Original title: SocialFi 2.0: Turning Fumbles into Fame
Written by Simon and Gregor, Moonrock Capital
Compiled by: Chris, Techub News
We all remember the golden age of Clubhouse. Due to the increased demand for social applications during the epidemic, Clubhouse's audio chat rooms attracted a large number of users, causing it to quickly climb to the top of the app rankings. The app was originally only open to iPhone users and required an invitation to join. This scarcity and uniqueness sparked widespread discussion, and even some people raffled and sold invitations. However, over time, Clubhouse's popularity declined rapidly.
Nowadays, there is a new Clubhouse moment in the SocialFi space almost every other week. New SocialFi applications continue to emerge. The most representative ones recently are friend.tech and FantasyTop. Although these applications still have retained users, they also face challenges in sustainability.
Eugene Wei mentioned in "Status as a Service" that a successful social network relies on three cores:
Social capital (identity): This is the social status or influence that users gain through participating in platform activities. Users want to gain recognition, attention or status on the platform, which is one of the main motivations driving them to use social networks.
Entertainment: The entertainment value of the platform. That is, the fun, entertainment or recreational experience that users can get on the platform, which is very important for attracting and retaining users.
Actual value: The actual value of the platform, that is, the actual functions or utilities that users can extract from the platform, such as information acquisition, tool use, or other practical conveniences.
Initially, identity and status on social platforms were mainly obtained through user contributions and value addition. For example, those who actively participate in the network and bring real value to the network will become the elites and leaders of the network. However, SocialFi platforms like friend.tech replace this real value-based mechanism with financial incentives. This means that users' identity and status rely more on financial investment or transactions rather than actual contributions.
In October 2023, friend.tech had more than 70,000 daily active users, but that number has now plummeted to only about 400. This change has triggered a reflection on the Friendtech problem. We can analyze the problem from three core perspectives:
Social capital (identity): Initially, friend.tech gave users identity by holding specific keys and joining exclusive but expensive groups. This approach did give users a sense of identity and unique social status.
Entertainment: Users experience a dopamine rush on friend.tech, and feel excited when they see their investments rapidly increase in value. However, this rush comes more from the success of the financial investment than from the entertainment nature of the platform itself.
Real value: This is where the main problem with friend.tech lies. While users’ investments can bring short-term gains, the platform lacks long-term real value and utility. The main use case of the platform is speculation, and users are more concerned with increasing the value of their portfolios and receiving airdrops, while actual applications such as interacting with creators become secondary.
When the price of the “key” fell, the dopamine stimulation disappeared, users gradually stopped participating, and successful creators found it troublesome to manage another account, and as their income decreased, their participation gradually decreased, causing the platform to gradually collapse.
FantasyTop has experienced a similar path. It launched strongly in early April 2024 with five-digit daily active users, but now has only 2-3k daily active users.
Unlike friend.tech, FantasyTop is more like a game combined with social features. Initial interest was driven by speculation, but as card prices fell and creators' income decreased, people's interest also decreased. FantasyTop's user engagement has dropped significantly. In order to restore user interest, FantasyTop is transforming into a fantasy sports app similar to DraftKings, hoping to re-attract users by providing a fantasy sports experience similar to real life.
The main problem facing many SocialFi apps, and others like them, is that they rely too heavily on financial incentives to attract and maintain users. As these financial incentives decrease, user engagement decreases, creating a vicious cycle. Examples like Axie Infinity and Stepn show this trend. Users are generally more willing to continue using established platforms, as financial incentives should be an additional feature of the platform, not the main driver. Actual utility and practicality should be the main pillars of a platform to attract users.
Orb and Warpcast are Dapps focused on Web3 ideals, which differ from traditional social media platforms in that they emphasize user control over content and decentralization. These platforms look like the future of social networking, but they face a major challenge: lack of utility. Although these platforms can theoretically compete with mainstream platforms such as Instagram and Twitter in terms of entertainment value through good network effects, the actual value they currently provide is still insufficient.
Young users (such as 15-year-old girls) are more concerned about gaining attention, likes, interactions, and following their idols when using social media, without caring whether they actually own the content they post or the decentralization of the platform. When these users use social media, the concepts of ownership and decentralization are not important to them.
As Peter Thiel said, current forms of decentralization and ownership offer very limited improvements to the user experience. Although they have some theoretical advantages, they do not significantly improve the user experience or bring revolutionary changes. These ideas may be attractive to technology enthusiasts, but for ordinary users, they are not attractive enough to prompt them to leave the social platforms they are already familiar with and like.
SocialFi apps face challenges because they initially rely on speculation to attract users and funding. This approach can boost user growth in the short term, but it is not sustainable. While decentralization is important, users care more about the actual value provided by the apps themselves. To achieve long-term success, these apps need to provide enough actual value that users are willing to continue using them after the speculative appeal wears off. That is, apps must provide stable, meaningful functionality and value, rather than relying solely on short-term financial incentives.
To get more people using cryptocurrencies and blockchain technology, we need to shift our focus from purely financial products to products that capture user interest. SocialFi has the potential to be a significant space, but we need to treat speculation as a fun add-on, not a necessity, and move beyond the Web3-only world to capture more attention.
When integrating Web3, think outside of crypto
To understand the impact of SocialFi, we first need to examine the dynamics of Web2:
Social innovation: New features or use cases that emerge on social media (such as new ways to interact or types of content) tend to become popular quickly.
Emergence of KOLs: These innovations have given rise to a new class of key opinion leaders (KOLs) who have gained a lot of attention and influence due to these new use cases.
Attraction of users: These innovations and the emergence of KOLs have attracted a large number of users to join social media, who hope to gain similar fame and attention.
Traditional social media platforms succeed through a positive cycle: new features or use cases attract a large number of users, who in turn attract existing key opinion leaders because they want to reach new audiences and worry about being left behind. KOL participation enhances the credibility of the platform, further attracting more users to join. This cycle continues to strengthen the network effect, making the platform more attractive and increasing user stickiness.
As users’ attention spans shorten and their patience wanes, platform operators need to constantly innovate to maintain user interest. For example, Instagram started out as a simple photo-sharing tool for capturing, editing, and sharing photos, but in order to keep users’ attention, it constantly updates and upgrades its features to adapt to users’ changing needs and preferences.
In 2016, Snapchat launched the "Stories" feature, which was very popular and put pressure on Instagram. In order to maintain competitiveness and user activity, Instagram also launched a similar "Stories" feature and even used the same name. This is to ensure that users continue to use Instagram and avoid being left behind by competitors.
Instagram’s successful evolution demonstrates an important strategy: when competitors, such as Snapchat and TikTok, launch popular new features, Instagram quickly follows up, imitating and integrating these innovations. This strategy includes the introduction of Snapchat-like “Stories”, algorithmically recommended content streams, and TikTok-like “Reels”. This approach has helped Instagram keep its users engaged and the platform relevant. In short, Instagram ensures that it will not be eliminated by copying and integrating the successful innovations of others.
So, what does this mean for SocialFi?
While SocialFi's financial incentives and speculation are attractive, these should not be its main features. The real selling point should be social innovation and new use cases to stimulate the growth of the platform. What we need now is how to use Web3 technology to create novel social experiences to compete with existing large platforms such as Meta, TikTok, and X. While we don't have all the answers, we have some ideas that we hope will inspire developers to create new social applications.
Attention as a new financial asset
In Web3, we are good at creating new financial assets, but in the social media world, attention is the most precious resource. While the amount of content is increasing, users’ attention is limited. However, the tools used to measure attention (such as likes, comments, etc.) have become too common, causing their value to decline.
So while attention is scarce, it becomes increasingly diluted due to the infinite abundance of attention tools. As each tool receives less attention, its quality decreases.
Imagine that in Web3, social media interaction tools (such as likes, comments, and follows) can be tokenized, making them scarce or non-depreciating. In this way, decentralized social platforms can become markets for these tokens. Users will receive these tokens and can distribute them to their favorite creators. This approach will not only encourage users to be more selective in their content, but also incentivize creators to produce higher quality content.
According to the three key points raised by Eugene Wei, social platforms make likes, comments and attention scarce through tokenization, so the attention that each content can get will increase. This increased attention may attract large advertisers because they are more inclined to invest in advertising on platforms that can bring high-quality user interaction.
Or imagine followers themselves as financial assets, with values that vary based on their social graph. If you manage a high-profile user, like Vitalik or Ansem, who follows you, you can sell this scarce “credential” of attention to someone who is willing to pay for his attention.
While these ideas are abstract and require further refinement, they show potential directions.
By tokenizing the IP of content, a more practical solution can be provided for the creator economy. Coinbase recently demonstrated this in their "Mister Miggles" event. This event raised the challenges facing the creator economy and encouraged people to not only create content, but also consume it on the blockchain. This way, the intellectual property of the content can be better managed and utilized.
Story Network is taking this idea a step further. They are developing a new Layer 1 blockchain that enforces programmable intellectual property rights and licenses at the protocol level, allowing people to legally register their intellectual property as a new financial asset worldwide.
Imagine applying this to decentralized social.
Suppose a video, such as "Finance Girl", is released on a platform using Web3 technology. This platform will convert the IP of the video into tokens and distribute these tokens to those who helped promote it in the early days of the video, such as early followers. In this way, early supporters not only help the spread of the video, but also get part of the benefits from the success of the video.
With a mechanism like this, you can think of social creators as similar to NFT collectibles or brands, with their early followers acting as their NFT community. This way, each creator will have a loyal following that helps spread their content across the internet, accelerating their success while directly participating in it. We're not just talking about financial gains, but also the non-monetary value of social capital from your favorite creators. For example, when "Finance Girl" performed on the same stage with David Guetta, you could get tickets.
Make community great again
Users need to become a priority again. In Web3, user priority has always been key, and if this feature is applied to social platforms, it can become a very powerful advantage. Network effects, that is, the added value brought by the growth of users on the platform, are the key to the success of social platforms. In short, paying attention to the needs and priorities of users can enhance the network effects of the platform and make the platform more successful.
The following is the current value distribution of Web2 and Web3 social platforms:
As Chris Dixon mentions in his recent book Read, Write, Own, in the social networking space, top platforms like Meta and TikTok control the majority of web traffic and advertising revenue. These platforms earn most of the value from advertisers, but most of the revenue is concentrated on these platforms, leaving creators and users with little return. Decentralized social platforms aim to change this, hoping to allow creators and users to benefit more directly from the value they generate, rather than being monopolized by these large platforms.
Currently, social media platforms often act as intermediaries, trading attention between advertisers and users. Platform operators control most of the value, and the fees paid by advertisers mainly flow to the platform rather than being directly distributed to creators or users. After breaking this monopoly, the distribution of value will be more fair, and revenue will be more directly distributed to creators and users, rather than being controlled only by platform operators.
Current social platforms maintain their market position by controlling network effects (such as the number of users and interactions), but this approach will become increasingly difficult. In the future, there may be many small social platforms focusing on specific areas, each of which attempts to obtain revenue from multiple channels, rather than letting one large platform control all value flows. This will lead to a diversification of social platforms, each focusing on different functions or services.
As long as social platform operators can effectively provide value to content creators (supply side) and advertisers or users (demand side), these platforms will operate successfully. Operators will act as a market role in this process and fairly obtain income from the transactions they facilitate. In other words, the platform will get a reasonable share of it.
We recommend that content creators distribute the revenue they earn on the platform to their most active fans. This means that content creators use their revenue to reward highly engaged viewers, thereby increasing their status in the social network. This practice makes fans feel valued and also helps content creators build a more loyal audience.
Status as the new Ponzi scheme
In today's society, personal social status (such as fame and influence) is more important than money. If a person has a high social status, he can make a lot of money through this status, and this way of making money is usually more sustainable. On the contrary, it is difficult to obtain the same level of recognition and fame with money alone.
Having social status brings opportunities and privileges that money can't buy, such as getting VIP seats to the Super Bowl, getting the last seat at a popular restaurant, and attracting the attention of a celebrity or politician.
If new social platforms can be built that allow creators to directly give back and reward their loyal fans, this approach can drive rapid growth in social capital. This growth effect is similar to the rapid accumulation of wealth in Ponzi schemes, but in this case, it refers to the accelerated growth of social capital.
Pudgy Penguins and Mr. Beast are two successful examples of how giving back and rewards can be used to build strong communities and brand influence.
Pudgy Penguins is a popular NFT project that has created a loyal community by returning value to NFT holders, which has enabled them to succeed not only in the Web3 world but also in the wider market.
Mr. Beast is an extremely popular YouTuber whose secret to success is to give the majority of his revenue back to his viewers. This includes reinvesting in his content to increase the entertainment value, or directly giving back to his viewers through giveaways. In this way, he strengthens the loyalty and engagement of his viewers.
If you want to build social influence from scratch, one of the most effective strategies is to give back and reward your community. This means that creators return a large portion of their revenue or profits to their loyal fans or supporters. Doing so can strengthen the relationship between creators and their audiences, increasing user engagement and support.
In this way, creators’ social influence and status continue to grow, while their loyal communities become stronger and more active.
Implementing this feedback mechanism in blockchain technology can help creators better build influence and even serve as a basis for cultivating and creating new influencers.
What is the key
We all have dreams of becoming a celebrity or getting a lot of attention, but the manifestation of this desire may vary from person to person.
Social media provides users with a platform to realize their dream of becoming a celebrity. People post content, tweet, and share on TikTok every day, all in the hope of vying for that chance to gain instant attention and become a celebrity.
On social media, users and content creators face fierce competition to attract attention and get recommended by algorithms. This competition process is not only very complicated, but also not transparent and often frustrating. Blockchain, with its open source nature, can provide a unique solution in this regard.
Imagine a social media platform where the rules of the algorithm are coded in the background of the system in a fixed and unchangeable way, and these rules are transparent and fair to all users and content creators. This platform not only displays these rules, but also provides analysis and data indicators about current hot trends, most popular content, etc. Combine this complex data with gamification mechanisms, and you will build an open and fair framework that helps users easily achieve virality and growth. If people don’t like your content, it means that the content itself needs to be improved, no other excuses.
While we have some criticisms of the current SocialFi market and believe that there are problems or shortcomings, we are very excited and looking forward to new application scenarios or new use cases that may emerge in the future.
The growth mechanisms of social networks have not changed fundamentally, but the introduction of Web3 elements can accelerate these growth processes and improve user retention. While we encourage entrepreneurs not to focus solely on economic incentives (such as money), tokenization and financialization mechanisms (such as the use of cryptocurrencies or tokens) can indeed drive social innovation and bring new impetus to the development of platforms.
We believe that the unique new experience of decentralized social platforms is the main difference between it and other crypto fields. Web3 technologies such as blockchain and decentralization have the potential to provide a better user experience. This potential can attract people who are not interested in the current crypto field.
This strategy can effectively kick-start user growth and ensure a smooth user experience while focusing on providing strong value. FantasyTop is a great example of a platform that took this approach and achieved rapid growth in the early stages. FantasyTop still has the potential to further grow its network if it can continue to expand its user base and drive engagement.
If we approach this strategy right, perhaps we can leverage these new experiences to attract a wider user base by leveraging the real value of ownership, decentralization, and new monetary flows as a distinct advantage.
