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What Is SocialFi?

Features Lead

Elena Bozhkova

Features Lead

Elena Bozhkova

About Author

Elena is the Features Lead at Cryptonews.com. With a Master's degree in science journalism from City University, London, she is passionate about exploring complex topics in the world of technology.

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Last updated:

September 9, 2024

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Key takeaways:

SocialFi, short for “social finance,” merges traditional social media with Web 3 technologies.
SocialFi allows users to control their data and content, earn from their activity, and avoid censorship.
Despite its potential, Web3 social media platforms remain niche due to scalability issues, regulatory uncertainties, tokens volatility, and the dominance of major players.

SocialFi combines the familiar reality of social media with the world of decentralized finance (DeFi). It aims to transform how we use social platforms by giving users more control over their content, data and the ability to earn directly from their posts. This guide explores what SocialFi is, how it works, and why it still can’t beat traditional social media.

SocialFi Explained

SocialFi means “social finance.” It merges the social interactions from platforms like Facebook or X with financial activities you might find in banking or investing apps. The difference is that SocialFi operates within Web3, which means it uses blockchain technology.

How does SocialFi work?SocialFi platforms are powered by what is called decentralized autonomous organizations, or DAOs, and social tokens. Simply put, a DAO is a group managed by its members without a central authority. Members make decisions collectively by voting on proposals, and these votes are recorded on the blockchain. SocialFi platform users can create or earn social tokens, which can be used to pay for things within the platform, support other users, or access unique content. Social tokens make the platform run smoothly and allow users to benefit from being active participants.

Why SocialFi Is Important

According to a Forbes report, we spend about 145 minutes on social media every day. Another research shows there are more than five billion social media users worldwide, which is around 64 percent of the global population. Yet, Web2 social media platforms have certain flaws that new decentralized social media aims to solve.

Decentralization and control: Traditional social media platforms are controlled by a few big companies that store user data on centralized servers. This means they have access to your data and can use it to make a profit. SocialFi platforms are decentralized, and no single entity controls the platform or the data.
Censorship resistance: On standard social media platforms, a central authority decides what content is acceptable. This can lead to censorship of content that might not necessarily violate any laws but doesn’t align with the platform’s policies. SocialFi, with its decentralized nature, allows for a more democratic approach to content management.
Fair monetization: Traditional platforms earn significantly from user-generated content without the creators receiving a fair share. SocialFi allows creators to monetize their content directly. Users can earn from their work based on their audience’s engagement and support.
Security and privacy: SocialFi platforms distribute data across a blockchain network, reducing the risks of data breaches. This decentralization also improves privacy since there’s no single point of failure.

Why Isn’t SocialFi Mainstream Yet?

SocialFi offers a new approach to social media, but the number of its users is still not comparable to those of its Web2 rivals. Why is this?

Scalability: One of the biggest issues for SocialFi platforms is handling large volumes of transactions and interactions. Traditional social media platforms manage millions of user interactions per second, a level of activity that current blockchain technologies cannot support.
Regulatory uncertainty: SocialFi platforms often operate in a gray area of finance and digital communication, making them vulnerable to sudden regulatory changes.
Value fluctuations: The value of social tokens and other digital assets used on SocialFi platforms can be highly volatile. This unpredictability can affect both users and creators.
Web3 user experience challenges: Web3 applications often have complex interfaces that can be difficult for users to understand and turn them away.
Strong market rivals: Dominant platforms like Facebook and X control a large share of the social media market. It is hard for new platforms, especially decentralized ones, to attract and retain users.

Examples of SocialFi Platforms

Farcaster

Farcaster is a social protocol on Ethereum that allows developers to create new applications. Warpcast, a social network resembling X, is one of such apps. This platform stores user identities on the blockchain but keeps posts and interactions off-chain to maintain efficiency. Users pay Farcaster a fee to keep their data—$7 worth of ETH for 5,000 posts. If a user chooses not to pay, their oldest posts, or casts, will be deleted to make room for new ones.

Dan Romero, founder of Farcaster, shares an update on Warpcast

Lens Protocol

Lens Protocol is an open social network where users own their content and connections. Profile NFTs feature lets users control their social interactions and content across various apps. Profiles are tracked using Follow NFTs, managed by customizable smart contracts. Lens also has a Profile Manager, allowing users to delegate social activities to other addresses. For security, the Profile Guardian feature protects against unauthorized transfers with a 7-day cooldown period.

Orb.club, a Web3 app on Lens, built for artists

Audius

Audius is a decentralized music streaming service that allows artists to share their music directly with fans and earn money without going through traditional music industry middlemen. It’s managed by a community of artists, fans, and developers. Built on blockchain technology, Audius is open source, meaning anyone can contribute to its development. It emphasizes open access and ownership, ensuring that artists maintain control over their work.

Conclusion

SocialFi merges traditional social media with Web3 technology, giving you more control over your data and a chance to earn from your interactions. However, SocialFi still lags far behind large traditional social media platforms for various reasons. For instance, it struggles to handle the vast number of transactions that larger platforms manage with ease. Additionally, such platforms can be risky for investors due to cryptocurrency’s regulatory uncertainties. Despite these challenges, SocialFi could become a significant shift towards more secure and financially rewarding social media platforms.