Opportunities and Challenges: Exploring the Web3 Social Sector
Author: Juliet Tang, Investment Analyst at Huobi Ventures
Summary
As Web3 technology and infrastructure develop, the Web3 social sector is facing new opportunities. Anonymity, censorship resistance, and user data ownership, among other features, are enticing users and developers to explore novel social tools. Some developers and investors have ventured into the sector, giving rise to hundreds of Web3 social projects spanning domains like social interaction, identity, NFTs, DAOs, and fan engagement. Notably, tools like CyberConnect and Lens Protocol have garnered large user bases and massive attention. In this article, we delve into the developments of the Web3 social sector and the distinctive features of Web3 social products. We also analyze several leading Web3 social projects and examine the risks and challenges facing the sector.
Why should we pay attention to the social sector?
The cryptocurrency domain has been considered an interdisciplinary field involving computer science, finance, cryptography, mathematics, and more. However, its adoption on a global scale is yet to be achieved, due to its short existence, inadequate infrastructure, and varying regulatory standards, as well as a steep learning curve and associated costs. As smart contract public chains like Ethereum improve, on-chain DApps have witnessed a boom since 2020. So far, there are more than 40 million DeFi user addresses, as shown in the figure below. Defi led the way in bringing users to on-chain interactions, using realistic, convenient use cases to drive on-chain economy and foster a range of on-chain Degens. In 2021, blockchain games and NFTs began to usher in a new wave of trends, acquiring numerous new Web3 users with novel gameplays, Ponzi tokenomics designs[1], and a diverse value system. Specifically, blockchain games, by allowing users to convert in-game assets into real-world value, have attracted Web2 gamers and low-income individuals in developing countries. NFTs, with attributes of identity, collectibility, and brand value, have drawn in collectors, art lovers, and traditional brand owners.
[1] Ponzi: A Ponzi scheme is a fraudulent approach commonly seen in the financial sector, using funds collected from new investors as quick profits to pay existing investors. It lures victims into investing by promising high returns. As more people join the scheme, it often leads to a financial bubble that eventually bursts when the funds become insufficient. Subsequently, many later investors will suffer financial losses.
Total DeFi User Addresses Across All Chains Over Time
Since 2022, the crypto market has experienced a prolonged bearish sentiment. The once-prominent games and NFTs have waned in popularity, and the Ponzi-like economy has collapsed due to inadequate increments, resulting in a stagnation of Web3 user growth. Despite ongoing innovations, as well as persistent efforts to explore new possibilities in infrastructure, zero-knowledge proofs, payment, identity, and DeFi 2.0, a limited user base remains an essential challenge for the development of Web3. Amid the lingering bearish market, many ecosystems find themselves in an awkward situation where projects are in place without enough real users. The number of real on-chain users, excluding airdrop studios and users with multiple wallets, is probably not encouraging.
To attract new users, Web3 needs to offer more use cases and create various gameplays. Currently, the social sector is anticipated to be the next catalyst for driving Web3 user growth. This sector has shown enormous potential in the traditional internet space, leveraging its massive user base and commercial value to the fullest. From MSN to Facebook, Instagram, and now TikTok, each technological upgrade has spurred the rise of new internet giants and created numerous job opportunities throughout the industry chain. With growing awareness of the privacy and commercial value of data ownership, more voices are advocating for users to control their social information and data through Web3 to enjoy the value of identity and behavioral data. For this reason, exploring Web3 social projects is expected to be one of the most promising and profitable topics in the coming period.
As ecosystems like Cyber Connect and Lens Protocol mature, the Web 3 social sector is growing more robust. Although in an early stage of a boom, it has garnered market attention with some eye-catching projects. For instance, Elon Musk, one of the most influential figures in crypto, has captured global focus by endorsing Dogecoin and incorporating Bitcoin into Tesla’s official documentation. Despite his statement that Twitter will never issue tokens, topics such as social identity and token rewards have been widely discussed. Moreover, events like Lens Protocol’s successful fundraising of $15 million, the issuance of NFTs by internet giants like Instagram, and the listing of CYBER and other tokens on major exchanges have all contributed to the growth of the Web3 social sector.
Characteristics of the Web3 social sector
There isn’t a universal definition of what Web3 social is, but we can put products involving information publication and exchange among individuals and user characterization into this field. Based on current developments, these mainly include social public chains, social graphs, social identities, social applications, and service tools.
In the Web2 realm, traditional social media platforms like Twitter, Instagram, and TikTok have amassed a significant user base and evolved mature and diverse business models. However, the necessity and feasibility of developing Web3 social need validation. Unlike Web2, Web3 has a limited user base and is still in the stage of technological exploration. In this article, we believe that the key factors for a flourishing Web3 social sector include:
1. Anonymity and censorship resistance
One of the most prominent advantages of Web3 social, compared to Web2 social, is its anonymity and censorship resistance. This feature has been proven a user need. In Web2, as data is controlled by centralized institutions, users can be arbitrarily censored and forced to delete or alter their posts on social media. Essentially, Web2 social is a social model that operates under surveillance, leaving users unable to protect their privacy. On the other hand, the decentralized Web3 social inherently safeguards user privacy and resists centralized institutional censorship, satisfying users’ need for privacy protection and security.
2. User data ownership
In the Web2 social model, user data is owned by centralized platforms. Leveraging user data, these platforms create user profiles to analyze user behavior for targeted advertisements and products. This approach maximizes traffic monetization while highlighting the value of data for business analysis. In Web3, users can gain commercial value from their data by controlling data ownership. From a user perspective, projects that facilitate data value monetization are appealing. In fact, this model has made some gains in Web2. For instance, Pinduoduo, a Chinese e-commerce platform known for its competitively priced products, offers cash rewards for watching videos or inviting friends to join activities (a method of acquiring new users through social networks), enabling users to monetize their traffic. So far, the Web3 space has seen several attempts to return data ownership to users, with projects like Bitcoin Lightning Network-based Nostra, Polygon-based Lens, and multi-chain protocol CyberConnect. We believe that with diverse and volatile tokens and a rich design for the token economy, monetizing data ownership can generate numerous engaging gameplays, growing wealth and new users more effectively than the previous bullish market for blockchain games.
3. Easy to use
One of the elements of social projects is enabling the abundance and free flow of information within a community, and abundant information relies on a large user base. Attracting a large number of users is the most notable challenge and opportunity facing Web3 social projects. A critical factor hindering the development of the crypto sector is its limited user base. First, engaging in the industry requires a steep learning curve — users must acquire computer and crypto knowledge to be involved in on-chain interactions. Second, today’s crypto projects are more complicated than their Web2 counterparts. Taking EOA wallets as an example, user experience is undermined by issues like complex seed phrases and storage methods, phishing and private key theft risks, and software updates and compatibility. This has prevented numerous Web2 users from entering the crypto world. On the other hand, this also means than any projects that are easy to use will attract a massive influx of users.
4. Composability
In Web2 social, the presence of centralized institutions has resulted in massive data silos. Internet giants formed by these data silos control data access and pricing, requiring other projects to ask for permission to use data or build applications upon the data. Additionally, incompatibility and potential competition among these data silos hinder the interoperability of many Web2 applications, leaving users to register new accounts and re-accumulate information and data when switching platforms. We believe that an ideal Web3 social product has the potential to eliminate data silos, as demonstrated by the user portrait descriptions provided by POAP and ENS. We expect simpler, easier standard protocols to emerge, allowing access to most protocols while empowering users with convenient control over data ownership. This area is one of the key directions that DID explores.
Overview of top projects
Based on project types, social projects mainly fall into three categories: social graphs, social applications, and tool projects.
Social graphs
Social graphs serve as infrastructure in Web3 social, providing common standards and data sources for other application projects. A social graph should be rich in data sources, extensive in composability, and easy to use. For this reason, there is no need to build standalone new public chain projects or native projects on less popular public chains, as they create isolation from mature ecosystems. Currently, the mainstream option for developing a social graph is to build universal standards for social identities on mature chains. Prominent projects include Lens Protocol, CyberConnect, and RSS3.
CyberConnect
CyberConnect is a multi-chain social graph that validates and accumulates user interaction data. It provides users with personal profiles, social graphs, and smart contract wallets, and offers DApp developers standard API data interfaces for migrating user data across DApps. Having connected with Polygon, Linea, and Optimism, CyberConnect will further its integration with more networks like Arbiturm, which will help increase its user base. As of August 8, 2023, CyberConnect has 368,000 user accounts, 738,000 user operations, and over 1.25 million user profiles, as shown in the figure below.
User Data of CyberConnect
Despite the current weak market performance, CyberConnect has maintained DAU of over 10,000, indicating large overall traffic.
Traffic Data of CyberConnect
Lens Protocol
Lens Protocol, developed by the renowned DeFi lending project AAVE’s team members, is a Polygon-based social graph protocol that allows anyone to create non-custodial social information and build new social DApps. Through their wallets, users can create their own social profiles to engage in social interactions. They can also build interactive DApps based on Lens (they can log in to Lense for interactions, and interaction records will also be stored in their Lens social profiles).
The image below shows projects within the Lens ecosystem. Over 100 projects have been built, including social, play-to-earn, streaming, DAO tools, ad management, information sharing, online paid knowledge, and lottery DApps. While still in an early stage, these projects exhibit both quantity and variety, rendering Lens even more abundant than some public chains. In general, this on-chain social ecosystem is highly economically friendly to creators.
Some Projects in the Lens Protocol Ecosystem
More than 110,000 addresses have obtained their profiles. According to the figures below, Lens has a user count of over 360,000 and a transaction count of 21.93 million. Both peaked in February 2023, indicating involvement from a large number of individual users or airdrop studios. Currently, daily on-chain transactions range between 15,000 and 20,000, with 3,000 to 50,000 wallet addresses participating in daily interactions. Such a large active user base amid the bearish sentiment reflects sound user data performance and growth potential in the Web3 social sector.
User Data of Lens Protocol
Social graphs form the infrastructure and common tools for the entire social sector. Universal, simple, and convenient social graphs help flatten users’ learning curves and reduce the barriers between DApps while accumulating more users and data. The Polygon-based Lens Protocol focuses on building its own social ecosystem. By contrast, CyberConnect, instead of creating a content platform and ecosystem, supports multi-chains and interactions with various applications. It is also actively exploring ways to attract Web2 users through wallets, and prioritizing open social profiles. Both projects are leading in the social sector, which could experience a boom due to the progress of Lens Protocol and the introduction of more of its projects.
Social Applications
Farcaster
Farcaster, created by Dan Romero, a former executive at Coinbase, is a decentralized social media platform built on Ethereum and aims to compete with Twitter. It is currently in the beta testing phase. Farcaster enables Web2-like fast and low-cost decentralized social experience by creating and storing on-chain user identities while storing other information in off-chain databases (or “Hubs”). Additionally, Farcaster ensures decentralization by allowing users to use a self-custodial model for sending and receiving messages without gateways. The ecosystem now includes nearly 20 derivative projects, spanning data analysis, image enhancement, trending topics, related topics, and search engines.
As of August 9, 2023, Farcaster has over 13,000 wallet addresses, including those registered by crypto degens like Vitalik Buterin. As an independent social application, it boasts decent user numbers and engagement — there was a 2.2% growth in users and 2,500 casts were posted in the past seven days.
On top of decentralized anonymity, driving Web2 users from Twitter to Farcaster remains a research priority for the platform’s projects.
User Data of Farcaster
Nostr
Nostr is a decentralized open-source social transmission protocol that allows developers to build DApps. Without any centralized servers, Nostr transmits messages through a design of client and relay nodes. Unlike Web2 social, the protocol achieves full decentralization, enabling censorship resistance and privacy protection. Damus, a Twitter-like social product built on Nostr, features a decentralized, anonymous, and ads-free experience. Although still in an early stage, the product has been endorsed and backed by Jack Dorsey, the co-founder of Twitter.
As a fully open, anonymous, and censorship-resistant decentralized product, Damus is more competitive than traditional social products in terms of privacy security. It has a defined market and target audience. However, to attract a broader base of Web2 users, it may need new product design and features.
Friend.Tech
Friend.Tech, invested by Paradigm, is a social application deployed on BASE, a Coinbase-affiliated L2 blockchain. Like traditional fan token/creator economy projects, the application offers creators services such as fan communities and token issuance. Users join a creator’s community by holding tokens issued by the creator. It has become a smash hit since its launch on August 10. As of August 29, as shown in the chart, in less than 20 days since its release, it has garnered over 120,000 registered addresses, with more than 20,000 active addresses (users who access the user space).
For each transaction, users need to pay a 10% fee, including 5% for the creator and 5% for the protocol. As depicted in the chart below, the protocol has accumulated revenue of over $4 million as of August 28, 2023.
The rapid surge of Friend.Tech has captured attention and triggered speculations about the social sector. People are curious about the product’s approach that enabled its achievements. In this article, we believe that although Friend.Tech follows the existing design of social products and token models, there are reasons behind such a success, including:
1. Ponzi-like tokenomics
Fan tokens are mainly designed in two ways. One is the issuance of fan tokens. Users gain entry to a creator’s community by holding a certain amount of fan tokens. These tokens follow a market-based pricing mechanism and offer features like buybacks, burns, profit sharing, and staking. The other is the issuance of fan NFTs. Users can hold fan NFTs to enter a creator’s community. While also being priced on a market basis, fan NFTs may offer new token mapping, new NFT airdrops, or other privileges.
In the token economy preceding Friend.Tech, fans buy or sell tokens solely based on their admiration for the creator, rather than the fluctuation of token prices. However, Friend.Tech introduced a combination of referral mechanism and Ponzi-like design to inject vitality into the fan token economy. According to Friend.Tech, a point will be distributed within six months. Although specific rules are still unknown, user points are broadly believed to be associated with token airdrops. The fusion of this strategy and the referral mechanism encourages users to invite their friends to join Friend.Tech. It also spurs them to buy shares in various creators to generate trading fees and data. Like Blur’s airdrop strategy, Friend.Tech’s approach attracts users by offering long-term point incentives and airdrop expectations. Meanwhile, the extended timeframe enhances customer loyalty, enabling Friend.Tech to maintain its market share after airdrops conclude.
Friend.Tech has not disclosed the calculations of its tokenomics. However, according to Laurence Day’s widely accepted estimation of the model, as depicted in the chart below, Friend.Tech’s fan tokens follow a price curve represented by P = supply ^ 2 / 16,000. Under this model, price fluctuations are exponential, in both upward and downward directions. As early investors have the opportunity to enjoy remarkable profits, such a Ponzi-like design will continue to drive prices up until a balance is reached between buyers and sellers. This will attract more speculative participants. On the other hand, it also implies that the last few investors who haven’t profited will find themselves holding valuable tokens without a market to sell. Alternatively, they can try to recover partial costs by continuously reducing prices until a new market equilibrium is reached. However, when a rapidly rising price suddenly experiences a sharp decline, it often triggers panic selling, resulting in a steep price drop. In a nutshell, the incorporation of a Ponzi economy is one of the most critical reasons for Friend.Tech’s rapid surge. A similar design was seen in the Meme project XEN, where a Ponzi-like token economy and dividend incentives for early users quickly sparked a market frenzy.
2. Advantages of BASE’s early stage
Initially built on other blockchains, Friend.Tech’s launch and popularity are closely related to the excitement around BASE and the L2 space. Since the launch of Arbitrum in early 2023, the L2 space has delivered impressive performance amid a bearish sentiment. The subsequent Zksync ecosystem, OP Stack, and BASE have fueled market enthusiasm. Anticipated launches and token issuance of Starknet, Scroll, and Zksync later this year, along with the upcoming Cancun upgrade, make L2 the most crucial and promising sector in the crypto world for 2023. Moreover, BASE is affiliated with Coinbase, a prominent crypto exchange. By launching on BASE during its early stage, Friend.Tech strategically capitalized on the market’s focus and timing advantages.
3. Endorsement by Paradigm
Friend.Tech earned substantial credibility by being backed by Paradigm, a top-tier investment fund for crypto. Without a fully developed website (only a rough beta version), whitepapers, or explanatory documents, the project still managed to gain extensive trust and enthusiasm. Additionally, its Blur-like point incentive mechanism was possibly designed under the guidance of Paradigm.
In conclusion, while Friend.Tech follows a conventional product mechanism, it takes bolder approaches in tokenomics design, user acquisition, and marketing. In the short term, Friend.Tech might replicate Blur’s path to user growth. However, the project’s long-term performance as a social product needs further examination after it is fully launched.
Tool projects
Most social tools are designed to serve DApp projects. For example, Lens Protocol has Lenscan for browsing data and LensDAO for organization and community management; Farcaster has Alertcaster for information alerts and FarQuest for launching surveys. Social tools also comprise various general auxiliary tools, such as Debank Hi for social promotion and Utopia for DAO treasury governance, as well as tools for NFT design, account management, and wallet management.
In a nutshell, the social sector is a field where developers can unleash their creativity for applications. Apart from social graphs and application tools, social applications in particular, various types of social platforms, follower platforms, and streaming platforms are emerging. As the sector is still in its infancy, the enthusiasm and efforts from developers and investors will continuously help it grow.
Risks and challenges
While the crypto social sector has attracted many developers and investors, it’s essential to recognize the risks and challenges facing the sector. These chiefly involve technology, user growth, and compliance.
Technological challenges
As social products are application-focused, their development relies on mature infrastructure and technologies. A growing user base will raise more and higher requirements for social products, whose progress needs resolving issues like data storage, cross-chain information transmission, information transmission cost, and network congestion. However, today’s infrastructure cannot accommodate the emergence of Web2-scale social software.
User growth
Apart from anonymity and censorship resistance, why would Web2 users move to Web3 social applications? Apparently, not all users have extremely high requirements for privacy protection. Numerous users fulfill their social needs on centralized social platforms. How can Web3 social products acquire more newcomers, except for these users? Should they focus solely on a privacy-conscious audience? If using economic incentives, how should they design the model to avoid economic loopholes or Ponzi-like pitfalls? Although Web3 social has garnered decent market attention and traffic, this excitement remains within the crypto community. Therefore, whether to address existing issues or create new features and demands is the key question for Web3 social products to increase their user base.
Compliance
Web3 social products have three major features distinguishing them from their Web2 rivals. First, Web3 products are decentralized, censorship-resistant, and privacy-protected. Second, users own their data. Third, users gain the benefits from their data ownership. Nonetheless, these selling points may become risks. Web3 products are anticipated to attract illegal and illicit practitioners while capturing the attention of regulatory agencies. With a maturing sector and a growing user base, developer security and potential regulatory inquiries, among other issues, need to be considered in advance.
Conclusion
Still in its early stage, the Web3 social sector relies on the development of infrastructure, including, but not limited to, cross-chain information transmission, data storage, lower transaction cost, and compliance. Today’s social products encompass social graphs, social tools, and social applications. Social graphs form the foundational layer, and social applications are the largest in quantity and cover the most categories. Currently, a significant number of developers are experimenting with Web3 social product development, and investors start putting money into the sector. Growing market interest is demonstrated by the launch of CYBER tokens as well as Twitter’s rebranding and ad revenue sharing model. Despite these opportunities, it’s necessary to recognize the challenges facing Web3 social, including immature infrastructure, user growth, and compliance. Overall, we believe the Web3 social sector shows promise in terms of its prospects, trends, and market enthusiasm. With improved infrastructure and growing projects, investors, and tokens, we are optimistic about the sector’s investment potential and future.
References
Web3 Social: Road to Mass Adoption (binance.com)
https://messari.io/report/web3-social-usage-and-engagement
https://mpost.io/web3-fundraising-report-for-q2-2023-trends-in-gaming-and-social-network/
https://medium.com/@Cobo_Global/socialfi-fdb821e1e7da
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