoperable, secure, decentralized, and transparent SocialFi framework must be established to avoid projects such as DeSo and friend.tech undermining trust in Web3 technology. Finally, the article gives an ecosystem overview and presents “an honest approach to SocialFi”.
DeSo Founder Charged by SEC
Japan based blockchain project Bitclout (aka DeSo) raised $200m in funding from investors including a16z, Coinbase Ventures, Sequoia, Winklevoss Capital, Polychain Capital and Pantera Capital. Today the SEC has charged Nader Al-Naji, founder of the BitClout blockchain protocol, with fraud and unregistered offering of crypto asset securities.
Al-Naji allegedly raised over $257 million from investors through false claims and used over $7 million for personal expenses. He also misled investors about the project’s decentralization to evade regulatory scrutiny. The SEC’s complaint includes Al-Naji’s family members and related entities as relief defendants. The U.S. Attorney’s Office of New York has also announced charges against him. For more details, refer to the SEC press release.
After the announcement, the $DeSo token took a big dive.
It’s telling that the crypto industry isn’t backing DeSo anymore. Even more obvious is the fact that both DeSo’s and Nader’s X accounts haven’t posted in weeks.
Friend.tech — Lack of Oversight and Transparency
Friend.tech is a social platform built on Base Chain. It closely integrates with X to use users’ Web2 identities, enabling potential profit based on these identities. Each user can be tokenized, with their influence priced by the market. As a successful Web3 dApp in SocialFi, it achieved over $2M in revenue and $33M in net deposits in its first month.
The platform is based on the fan economy concept; users need an invite code and 0.01 ETH to buy shares in others, facilitating one-on-one chats and profit from increasing popularity. Influencers earn a 5% fee on share transactions, with another 5% going to the platform’s treasury, totaling a 10% transaction fee.
Things turned in May 2024 when friend.tech distributed its airdrop to users. A Whale known as “Murphys1d” quickly sold all received tokens just hours after the airdrop began. This sudden, significant sell-off raised concerns about the airdrop’s fairness and potential token price manipulation.
Users faced difficulties claiming their tokens, adding to the controversy. Blockchain data shows “Murphys1d” received a large share of FRIEND tokens, then unloaded over 55,000 tokens, causing a dramatic impact. The market saw FRIEND tokens drop 52.5%, plummeting from $3.26 to $1.32 within an hour of Murphys1d’s sell-off. Today (July 30th 2024) it’s worth only $0.153.
State of SocialFi — Users Lost Trust Due to DeSo and friend.tech Disasters
After peaking at $53 million in total value locked and almost 400,000 transactions per day in October, SocialFi lost significantly of its TVL and suffered a 98% reduction in daily transactions, according to DeFiLlama and pseudonymous analyst Cryptokoryo. This is primarily driven by the friend.tech collapse, which has destroyed users’ trust in SocialFi.
SocialFi TVL (DeFiLlama)
According to DeFi Lama TVL for SocialFi currently sits at around USD 10 million. So what can we learn from this?
Case Study: Insights From friend.tech to Build Better SocialFi Infrastructure
friend.tech faced several issues that future decentralized social media protocols should aim to avoid:
Centralization of Control: Despite being built on decentralized technology, friend.tech maintained centralized control over key aspects of the platform, leading to trust issues.
User Privacy Concerns: There were significant concerns about how user data was handled and secured, which undermined trust.Scalability Issues: The platform struggled with scaling, leading to poor performance and user experience during peak times.
Economic Exploitation: The economic model led to speculation and exploitation, with some users manipulating the system for profit at the expense of others.
Exzessive airdrop farming of users: The mysterious friend.tech whale is another example of a professional airdrop farmer (squatter) who interacts with emerging protocols solely for the airdrop rewards, often with multiple wallets to compound rewards. The main issue with airdrop farmers is that they tend to market sell all their airdropped tokens, creating significant sell pressure and resulting in more panic selling by legitimate protocol users.
Why We Need A User-Centric Infrastructure for SocialFi
Currently, various protocols and social media applications are gaining attention by demonstrating SocialFi infrastructure solutions (see ecosystem overview below).
SocialFi and Account Abstraction Ecosystem
Notable pioneers in this space include LENS Protocol, with its decentralized graph-based apps, and Farcaster. These platforms boast impressive features such as self-sovereign profiles, customizable feed algorithms, open-source code, a censorship-resistant base layer, and the elimination of intermediaries. However, the limitations of widespread Externally Owned Accounts (EOAs) are evident across all services.
Historically, most Web3 applications have revolved around wallets, which are essentially combinations of private and public keys. While these wallets can hold tokens, they lack the comprehensive functionalities needed for a robust user account system. Moreover, the security risk is significant; if a private key is lost, access to the wallet is permanently forfeited. This setup is not only insecure but also creates a poor foundation for SocialFi.
To address these issues, account abstraction has become a top priority for improving the user experience. Account abstraction involves creating smart contract-based accounts that go beyond the basic functions of traditional wallets. This approach abstracts away the complexities associated with user accounts, providing a more secure and user-friendly foundation for Web3 applications.
By leveraging smart contracts, account abstraction allows for enhanced functionalities such as recovery options, multi-signature approvals, and more sophisticated permission settings, thereby making the user experience smoother and more secure. This is exactly how SocialFi can move to a user-centric, secure, transparent and decentralized infrastructure.
Three User-Centric Account Abstraction Infrastructure Protocols for SocialFi: LUKSO, Abstract and XION
1. LUKSO (Layer-1 EVM compatible, Mainnet $LYX)
LUKSO is a layer-1 addressing the shortcomings of existing SocialFi protocols focusing on creating a more user-friendly and secure experience for decentralized applications. The layer-1 blockchain was founded by Fabian Vogelsteller (@feindura) who created the ERC-20 standard earlier at Ethereum Foundaiton together with Vitalik.
It aims to transform Externally Owned Accounts (EOAs) into smart contract-based accounts, providing enhanced functionalities such as social recovery, multi-factor authentication, and transaction batching without modifying the Ethereum protocol.
Here’s how LUKSO incorporates these principles:
Smart Contract-based Accounts: LUKSO implements Universal Profiles, which are essentially smart contract-based accounts that offer greater functionality and flexibility compared to traditional EOAs. These profiles enable users to manage assets, identities, and permissions in a more intuitive and secure manner.
Social Recovery: the protocol integrates social recovery mechanisms, allowing users to designate trusted contacts who can help recover access to their accounts if they lose their private keys.
Enhanced Security and Permissions: so called Universal Profiles support granular permission settings, enabling users to control who can access and manage different aspects of their accounts.
Transaction Batching and Fee Management: LUKSO facilitates transaction batching and gas fee sponsorship, reducing the complexity and cost associated with multiple transactions.
Modular and Interoperable Design: LUKSO’s infrastructure is designed to be modular and interoperable, making it easier to integrate with other blockchain networks and standards.
Universal Profiles are accessible from multiple devices and offer granular control over data access, providing various levels of permissions for different activities such as updating profiles, transferring assets, interacting with smart contracts, and signing into dApps. Additionally, UPs support password recovery and social recovery mechanisms, enhancing security and user convenience. They also facilitate gasless transactions, with third parties covering the fees, and can store comprehensive identity information, acting as a complete identity profile.
Advantages of LUKSO:
Universal Profiles: LUKSO introduces Universal Profiles, allowing users to have a single digital identity across multiple dApps, enhancing usability and integration.
Focus on SocialFi: the protocol designed with a strong emphasis on SocialFi, making it particularly suitable for applications in the social media and digital lifestyle sectors.
Innovative Features: LUKSO includes advanced functionalities like social recovery mechanisms and multi-factor authentication, improving security and user experience.
Truly Decentralized and interoperable Layer-1: 118,585 validators live (as of July 30th 2024)
Tokenomics and Mainnet: Mainnet went live in May 2023 and tokens are fully unlocked (no VC funding, no airdrops)
Disadvantages of LUKSO:
Development Stage: As a relatively new blockchain, LUKSO might face challenges related to network maturity and adoption.
Ecosystem Integration: Integrating LUKSO with existing blockchain ecosystems and ensuring interoperability can be challenging, especially if it introduces unique standards and protocols.
2. Abstract (Layer-2 EVM compatible, still Testnet)
Abstract is a consumer-focused Layer-2 blockchain powered by cutting-edge ZK cryptography for consumer crypto, driven by the culture economy, leveraging ZK Stack and @eigen_da. Abstract has received $11 million in funding from investors including Founders Fund, Fenbushi Capital, and 1kx. It aims to improve scalability, reduce transaction costs, and maintain a high level of security and decentralization. The primary focus is to provide an efficient and user-friendly experience for decentralized applications (dApps).
Advantages of Abstract:
Scalability: Abstract significantly increases transaction throughput by offloading a substantial amount of transaction processing from the main Ethereum chain to the Layer-2 network.
Cost Efficiency: By handling transactions off-chain, Abstract reduces gas fees, making it more cost-effective for users and developers.
Security: Leveraging Ethereum’s security model, Abstract ensures that transactions are secured by the underlying Layer-1 blockchain.
User Experience: Abstract focuses on improving the user experience by providing faster transaction times and lower fees, making it more appealing for dApp developers and users.
Adoption: Connection to @pudgypenguins might help adoption
Disadvantages of Abstract:
Complexity: Integrating and managing a Layer-2 solution adds complexity to the development and maintenance of dApps.
Centralization Risks: Project has received large VC funding and prepares airdrop— tokenomics are not yet known
Interoperability: Ensuring seamless interaction between Layer-1 and Layer-2 can be challenging, and there might be issues with compatibility across different protocols.
3. XION (Layer-1 chain, still Testnet)
XION is a layer-1 blockchain developed by Burnt Finance, designed to abstract away the complexities of Web3 technology to enhance user experience and adoption. Its infrastructure focuses on generalized chain abstraction, aiming to make blockchain interactions as seamless as traditional web applications. Key features include:
Meta Accounts: Protocol-level accounts that allow diverse authentication methods, key rotation, account recovery, and cross-device usage.
Signature Abstraction: Enables onboarding using familiar methods like email and biometrics, while still supporting traditional crypto wallets.
Device Abstraction: Eliminates the need for users to manage private keys, enhancing accessibility and security.
Parameterized Fee Layer: Allows transactions to be denominated in any token, abstracting gas fees from users.
Abstracted Interoperability: Facilitates seamless cross-chain interactions.
Advantages of XION:
Generalized Chain Abstraction: XION offers a broad, protocol-level abstraction that simplifies all aspects of blockchain interaction
Meta Accounts and Signature Abstraction: Provide a more intuitive and accessible user experience compared to traditional key management and account setups.
Parameterized Fee Layer: Innovative approach to handling transaction fees, making it user-friendly and adaptable to various token economies.
Disadvantages of XION:
Newer Ecosystem: XION, being a newer project, might lack the mature ecosystem and developer support seen in more established platforms
Complexity of Implementation: Its all-encompassing abstraction might introduce complexities in implementation and governance.
Centralization and tokenomics: probably more centralized tue to large VC investment — Tokenomics remain unknown
Conclusion
To develop robust and resilient decentralized social media protocols, developers must focus on decentralization, user control, privacy, interoperability, fair economic incentives, effective content moderation, scalability, user experience, and regulatory compliance. By addressing these areas, decentralized social media can avoid the pitfalls seen in current platforms like friend.tech and achieve broader adoption and trust.
In summary, XION stands out with a comprehensive approach to abstracting blockchain complexities. However, it faces challenges in ecosystem maturity and potential implementation complexities. LUKSO excels in its focus on digital identities, while Abstract offers significant scalability and flexibility as a Layer-2 solution. Each has unique strengths and trade-offs that cater to different aspects of the evolving blockchain landscape.
Smart Contract Account Solutions will be the foundational, transparent and secure layer of SocialFi. LUKSO’s approach with Universal Profiles, Abstract’s Layer-2 scaling solution and XION address these issues by providing a more integrated and flexible solution for user identity and interaction across the blockchain ecosystem, setting both apart from Lens Protocol and Farcaster.
