The road to mass adoption has been far more challenging for SocialFi than anticipated. Yet, decentralized social networks are still fighting for a place under the sun, positioning themselves as alternatives to traditional platforms. So, what’s the real issue?
Much like the siege of Troy, SocialFi projects are fighting to breach the walls of established platforms. To succeed, they need more than innovation—they must present a unique advantage that makes them the go-to choice for users.
Read more: SocialFi in Crypto: Insights and Perspectives
If SocialFi doesn’t address these issues, it risks remaining a temporary trend without the potential to reshape social interaction in any meaningful way.
Many projects have adopted a strategy of financial incentives, offering cryptocurrency rewards for user activity. However, this model has proven to generate only temporary enthusiasm, with engagement waning soon after. It’s comparable to paying a friend to stick around—no matter how reliable they are in meeting expectations, real loyalty can’t be bought.
Another approach has been to integrate SocialFi features into existing platforms, but this path comes with technical limitations and fails to create a truly distinct product.
To truly succeed, SocialFi projects need their own "Trojan Horse"—something that allows them to break through the strongholds of X, Facebook, and Reddit, and win over their loyal users.
Three years after the first SocialFi projects launched, the weaknesses in their positioning have become more evident.
Read more: SocialFi in Crypto: Insights and Perspectives
Lack of Social Values and Reliance on External Investments
Many SocialFi projects struggle with the absence of a clear and sustainable value system. Often driven by the demands of venture capital investors seeking quick profits, these platforms risk becoming cumbersome, impractical, and more like financial instruments than engaging social networks that people want to use.
When external funding becomes the primary financial source, projects lose their independence and are forced to meet the expectations of investors. This often results in the social aspect being sidelined, with profit maximization taking center stage.
And users can sense this.
They start to ask a natural question: How can a project claim to be decentralized when it’s essentially controlled by centralized forces, and the community’s rights are declared but not truly respected?
What’s the solution?
It seems clear—the key is balance. SocialFi developers need to find a delicate equilibrium between investor interests and the social purpose of the platform.
The balance between community and investor interests is essential. Source: Medium
To do this, they must:
- Balance financial and social incentives. Users should not only be motivated by earning opportunities but also by the desire to engage, create, and be part of a community.
- Develop a strong value system. Projects should clearly define their values and mission, giving users something meaningful to identify with.
- Focus on long-term sustainability. SocialFi platforms should not be entirely reliant on external capital. They need models that enable self-sustained growth and revenue generation through donations and ecosystem support.
- Prioritize building an active community. Social connections are the foundation of any social network’s success. Creating spaces for communication, collaboration, and joint creativity is essential.
Unstable Business Model at the Crossroads of Social Networks and Cryptocurrencies
Many SocialFi projects face a somewhat paradoxical challenge: combining two seemingly incompatible elements—deep social engagement and monetization. Charging fees for various user interactions often appears to be the easiest solution.
However, unlike other areas of DeFi where fees are used to incentivize validators and sustain the network, in SocialFi, financial transactions are theoretically meant to enhance relationships between users.
This focus on monetization typically causes SocialFi platforms to lose sight of their core social mission. If users engage solely for the purpose of earning money, it undermines the very essence of social networks, which are supposed to foster communication, idea-sharing, and connecting with like-minded people or professionals.
When financial gain becomes the primary reason for participation, the platform starts to resemble a job. While genuine, healthy relationships can certainly exist in work environments, social networks are different. In this case, everyone is "working" for personal gain rather than for the community, which tends to foster negative traits like selfishness, arrogance, and a lack of mutual value exchange.
The constant race for earnings wears people out and leads to a decline in the user base. Additionally, overemphasis on financial incentives creates conditions for speculative schemes, eroding trust in the project.
In such circumstances, SocialFi projects face a difficult choice in terms of positioning:
1. Niche Model: Focus on a narrow group of users, offering them deep social interactions and specialized services.
2. Mass Market Model: Aim for a broad audience by offering a standard set of social features, enhanced with specific crypto functionalities.
Both approaches, in their pure form, tend to be ineffective in the digital market.
The choice between niche and mass market is not always optimal. Source: Medium
However, strategies for solving this problem do exist:
1. Balance Commercialization: Fees should be reasonable (and in some cases minimal) so as not to drive users away.
2. Launch Socially Meaningful Initiatives: It's important to create programs and events that foster community-building.
3. Shift Focus to Social Achievements and Ethical Interaction: Projects need to clearly define their values and mission so that users can identify with them and want to be part of the community.
It's also essential to explore fundamentally new and creative monetization methods that do not contradict the social nature of the project.
For example, some SocialFi projects are successfully implementing these strategies.
Farcaster: An Early Start with a Long Search for Identity
Farcaster is an ecosystem of social networks where various Web3 applications interact with each other.
Imagine a decentralized version of Instagram, Facebook, and Reddit, all combined into a single platform while each maintains its own distinct identity. The founders of Farcaster promised that participants in the ecosystem would easily share data (articles, videos, messages) across platforms, creating a personalized user experience.
The idea sounded promising.
These challenges should have been addressed before the platform’s launch, but the team rushed to market as the SocialFi trend was gaining momentum. Now, the project seems stuck in limbo—"not dead, but not fully alive either."
However, Farcaster has faced several issues that have hindered its widespread adoption:
- User Interface: Farcaster turned out to be too complex for users unfamiliar with cryptocurrencies and decentralized apps. This high technical barrier discouraged many potential users.
- Virality: Despite efforts to create engaging content, Farcaster failed to achieve the viral growth typical of traditional social networks. The lack of built-in mechanisms for content sharing slowed the expansion of its user base.
- Business Model: A year after its launch, Farcaster is still in search of a viable business model. It’s unclear how the platform plans to generate revenue and ensure long-term sustainability.
- Competition: Farcaster faces stiff competition from traditional social networks that offer more features and a user-friendly experience.
We hope the developers will critically evaluate Farcaster's current state and find a way to improve its prospects.
Friend.tech: A Rapid Rise and Even Faster Fall
Friend.tech is a social platform built on the Base blockchain, allowing users to create and trade "personal tokens" that represent access to their profiles. In essence, it’s a marketplace for social status, where personal popularity can be monetized.
The initial overwhelming success of Friend.tech was driven by the novelty factor and speculative interest. Users were eagerly buying profile tokens of influencers, hoping to profit from their rising value.
However, the rapid rise led to several issues:
Currently, most social finance platforms are seen as quick profit opportunities: “Join, earn tokens, sell them on an exchange, and move on.”
SocialFi tokens empower users to become co-owners of the project, strengthening their sense of belonging and community solidarity.
1. Scalability Problems: The platform’s massive popularity caused network overload, revealing significant scalability issues. The developers were unprepared for the surge in demand, resulting in frequent crashes and disruptions. This frustrated users and hurt the project’s reputation.
2. Lack of Security Audits: The decision to forgo audits of smart contracts raised concerns about the safety of funds on the platform and its overall stability. As a result, users lost trust, leading to an exodus from the platform and the collapse of its early momentum.
A project that, within two weeks of launching in August 2023, surpassed Uniswap, PancakeSwap, and Tron in trading volume, and by January 2024 generated nearly 50% of Coinbase’s fees, has now seen user activity plummet. Developers acknowledged the sharp decline but failed to offer a clear long-term vision for the platform’s future.
Friend.tech’s life cycle was brief, like that of a moth. The primary cause of its failure was the team’s focus on short-term profits without a well-thought-out long-term development strategy.
Is there a way out of this "black hole"?
The key lies in developing a carefully planned tokenomics strategy for SocialFi projects.
How Small Tokens Drive Major Activity in SocialFi
Tokenomics is the backbone of any successful decentralized finance (DeFi) project that issues its own tokens, and SocialFi is no different.
A well-thought-out tokenomics strategy keeps users engaged, builds a strong community, and ensures the project’s longevity.
Effective tokenomics carefully allocates tokens among all stakeholders (users, team members, developers, funds, etc.). Source: CoinBrain
SocialFi consistently grapples with similar challenges:
- Rapid token inflation, which naturally diminishes user incentives.
- Imbalanced token distribution between the team, investors, and users, leading to concentrated power and potential manipulation.
- Tokens lacking real value for users, turning them into tools for speculation rather than genuine use.
If a SocialFi project’s internal assets are well-distributed, it’s much easier to achieve success and maintain stability, avoiding the fate of becoming an empty, forgotten vessel in a sea of failed projects.
Read more: What is Tokenomics and How to Analyze It
Principles of successful tokenomics in SocialFi:
- Fair Distribution: Ensuring that tokens are distributed equitably among all project participants helps prevent power concentration and reduces the risk of manipulation.
- Transparent Rules: Clear and transparent mechanisms for token distribution should be in place for all community members to understand.
- Flexible Issuance: The token issuance should be adaptable to evolving market conditions and the needs of the community.
The shared goal of advancing the project fosters unity among participants. As users engage in content creation, voting, and other activities, they build stronger social bonds within the platform.
A good example of successful tokenomics is the Galxe platform and its native G token. Galxe allows users to earn NFTs and other rewards for participating in various Web3 activities, while the G token is used for governance and access to premium features.
The developers have also introduced a fully-fledged DAO, governed by G token holders. This DAO operates as a transparent, secure, and accessible structure for all members, promoting a culture of unity and collective progress.
G tokens are used for transactions and to cover all fees on the platform. They can also be used to purchase services across the DApps launched on Galxe. Additionally, G stakers are eligible for airdrops and exclusive offers from the platform's partners.
The Future of SocialFi
The future of SocialFi will depend on whether project creators can successfully balance financial objectives with their social mission.
Projects that bring communities together around meaningful, engaging, and valuable goals, rather than exploiting users for impractical or short-term gains, will stand the best chance of succeeding.
On such platforms, users will feel at ease, able to fulfill their potential and convert their activities into financial rewards.
After all, isn’t that what SocialFi is truly about?
With the rise of censorship, legal restrictions, and increasing oversight on user interactions in traditional social networks, SocialFi now has a historic opportunity to thrive.
