Original Title: Financialisation of Social Networks

Original Author: JOEL JOHN

Translation: Scof, ChainCatcher

Introduction:

In the digital age, social networks are gradually integrating financial elements, and the development of blockchain technology has accelerated this trend. This article will explore how blockchain is changing the nature of social networks, transforming them from simple information-sharing platforms into complex financial ecosystems. Together, we will witness that in the future, the boundaries between social networks and exchanges will become blurred, and every interaction we have may become a medium for value transfer. This is not just a technological revolution but a profound reflection on the patterns of human social interaction.

Blockchain transfers capital at the speed of data. They can also segment and amplify online economic interactions between participants in ways that traditional fintech companies cannot. We do not yet fully understand the consequences of this phenomenon on interpersonal interactions.

When capital formation and speculation meet the attention market, human behavior changes. Polymarket and PumpFun are precursors to the future of social networks. The next major exchange will be a social network, and the next major social network may be an exchange.

This chart created by Ben Evans is one of my favorites. It shows the changes in newspaper revenue around the time the "information superhighway" emerged in 1995. Source: https://www.ben-evans.com/benedictevans/2020/6/14/75-years-of-us-advertising

I hope you consider Ben Evans' chart. Published in 2019, it shows the revenue of newspapers up until 2019. Newspapers have historically been a human institution, a part of our morning lives. But today, we have replaced them with endless scrolling and a plethora of memes. In the age of clicks, the relevance of a story is no longer important. What matters is how much emotion it can evoke. This is also why Elon Musk chose to acquire X instead of buying The Washington Post like his billionaire counterpart Jeff Bezos.

Media in the 21st century has become a game of clicks. We have created a parallel world where attention is commodified, quantified, and sold like pastries in a bakery. The difference is that what is being shaped here is not flour, but human thought. And this trading, like most markets, comes with costs. Ben Evans' chart simply shows a number declining. Kyle Chayka's "The Filter Bubble" illustrates the cultural and social consequences of this change.

As the internet evolves, our definition of a "good story" has also changed. We no longer optimize for the relevance of information but for the breadth of its dissemination, and even worse, for the emotions it provokes. Thus, local newspapers that once highlighted peripheral charitable activities or foreign journalists who risked their lives to reveal overlooked struggles are no longer significant.

We prefer to see cats, dogs, and 30-second political highlights on social media.

The reason social networks operate this way today is that they are essentially exchanges. In the early 2010s, people who had worked as quantitative analysts on Wall Street decided to skip the market—thanks to the 2008 financial crisis—and join emerging social networks like Facebook. This talent pool then segmented, reorganized, and sold human attention to the highest bidder. In the process, social networks became exchanges, but these exchanges hold significant value.

Neither the supply side (creators) nor the demand side (users) can capture any value from this. Of course, Twitter is trying to distribute advertising revenue to its top creators, which may be an effective model. But in the process, it is tearing apart democracy, making weekend family gatherings unbearable. Are there other options?

We hope so. Qiao Liang from Degencast collaborated with us to write this story. He has been building Web3 social primitives over the past year and has made some thought-provoking observations. The core argument is that blockchain is a tool for value transfer.

As they expand, funds will flow at the same speed and frequency as all other data. In such a world, can social networks change their business models? Let's explore.

Incentive Networks

Over the weekend, several AI-related tokens were released. They can be seen as large language models (LLMs) accessing the Twitter API. The largest token ($GOAT) has a market capitalization of $400 million, while most startup founders are struggling to prove their work is worth $10 million. What is the reason for this capital flow? Why are people willing to invest tens of thousands of dollars in these assets?

A simple explanation is that the meme market is a rapid demonstration of the greater fool theory. People buy these assets hoping to sell them to others at a higher valuation. Owning one token does not diminish your identity compared to a member of the GOAT community who owns 10,000 tokens. But the scale of people is such because this narrative has the ability to find its own dissemination and attention. Considering that one of my favorite writers, Matt Levine, mentioned both WIF and GOAT in his Bloomberg newsletter, early-stage startups struggle to gain the same media attention.

Meme assets create interpersonal networks that incentivize people to provide attention and capital. They share many similarities with social networks, being a collective of humans on the internet. But their incentive mechanisms are not driven by malicious or meaningful comments but by capital formation and speculation. As long as there is a significant influx of new users, they can benefit. In extreme cases, meme assets lacking a "Lindy effect" like Doge sound more like Ponzi schemes than social games.

The internet largely operates on a spectrum of attention and financialization. When you interact with Twitter, you are on the attention side. Users sacrifice attention for a dopamine rush while watching TikTok videos. Cryptocurrency represents the other end of this spectrum. When users gather on Reddit around Gamestop, their incentives are financial. In extreme cases, you see PumpFun, a meme coin platform where users come for tokens and stay due to the social interactions behind each token. Fundamentally, both are mechanisms to attract and retain users. You either provide them with something that stimulates dopamine or give them capital.

This is also what I tried to emphasize in an article last year about how volatility drives product adoption.

At that time, I did not fully understand how capital could build new social networks. Farcaster and its preferred meme asset Degen launched in the following months. In the early days of Farcaster, the user registration process was personalized. Dan Romero was known for arranging calls with potential users and giving them invites. This early core group of users, primarily founders and developers in the crypto space, became the social graph driving early usage of Farcaster. Then, Degen emerged.

Degen has a tipping system that allows community members to tip initiatives or users that add value to the ecosystem. To date, nearly 10 million transactions have occurred on Degen. About 784,000 wallets hold the asset. Degen separates the social network (Farcaster) from the financial incentives on it. Suddenly, creators providing meaningful value to the network could receive substantial tips.

In the following months, several Farcaster communities launched their own tokens. While many tokens have since declined in value, it interestingly illustrates how the spectrum of financialized attention can blur. If Reddit launches in 2024, it might adopt a base token (like RDIT) and millions of sub-tokens distributed to various community administrators. The value of these tokens could be driven by the number of sub-community members and meaningful participation.

But this has never happened in Farcaster. As a user, I stopped logging into the product because at some point, the quality of content declined. And I could only allocate limited time between Twitter and Farcaster.

One project adopting this tipping model is Bonsai. Initially a meme token, this product allows users to tip artists across social networks in a cross-chain manner. Launched initially on Lens, the network integrates with social wallets like Orbs Club, allowing users to collect, reward, and tip assets on zkSync and Base. Essentially, they make the attention market composable by allowing users to hold and tip across networks. You can almost tip each other in group chats or use base assets to purchase reaction stickers.

We have already seen early variants of this incentive attention model, such as T2 World. The connection between users' tokens and the community correlates with their level of engagement in content. But what is the significance of this? The history of Web3 protocols provides some clues. Early developers of Ethereum were able to continue contributing to the ecosystem because they held ETH as an asset. New wealth created a new generation of entrepreneurs. However, community contributors joining the chain over the past two years have failed to achieve the same wealth growth.

We witnessed a brief flash of this world exhibited by the NFT craze (creator royalties) and Farcaster (Degen tips), but these phenomena did not last.

There are two reasons for this. To maintain such a community, continuity and relevance are needed. Bored Apes themselves are an interesting subculture. But their game quality or the distribution of intellectual property struggles to find any meaningful relevance. The beauty of current algorithmic platforms is that they can continuously attract new users and maintain engagement.

The meme market is increasingly becoming a speculative activity around the latest trends. These are fleeting games pursued for profit.

The closest proportionality we have to this phenomenon today is prediction markets and meme tokens. PumpFun often serves as an excellent source for pet names, as people quickly release tokens related to them. Similarly, Polymarket is becoming a hub for tracking market perceptions of event outcomes. In fact, if you visit a single market like the U.S. presidential election, you will see how users' views correlate with their bets on the outcomes. This helps understand the motivations behind their positions.

Polymarket and PumpFun have facilitated billions of dollars in capital flow. As of last week, Polymarket briefly ranked first in the app store. We have moved beyond the "crossing the chasm" phase. We are likely in a stage where consumers are asking, "What applications can I spend my time using?" To build these applications, we need to create sufficiently financialized social networks. In our view, these networks will have several fundamental principles.

Sufficient Financialization

When designing social networks, one cannot simply pursue all desires. Varun Sreenivasan, in a famous article titled "Sufficient Decentralization of Social Networks," argues that expecting every user to run their own server would be a misguided mechanism for scaling social networks. He then briefly outlines what trade-offs can be made to achieve sufficient decentralization without disturbing user preferences.

What the internet lacks is fast, low-cost, bidirectional micro-value transfer. When you see an ad on Instagram, the value transfer is one-way. You exchange attention for content. However, if we view social networks as the origin of the attention economy, this form of network emerged when Stripe was still in its infancy, and banks were hardly online. Since then, our toolkit has evolved.

Farcaster Frames and Solana Blinks are examples where bidirectional value can be transferred on-chain. Users can "mint" NFTs directly from their Farcaster feeds. Users are mapped on-chain and may receive rewards in the form of airdrops in the future. For instance, as a publication, one of my biggest frustrations is that we do not have an on-chain map of users consuming our content. In a Farcaster-driven world, each of our articles could be an embedded email. After reading an article, users could "collect" each newsletter and receive an NFT.

What is the significance of this? It can be viewed from two perspectives.

1. One is a top-down approach. Whenever brands want to engage with our audience, we can simply ask them to incentivize a subset of our on-chain audience. In this model, I share incentives with our active audience.
2. The other is community-driven growth. In this model, as a publication, we may become redundant over time, allowing the community to self-drive. We merely become the center where these ideas converge, discuss, and collaborate.

In the second model, the community's reliance on independent creators is significantly reduced. Platforms like FriendTech face challenges partly because their financial outcomes heavily depend on the creators who established the accounts. If a creator flips or decides to stop caring, the community faces a dilemma. Ironically, in the case of FriendTech, the platform's founder also decided to stop caring and abandoned the platform. In this scenario, providing tools for a stronger, more resilient community becomes particularly important.

Another reason is that independent individual creators should not be treated like stocks, as they are ultimately human. Linking their value to stocks and trading them is unethical, as it places pressures on creators that they ideally do not wish to bear. Would Van Gogh be a great stock during a depressive episode? Would we want to invest in Nikola Tesla during his manic phases? The economic value of individuals ideally should not be quantified and traded, as the price at any given moment reflects a person's state at that moment. Humans are collections of potential that can erupt over time. Adding speculative elements does not genuinely promote the creative process.

In this regard, communities are closer to nation-states, while individuals are like citizens. A strong community can withstand market pressures, even if its independent members struggle under the conditions necessary for survival. Perhaps this is why the evolution of civilization is so reliant on tribes. Anyway, I digress.

If communities are indeed the best way to form capital and trade, what primitives today hint at this possibility? Most communities that emerge as social networks will be niche-specific, using quantifiable metrics to define rankings and communities. These will be consumer applications, with little resemblance to the extreme speculation we see on Pump. A prime example of such a product is Receipts.

Users "show off" their workout results on Twitter.

Receipts issues points by collecting data from fitness trackers like Apple Watch or Garmin. Users often showcase their "receipts" on Twitter to gain prestige and community recognition. If users connect their Farcaster accounts, they can also be ranked based on so-called "intensity minutes," which are the minutes their heart rate is elevated during workouts. Notably, these "receipts" are issued on-chain, and there are currently 2,100 "receipts" for sale on OpenSea. So, what does all this mean?

Muzify ranks users based on their playtime for various artists.

They create an on-chain map of fitness enthusiasts. We also see similar transformations in one of our portfolio companies, Muzify. Muzify allows users to connect their Spotify accounts to obtain relative music play rankings for artists. In the past few months, nearly a million users have interacted with the product. As the user base grows, Muzify can leverage this "verified" map of music enthusiasts to offer them free concert tickets or early access passes to independent artists, who often have little data on their most loyal audience.

Muzify's founder, Nameet, shared two interesting observations with me. First, among his users, Kanye West is the most played artist, which is not surprising. Second, what users truly want in terms of "prestige" is to discover obscure and relatively unknown artists. Users often want to "show off" their knowledge of lesser-known artists to demonstrate their taste.

Our reader Jaimin is building a similar product that helps users "check in" to niche websites through a browser extension. So, if you registered when a new site (like Google in 1998) launched and it later became popular, you would have an on-chain timestamp credential in your wallet to prove it. What is the use of this check-in? Currently, it seems to have little utility. It merely symbolizes the user's keen insight into trends and their early discovery of new sites.

To enable the growth of these niche social networks, a critical mass of users is needed. Receipts and Muzify are currently building this critical mass by curating user experiences. Over time, the platform will only evolve into a true social network as user interactions increase.

So, how can financial outcomes be maximized? What is the business model? Is it merely packaging users and selling them at a high price? Probably not. To scale these businesses, three core elements are needed.

1. First, asset issuance. Users contributing to Web3 social networks should be able to earn corresponding assets. Receipts and Muzify currently use NFTs to achieve this. In the future, this could be points redeemable for tokens.
2. Second, context and trading. A single asset will become irrelevant over time if it lacks any context. Polymarket operates because it has multiple tokens related to specific topics of interest, each with different prices. PumpFun has a similar situation.
3. Third, coordination. Among the 2.5 million tokens launched on Pump, fewer than five have a market cap exceeding $100 million. The reason is that most tokens are launched to play with volatility. When these assets are linked to communities that genuinely require on-chain coordination (through DAOs), we will see the value of these tokens and the platforms facilitating them increase.

We can view all this through a mental model: blockchain networks are the dynamic part of social networks. Events occurring on-chain, such as asset price changes or large-scale user asset transfers, can form the foundation of social networks. It’s like if Venmo became a social network. Only, in this case, the transaction flows you witness are global and much more interesting. One of our portfolio companies (0xPPL) is building on this theory.

0xPPL helps users find connections between wallets and achieve social trading experiences based on emergent information. Image from their Twitter account.

Blockchain technology makes the financialization of existing social graphs possible. Telegram has nearly 800 million monthly active users, and they are now monetizing through the TON network. According to TONStat, there are about 23 million wallets on the network. What does this mean? The extremely high retail user density of TON provides a powerful distribution channel for emerging applications.

Multiple chat groups that users have already participated in make social financial interactions on the network possible. In fact, Telegram's adoption of TON may be the best example we see of "sufficient financialization."

The application (Telegram) itself remains centralized, while the network (TON) serves as a medium for global value transfer. As of May 2024, Telegram is also experimenting with sharing revenue from advertising and sticker pack sales with creators on the platform. In this case, the crypto elements are not used for open access or user ownership but for monetization.

Future Outlook

When studying the essence of social networks, one thing becomes evident: existing businesses are not disrupted by better alternatives but are replaced by products that serve the same function but are fundamentally different. TikTok is not a better Instagram, Instagram is not a better Twitter, and neither is it a better AOL chat. I apologize if this expression is somewhat inappropriate, but you understand my point. The future Web3 social networks will not be better Twitters. Instead, they are more likely to showcase the current advantages of the industry, such as speculation, verifiable rankings (prestige), and ownership.

From this perspective, we believe the next big social network is more likely to resemble an exchange. Nowadays, when Binance lists an asset, it is immediately followed by tens of millions of users. The next big social network may be those networks that highlight assets around which users gather and trade. Moonshot and Pumpfun are two instances of this phenomenon. But structurally, they have not solved the age-old problems that plague Web2 native social networks, namely the repair of media or incentive systems.

Web3 native meme coins (like Goat) have already spread on traditional social networks (like Twitter). Whenever these LLM-driven accounts publish content, users quickly retweet and create distribution for the stories attached to them because they have financial incentives. We are unclear what behaviors would emerge if the same approach were taken toward community-generated content. Would users be better at spreading stories? If a community had a local newspaper, could it sustain itself? We are not sure. But it is clear that the future will be different.

No longer will it be about everyone’s "fifteen minutes of fame," but rather assets will temporarily rise to a fully diluted value (FDV) of $100 million in the flow of attention. By studying the nature of meme assets like Moo Deng, you can see a real-time manifestation of this phenomenon. But how do we move beyond speculation?

The history of networks is a process of packaging and unpackaging. Niche products like Receipts and Muzify are currently standalone applications, with no interaction between users. But as users realize that these assets (NFTs or tokens) are interoperable within protocols (Base), this situation may change. When this happens, we will see interfaces merging on-chain primitives with information flows. This will empower users to discuss, own, and coordinate topics relevant to them. Products that can achieve this well are most likely to become the next big social network. Web2 social networks commodified our attention and sold it to advertisers.

Blockchain-based social networks have the potential, through more nuanced mechanisms, to help users regain control of their value: the ability to capture, trade, and benefit from the value they create.

What will this look like? Joseph Eagan from Anagram once shared an interesting analogy with me. In 2021, the Gamestop rebellion on Reddit provided some clues. Users gathered to target the short positions held by hedge funds on Gamestop. The trading content was posted on Reddit, while the trades were executed on platforms like Robinhood. If we assume that more and more assets in the world will be tokenized and put on-chain, then a Web3 native social network would help users:

(i) Execute trades

(ii) Share a portion of the profits with the platform

(iii) Reward the initiators of trades and the community managers.

But this has not happened. Instead, most of the value (and risk) of the trades has been captured by the platforms executing the trades (like Robinhood).

Can Web3 social networks revive newspapers? The likelihood is low. I believe we have moved beyond that media stage. Perhaps we are entering a phase where community members can independently own, curate, and monetize content without relying on advertisers to facilitate the monetization of content. Substack is a preview of the future web. They (ironically) are built on fintech foundations, which limits their ability to empower creators to provide ownership to their audiences.

If markets (like Polymarket) are the ultimate truth-seeking machines, then combining financial incentives with community might be a better monetization model than the existing primitive attention economy. Meme coins are a prelude to what our future web might look like. We are stress-testing the primitives that could drive the future. It all seems a bit crazy, even somewhat ridiculous.

But perhaps, looking to the future, you will find that the primitives we need to build the future are actually right here, right now.

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