Clubhouse, we all remember its golden era. January 2021, Corona pandemic, the Clubhouse app is in everyone’s ears – quite literally. It shot to the top of the app charts with its audio-based chat rooms. Initially exclusive to iPhone users and by invitation only, it created a buzz where invites were even being raffled and sold. But as quickly as Clubhouse soared, it fizzled out just as fast.

Fast forward to 2024, and the SocialFi space feels like it’s having a new Clubhouse moment every other week. New and exciting SocialFi apps pop up regularly. The two most prominent ones recently? Friendtech and FantasyTop. While some people still use and play them, they struggle with sustainability. Why?

As Eugene Wei writes in Status as a Service, a successful social network relies on three core pillars:

• The potential to accumulate social capital aka status
• The measure by which people are entertained on the platform
• The utility, which we describe as the general practical value that people can extract

Initially, status on social platforms was mostly earned through “proof of work,” where those who added value became the network’s elite. However, SocialFi platforms like Friendtech and co have replaced practical value with financial incentives, leading to problematic dynamics.

In October 2023, Friendtech boasted over 70,000 daily active users—a number that plummeted to just around 400 today. Let’s reexamine the three pillars and see where Friendtech went wrong. Initially, users gained status by holding keys and being in exclusive, albeit expensive, groups. The dopamine hits were there as people saw their investments multiply overnight. However, the third pillar—practical value—was missing. The primary use case was speculation, with users hoping to increase their portfolio value and farm for an airdrop. Interaction with favorite creators was an afterthought for most.

When key prices dropped, the dopamine disappeared, and the practical value wasn’t enough to keep users engaged. Successful creators found managing another account burdensome, and as fees dwindled, their engagement waned, causing the platform to falter.

FantasyTop followed a similar path. It started strong with five-digit DAUs in April 2024 but now hovers around 2-3k DAUs.

Unlike Friendtech, FantasyTop is more of a game with social features, akin to fantasy sports like fantasy football. Speculation drove initial interest, with rising card prices and creators focusing on getting good scores. But as prices fell and fees vanished, interest dropped. Currently, FantasyTop is pivoting to a fantasy sports app with features reminiscent of DraftKings, hoping to regain users. For now, most users stay for potential airdrops.

The core issue with these apps, and SocialFi in general, is their heavy reliance on financial incentives. As these incentives diminish, so does user participation, creating a downward spiral. We’ve seen this pattern with many prominent examples outside of SocialFi as well, such as Axie Infinity, Stepn, and others. People tend to stick with established platforms because financial incentives should be a feature, not the main driver, with utility serving as the leading pillar.

On the flip side, Orb and Warpcast are dapps targeting the web3 ideals of ownership and decentralization. Unlike mainstream social media giants, these platforms prioritize giving users control over their content. At first glance, they seem like the future of social networking. But if we look closer, they face a significant challenge: the lack of practical utility. While they theoretically could match Instagram and Twitter in entertainment value with the right network effects, they don’t offer much more.

Think about a typical 15-year-old girl using social media. She doesn’t ponder whether she truly owns her pictures or words. Instead, she’s focused on attention, likes, interactions, and following her role models. Ownership and decentralization are far from her mind.

As Peter Thiel might put it, from a social experience perspective, current forms of ownership and decentralization don’t transform the user experience from 0 to 1, nor do they make it ten times better. Instead, these ideals offer marginal improvements. While they may appeal to tech enthusiasts, they lack the revolutionary pull needed to convince the average user to leave familiar platforms.

The current status of SocialFi apps is challenging. They initially rely on speculation to drive capital and user inflow, which remains an unavoidable element for growth but is transitory. While decentralization is important, users prioritize what the product has to offer. For long-term sustainability, these networks need to develop enough value to retain users beyond initial monetary games.

To reach a vast user base, crypto must transition from purely financialized products to those that engage the attention economy. SocialFi can become one of the biggest verticals if we implement speculation as a fun addition, not a necessity, and exit the Web3 bubble to capture a broader mindshare. How, you ask?

Thinking outside the crypto bubble while incorporating Web3

To understand the implications for SocialFi, let’s first examine the dynamics of Web2:

Traditional social media, undeniably one of the most utilized aspects of the internet, succeeds through an obvious flywheel. Social innovation - new use cases that offer real value - often goes viral quickly, leading to the emergence of new KOLs. This chance for virality attracts a large number of users, driven by the hope of fame and attention.

The dopamine rush from engagement, likes, and impressions - probably the most consumed drug of the 21st century.

This influx of users then draws existing KOLs, who are motivated by both the opportunity to reach a new audience and the fear of becoming irrelevant. This, in turn, lends more credibility to the platform, accelerating user onboarding. As this positive feedback loop continues, the network effects strengthen, creating a moat and increasing user stickiness.

However, as users’ attention spans shorten and their patience wanes, platform operators face significant pressure to evolve, ideally leading to further social innovation and restarting the cycle. Instagram, we all remember its early days. It started out as a simple tool to capture, edit, and share images with your followers. Quickly, it became a staple on everyone’s phone. But like any successful platform, Instagram had to evolve to stay relevant.

In 2016, driven by the relentless surge in Snapchat’s Stories popularity, Instagram faced mounting pressure to adapt. Responding to this competitive threat, Instagram launched its own version, not just mimicking the feature but even adopting the same name. This strategic move was a direct effort to retain user engagement and stay relevant in the dynamic social media landscape.

And this was just the beginning. They soon integrated an algorithmic feed to help users discover content more easily and capture their attention even more efficiently. Not long after, Reels emerged as a direct response to TikTok’s explosive popularity.

The message from Instagram’s evolution is clear: Copy and bundle innovation of others rather than being left behind.

So, what does this mean for SocialFi?

Speculation and financialization are surely interesting features of SocialFi but shouldn’t be the primary USP. Instead, the value proposition should focus on social innovation and new use cases, which kickstart the flywheel.

The critical question is: how can we use Web3 elements to create new, exciting social experiences that challenge Meta, TikTok, and X?

Obviously, we don’t have the answer to that. If we did, we wouldn’t be sitting here telling you all about it but be heads-down building instead to compete with Zuck and Elon.

While we don’t have all the answers, we have ideas that could inspire builders to develop novel social use cases.

Attention as a New Financial Asset

In Web3, we’re great at creating new financial assets. Right now, social media is a battlefield for attention. Content is growing exponentially while attention spans are shrinking, making attention a scarce asset. Attention is represented by tools such as likes, comments, follows, impressions, and time spent on the platform. However, these tools are highly inflationary and currently available in unlimited quantities.

So, even though attention is scarce, it becomes increasingly diluted due to the unlimited abundance of attention tools. As the amount of attention per tool decreases, so does the quality.

Imagine Web3 enabling the tokenization of these tools to make them scarce or at least anti-inflationary assets, with decentralized social platforms as their marketplaces. Likes, comments, and follows could become kind of attention tokens, carefully distributed to users, which eventually redistribute them to their favorite creators. This would not only encourage users to be more selective about curating their feeds, but also motivate creators to produce high-quality content.

According to the three key pillars of Eugene Wei, this would shift entertainment towards more utility. The overall ratio of attention per piece of content would increase, potentially attracting large advertisers seeking quality engagement.

Or imagine even followers themselves as financial assets, with different values based on their social graph. If you manage that a high-profile user, may it be Vitalik or Ansem, follows you, you could sell this rare following “voucher” to someone willing to pay for his attention.

While these ideas are obviously abstract and need refinement, it illustrates the potential direction.

More practical use cases could involve tokenizing the intellectual property (IP) of content. Coinbase recently highlighted this in their new “Mister Miggles” campaign, which addresses the current problems in the creator economy and urges everyone to not only create but also consume on-chain.

Story Network is taking this idea even further. They are developing a new Layer 1 blockchain that enforces programmable IP and licensing at the protocol level, allowing people to legally register their IP as a new financial asset anywhere in the world.

Imagine applying this to decentralized social.

Take the Man in Finance girl for example that went crazily viral all over the world. Imagine this video would have been posted on a platform that has Web3 tech running in the backend that directly tokenizes the IP of it and for example distributes part of it to the people who have helped make it go viral in the first place, such as their early followers.

With mechanisms like these, you can think of social creators as similar to NFT collections or brands, with their early followers acting as their NFT community. This way, every creator would have a loyal, incentivized super-following that helps distribute their content across the internet, accelerating their success while directly participating in it. We’re not just talking about financial gains here, but also about benefiting from non-monetary value that your favorite creator’s social capital can bring—for example, getting backstage passes for David Guetta when the “Man in Finance” girl performs with him.

Nevertheless, no matter how we look at it, we always end up back at an unavoidable feature:

Make the community great again

Users need to be prioritized again. This has always been a basic core feature of Web3 and probably could be the most powerful one if applied to social platforms, as network effects are key here.

This is how value distribution looks like as of today, and it doesn’t even matter whether we are talking about Web2 or Web3 Social:

As Chris Dixon describes in his recent book Read, Write, Own, the top 1% of social networks like Meta and TikTok control 95% of social web traffic and 86% of social mobile traffic. Most of the value generated by advertisers is monopolized by these platforms, offering minimal returns to creators and none to the users, even though they are creating the crucial network effects needed. By introducing decentralized social platforms, we have high hopes that this will significantly improve how value flows in order to enable creators and users to participate more directly in the value they generate.

By breaking up the platform operators’ monopoly as middlemen between attention suppliers (consumers and creators) and attention seekers (advertisers), we envision a future where value is distributed more equitably. Revenue should be distributed proportionally to those who earn it or to the community of creators who are targeted.

As a result, building a moat simply by controlling network effects will become much more difficult. We believe we will see a big unbundling, resulting in a variety of vertically integrated niche social platforms that try to accumulate multiple revenue streams, rather than a single platform horizontally controlling the value flows.

As long as operators generate enough value for both suppliers and seekers, their social platforms will thrive. In this case, they would act as a marketplace between these parties, taking a fair share of the value flows they facilitate.

Think of future social platforms as OpenSeas for attention.

In contrast to that, we would go a step further and suggest that creators should redistribute all of their platform revenue to their most engaged audience in exchange for social capital.

Status as the new ponzi

Nowadays, we live in a world where social capital is worth more than monetary capital itself. Status can generate money, if you do it right, even a lot and sustainably. Conversely, money can rarely buy recognition and fame.

Status can open doors that money alone never could. Imagine securing exclusive VIP seats for the highly anticipated Super Bowl, snagging a last-minute reservation at the city’s trendiest restaurant for your anniversary, or even catching the attention of powerful and influential figures like celebrities or politicians.

These connections and opportunities, when leveraged correctly, can have a profound impact. Nothing is more valuable to KOLs and creators than their reputation. We believe that building new social platforms that allow them to directly return value to their community would create a flywheel effect for social capital growth that is as strongly hyper-accelerated and leveraged as we typically see only in Ponzi schemes.

Take Pudgy Penguins as the perfect example. They became the most popular brand and are now even reaching into the non-Web3 world for one simple reason: they are committed to returning value to their NFT holders, resulting in a loyal community that acts as a powerful distribution network. Another example is Mr. Beast, the biggest YouTuber of all time. While his content is certainly entertaining, his secret to success has always been giving back most of the revenue, either by reinvesting in the entertainment value of his content or by giveaways to his community.

This is probably the most powerful go-to-market and growth strategy for those who want to grow their social capital, even from scratch. It significantly strengthens the creator-consumer relationship and likely leads to greater engagement and support. As a result, the social capital and status of these creators should continue to increase, enriching their most loyal community.

Encoding something like this at the protocol level could even serve as a launchpad to create and own new influencers.

Before we come to an end, we’d like to propose another idea that is predestined for blockchain.

How to become famous as a killer feature

Even if it is more or less pronounced in some people, everyone has wondered what it would be like to be famous or to have all the attention around you.

Social media gives you the platform to get there and this is exactly what every single person that is posting, tweeting, tiktoking from day to day is hoping for: the tiny chance of going viral to get all the attention and to become famous.

However, competing for attention and the algorithm’s favor is not only highly competitive but also opaque, extremely complex, and often frustrating.

Blockchain with its open source nature is a match made in heaven here.

Imagine a social media platform where the rules of how to be favored by the algorithm are immutably encoded into the backend, while transparently and fairly accessible for every single user and creator. You could even expand on this and include analytics and metrics on what’s currently trending, what content was the most liked etc.

Now combine that relatively complex pack of data with gamification mechanism et voila: you built an open and fair framework for users on how to go viral and grow easily.

There would be no excuses anymore, if people don’t like your content, it’s simply not like-able.

With that, we want to slowly but surely come to an end.

Despite our slight criticism of the current SocialFi market, we have numerous exciting ideas for new use cases.

The fundamental flywheel for social growth as depicted above remains unchanged, but Web3 elements can expedite these processes and enhance user retention. Even though we encourage founders to avoid focusing solely on monetary incentives, tokenization and financialization mechanisms can definitely play a role in driving social innovation.

In our view, this potential for significant new experiences is exactly what sets decentralized social apart from other crypto verticals. Web3 elements seem to enable significantly new experiences at a whole new scale that should also capture the interest of people outside of our degenerate bubble.

We also strongly support starting as a simple tool built on existing social networks like X or Instagram. This strategy can effectively kickstart growth and ensure a smooth user experience while focusing on delivering a strong value proposition. Fantasy Top is a prime example of this approach. This hasn’t only led to an explosive growth in their initial phase, but if they can further grow their user base and boost engagement, they still have the potential to develop their own network.

And who knows, if we do it right, we might even be able to use these very same experiences to ultimately foist the true added values of ownership, decentralization and new monetary flows on the masses as a secret trojan horse.

Disclaimer：

1. This article is reprinted from [moonrockcapital], Forward the Original Title‘SocialFi 2.0: Turning Fumbles into Fame’, All copyrights belong to the original author [Simon and Gregor]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.

2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.

3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.