Introduction
At its core, the Social Finance (SocialFi) movement reimagines the dynamics between online content creators, users, and the platforms that support them. Over the years, the world of social media and content creation has consolidated amongst a few major players such as Facebook, YouTube, Instagram, 𝕏 (formerly Twitter), and now TikTok. For instance, Statista shows that Facebook boasts 3.03 billion monthly active users. Combined with the fact that a significant proportion of today’s youth in western countries as well as LATAM dream of becoming an influencer and content creator, it is no wonder that the competition in the space has increased, and with it have increased discussions over platforms’ algorithms, censorship, as well as profit-sharing practices. In addition, recent scandals of narrative manipulation such as the Twitter Files, and the repeated accusations of Facebook’s shady data-gathering practices have further cemented calls for change from both users and creators.
Most challenges with social media giants arise from their centralized and opaque structures. Creators are at the mercy of the platform they are on, as it can decide to arbitrarily suppress their content, as well as set the rules for monetization. For instance, if a Youtuber is unhappy with their compensation, or finds out their content is being suppressed, they are forced to comply with the platform's policies and guidelines, as there are few, if any, alternative platforms with a comparable user base. On top of that, creators are incentivized to create content that the platform’s algorithm is more likely to promote, as opposed to content they truly want to make.
The aim of this article is to explore how SocialFi addresses these concerns by decentralizing social media platforms, disintermediating user-creator dynamics, safeguarding data privacy, and financially empowering both creators and users who drive content and engagement.
Understanding SocialFi
The first step in understanding the SocialFi space is to learn about the various narratives that drive SocialFi projects. For the purposes of this research, we conducted a private interview with Maxime Gay, CEO of SiBorg, a social network focused on integrating Podcast and Twitter spaces with the Lens Protocol (see our case study), whilst ensuring users retain ownership of their data. In our discussion, he gave an overview of the largest SocialFi Narratives, which are helpful to understand the problems they are trying to address.
Community Growth & Engagement: As Maxime explained, the foremost goal of SocialFi is to stop audience fragmentation across platforms, such as having a separate audience on Twitter and Youtube. An example of a Web3 project that tackles this is Guild.xyz, which offers a single, platformless membership across various applications like Discord, Telegram, Twitter, and more, while maintaining privacy and promoting seamless interaction within a unified ecosystem. It uses blockchain to ‘token gate’ the community to those holding the community’s token or NFT. In practical terms, this means that rather than having a Twitter premium subscription or becoming a Patreon, community members have a single subscription directly with the creator which gives them access to all exclusive content across platforms.
Creator Monetization: Maxime also emphasizes SocialFi’s mission to financially empower creators through direct fan-to-creator monetization. Through SocialFi, creators can earn fair compensation for their work without intermediaries and gain independence from centralized platforms’ requirements and algorithms. Up until 2022, Facebook shared less than 1% of its ad revenue with creators, and TikTok, sensing changing winds, only recently set up an expanded profit-sharing program. However, this has so far been a disappointment, with approved creators earning mere cents per 1000s of views. Some Web3 projects that are tackling creator monetization are MadFi, which also facilitates brand deals through their profiles on the Lens Protocol. Another project is Paragraph, which similarly allows users to write Web3-powered newsletters and can token-gate their content.
Data Ownership: Whether creators and users own the content and data they generate, is often unclear in traditional social media platforms. SocialFi platforms use blockchain technology to give users control over their personal information and how it is shared. In practical terms, this means that the data is encrypted and stored on a decentralized network. Therefore, ownership of content and data generated on the blockchain is tethered to a unique identifier, in the form of an NFT or using smart contracts. This ensures that the creator's rights are preserved, and they retain control over the monetization of their data and content. Thereafter, only the user can grant permission for their data to be accessed or shared, rather than a centralized entity making those decisions. The most obvious project to mention is the Lens Protocol, which is a decentralized, blockchain-powered platform that allows users to create and control their own social graph, which is a representation of all their connections and interactions with users on the network. This social graph is portable, meaning it can be taken by the user across various applications and platforms that integrate with the Lens Protocol.
Social Tokenization: Finally, Maxime spoke of Social Tokenization. In a social context, it refers to the creation of digital tokens that represent ownership or a stake in a community or content created on social platforms. These tokens can be used for governance, access to exclusive content, or as a form of currency within the community. A famous example is FriendTech, which pioneered the concept of tokenized ‘Keys’ to create content that is tradable, and get logarithmically more expensive as the number of Keys sold by the creators increases. This aims to create smaller and more exclusive communities.
The SocialFi ecosystem
Community governance within SocialFi platforms, often directed by Decentralized Autonomous Organizations (DAOs), significantly deviates from the conventional social media governance model. This decentralized approach offers protection against arbitrary deplatforming. A prime example is CultivatorDAO, the first social DAO for open and decentralized content moderation. Content rejection is no longer in the hands of the arbitrary and porous judgment of a centralized entity, but in that of the community. Indeed, DAO members have been able to choose their DAO leaders who will be in charge of accepting or rejecting content. The DAO leaders maintain two critical lists: a 'spam' list and a 'verified' list, ensuring content quality and community standards.
SocialFi platforms integrate social tokens or in-app utility tokens, a concept borrowed from DeFi and GameFi. In SocialFi platforms, social tokens play a pivotal role in user engagement and monetization, rewarding activities like content creation with tokens that govern economic interaction. These tokens enable exclusive access to creator content and direct communication, enhancing user experience. This mechanism promotes genuine participation, as users spend tokens for actions like liking or sharing, aligning platform growth with active user involvement. Users are not passive participants but active contributors to the platform's economy. For instance, Sound.xyz, a marketplace that goes beyond a typical NFT platform, allowing artists to engage with their fans through exclusive experiences such as concerts, fan meetups, merchandise drops, and more.
Additionally, platforms like BitClout experiment with a novel subscription model, allowing users to invest in creator coins, effectively subscribing to and profiting from a creator's social influence. Advertising also plays a role in platforms like Mirror, where content creators can earn through ad revenues, sharing profits more equitably compared to traditional social media models. This approach not only drives user activity but also ensures a fair distribution of value, aligning the platform's success with the welfare of its community.
Web2 decentralized social media competition
The recent Web3 SocialFi movement is not the first attempt at the decentralization of social media. One Web2 example is Mastodon, a German non-profit decentralized social media platform created in 2016. Utilizing the open ActivityPub protocol, Mastodon allows anyone to use their software to create websites, or "instances," that can be shaped and moderated in any way. Thereafter, unlike traditional social media, Mastodon instances can interconnect, enabling users to follow and interact across different servers with the same account. This federation creates a diverse digital ecosystem, where each server can have its own moderation policies and community culture yet remains part of a larger interconnected network known as the "fediverse". Mastodon's growth was hindered by widespread excessive moderation, a complicated user interface, and the difficulty of migrating accounts between instances.
However, the arrival of Nostr, a decentralized Web2 protocol, has fixed many of Mastodon’s data-transfer issues. Nostr comprises two essential elements: clients and relays. Users interact with the network through a client, while anyone can run a relay, which serves as the infrastructure for data storage and retrieval. Each user is uniquely identified by a public key, and every post they make is cryptographically signed to ensure authenticity, with clients responsible for validating these signatures. Users have the freedom to choose which relays they fetch data from and to which they publish their content. Unlike traditional social networks, relays operate independently, connecting users directly without inter-relay communication. For instance, to follow another user, one simply configures their client to request posts associated with that user's public key from their selected relays. This kind of Web2 federated social media platforms could pose a serious threat to truly Web3 blockchain-based platforms, due to their efficiency and simplicity.
Another Web2 project that can rival Web2 SocialFi is Threads, Meta’s personal Twitter competitor. Whilst discussing the roadmap of the project, Zuckerberg explained in an interview to The Verge that the decentralization of social media is not only ‘inevitable’, but ‘preferable’. As he put it, users feel better if they know they aren’t locked into a single platform, and that the more content can flow, the better all services become. Thereafter, he explained how the idea is to hook Threads up to the decentralized protocol ActivityPub, and to “make people run their own fiefdoms”, and that the ultimate goal of Threads is to become the platform that gathers the functionalities of all major platforms such as news-sharing, micro-blogging, and all other forms of content production.
Considering the existing user base across Meta’s multiple platforms, as well as their vast resources and expertise, every Web3 project should be paying attention and learn from these rising Web2 competitors. Moreover, unlike many Web3 platforms that rely on blockchain, protocols like Nostr achieve decentralization using a simple network of independent servers or relays. This approach circumvents the need for blockchain's complex infrastructure, potentially drawing faster adoption due to its simplicity and efficiency. However, Web3's edge lies in its introduction of innovative governance through DAOs and its support for fully cross-chain and cross-platform communities, unlike Web2's federated protocols which remain under a central authority like Mastodon or Threads.
Opportunities and Challenges
The period from 2020 to 2022 in the DeFi market, marked by various challenges (76% decline of TVL in dollar terms in 2022), has left the DeFi space searching for new narratives, like SocialFi, to potentially drive fresh inflows and rejuvenate the sector.
This new chapter in DeFi's evolution is marked by the integration of social elements, which holds huge potential for growth: SocialFi has the potential to attract a more diverse audience. For instance, Lens Protocol, a decentralized social graph, has reported more than 200,000 minted profiles, up from 125,000 in a matter of just a couple of days after going permissionless at the end of February, reflecting the growing interest in this sector (especially as Lens is still in closed Beta). This example highlights the growing appeal of SocialFi platforms, which are beginning to bridge the gap between everyday social media engagement and financial activities, reaching an audience that traditional DeFi platforms have not yet fully captured.
The key challenge for SocialFi projects lies in aligning their user interfaces (UI) with web2 social media expectations. Often, a disconnect in UI design impedes user adoption and engagement. For example, many projects who focus on the monetization and tokenization of content do not spend enough time on making their platforms accessible to non-crypto-native users, which risks making more convenient Web2 platforms seem appealing by comparison.
Furthermore, while some SocialFi platforms boast of handling significant user activities, they still lag behind established social media giants in terms of their systems throughput capacity. That is the big challenge for SocialFi, to manage the sheer magnitude of data generated by social platforms like Twitter, and whether blockchains can keep up with it.
Some solutions such as DeSo emerged earlier. Deso is a blockchain layer that is being created for SocialFi apps to be built on, claims it can scale better than most of the existing layer-1 chains as they are purpose-built for SocialFi use cases, by using methods such as indexing, block size management, warp sync and, sharding.
Another solution could be the one followed by the Lens protocol, which has switched to a new optimistic layer 3, called Momoka, leverages the scalability and reduced fee benefits of Optimistic Rollups by processing transactions off-chain with the advanced features of Layer 3. By using the Polygon EVM chain for transaction proofs, it enhances UI/UX user experience.
Case Study - Lens protocol
The Lens Protocol, functioning as a Web3 social graph on the Polygon blockchain, extends the concept of a social graph, a term popularized in 2008 by Mark Zuckerberg, for visually mapping social connections and patterns. Unlike its Web2 counterpart, a Web3 social graph like Lens prioritizes user data control and privacy protection, marking a significant evolution in how social interactions are managed and secured online.
The Lens Protocol utilizes ERC721 NFTs for a three-tiered tokenization system: the Lens Hub contract for initial profile NFT creation (each user profile is minted as a dynamic NFT), Follow NFT contracts (deployed upon a profile's first follow to represent follower positions), and Handles NFTs (allowing users to link and unlink them to their profiles).
Beyond technical features, Lens Protocol stands out for its focus on interoperability and modularity. By offering a user-owned, open social graph that any application can integrate with, Lens Protocol enables users to carry their data across various applications built on its foundation. Within its "Lensverse" ecosystem, over a hundred initiatives have already been launched. Currently managed by a multisig, Lens Protocol is transitioning to a broader DAO for developing and voting on new features and modules.
Since its inception, Lens Protocol has garnered 125,964 profiles, with users showing significant engagement averaging 104 followed accounts, 13 comments, 32 collected posts, and 31 mirrored posts. Collecting a post on Lens Protocol results in it being minted as an NFT and stored in the user's wallet, with the terms of acquisition determined by the creator.
We must qualify the platform's strong popularity in March-April 2023, as this period coincides with rumors of a potential airdrop for the protocol, which has attracted a great deal of speculation. To attract users in the long term, the protocol needs to focus on creating an interface at least as user-friendly as Web2 social networks. You can read more about Lens Protocol in our focused piece.
Case Study - Phaver
Launched on the Lens Protocol in May 2022, Phaver is a SocialFi platform that merges the best of Web2 and Web3 technologies to create a unique social media experience, often referred to as a Web 2.5 application. Phaver integrates with both Lens and CyberConnect, offering users a seamless way to access and build their digital identity across multiple social graphs.
The platform's approach to social media is innovative, focusing on user empowerment and engagement rather than exploiting user data for profit. Phaver gamifies the social media experience by letting users earn rewards through in-app activities and promoting quality content creation and interaction. This model is a departure from the norm and aims to build a community where interests are aligned around genuine engagement rather than superficial metrics.
Phaver has forged significant collaborations, for example with Pudgy Penguins, Mocaverse, and SheFi, all of which are making strides in the Web3 domain through NFTs and gaming initiatives. Moreover, the platform has had a tangible impact on the NFT market and projects have sometimes experienced significant increases in their floor prices shortly after inclusion into Phaver Cred system. This success has led users to actively monitor Phaver's supported NFTs list for potential investment opportunities.
Phaver has seen significant adoption recently, evidenced by its notable achievements and partnerships. With over 300,000 unique installs, Phaver is gaining traction among people seeking a decentralized social experience. It boasts over 15,000 validated daily active unique users, with engagement levels surpassing traditional Web2 platforms. In particular, users in South Korea are highly engaged, spending an average of six hours a week on Phaver.
Conclusion
The SocialFi landscape is on the cusp of revolutionizing our digital interactions, driven by a collective desire for a more equitable, transparent, and decentralized social media ecosystem. By decentralizing control, SocialFi projects like the Lens Protocol are addressing the monopolistic tendencies of major players like Facebook and YouTube, offering more equitable profit-sharing, content control, and true ownership. Projects like Guild.xyz and Lens Protocol exemplify this shift, providing cross-platform interoperability and user-centric data rights. However, the rise of Web2 decentralized platforms like Nostr and Meta's Threads underscores a significant challenge for Web3 SocialFi. These Web2 models, with their simpler and more efficient structures, pose a direct threat to the blockchain-based SocialFi approach. While Web3 offers innovative governance through DAOs and cross-chain capabilities, it must now contend with the simplicity and user familiarity of Web2 decentralized social media. SocialFi stands at the forefront of a social media revolution, its ability to integrate user-centric, decentralized models with intuitive, accessible interfaces will determine its future in the ever-evolving digital landscape.