What is SocialFi? The Bridge Between the Social Media Industry and DeFi

Social media creators still struggle to own and monetize their content fully. Platforms profit from engagement, while influencers and users get little control over their data or financial upside.

Until SocialFi became a thing, it was a combination of social media and decentralized finance (DeFi) that shifted power back to users. Instead of only likes and shares, engagement becomes an investment. Influencers can build their own economies through SocialFi tokens, NFTs, and DeFi platforms. Fans can buy, trade, and hold digital assets tied to their favorite creators.

But is SocialFi just another crypto fad, or is it the future of online content monetization? Let’s break down how it works and what it means for the creator economy.

Key Takeaways

• SocialFi combines social media with DeFi. Creators and influencers can monetize their content through blockchain-based financial transactions.
• Web3 enables digital ownership and decentralization. Individuals can take control of their data, content, and monetization.
• Memecoins are driving SocialFi platform engagement through communities on social networks.

SocialFi Explained

SocialFi is a world of finance where all the communities connect on social media. The DeFi communities are the backbone of the SocialFi world. Fans trade and hold digital assets of their favorite creators. Social media platforms have made it easier for individuals to access information. It also allows users to invest and trade in the crypto space. Platforms such as TikTok, X, Reddit, Telegram, Discord, and YouTube have a major role in it.

SocialFi platforms allow creators to monetize their content via blockchain-based financial transactions. The integration of DeFi into social media has played a vital role in monetization.

Web3 applications assist SocialFi monetization, leading to decentralized autonomous organizations (DAOs). SocialFi platforms take it one step further by using the concept of social tokens or in-app utility tokens. DOAs control the platforms’ governance and ensure autonomy for the online user activity. Decentralized Autonomous Organizations and social tokens play a role in running SocialFi platforms.

For instance, in DeFi and even GameFi, utility tokens drive in-app economics. SocialFi platforms help create social tokens that show the third tier of the economy. Creators can manage their economies through social tokens and improve user engagement.

Why is SocialFi Important?

SocialFi platforms protect freedom of speech and data. Unlike centralized authorities, Social Finance addresses censorship concerns. SocialFi platforms focus on decentralized processes through the labeling of on-chain data. All publicly viewable posts on a SocialFi network are on-chain. The on-chain allows individuals to select and display the content they want.

In this case, a node on-chain chooses to engage and endorse a post. If it contains anything harmful, it would be liable to legal prosecution. Thus, the centralized authorities are not in control of the network. This allows individuals to take control of and be responsible for their data.

Shikova shared her views on how social media is edging closer to SocialFi.

“Recently, we've seen X edging closer to the idea of SocialFi, by embracing free speech and also integrating monetization elements, like paid subscriptions, revenue sharing, and tipping creators. One of the core tenets of SocialFi is rewarding creators, whether it be through tokenized economies and fiat payments," she added.

If we summarize the significance of SocialFi in simple terms, here is why it is important:

• Decentralization: SocialFi operates on blockchain networks, creating a decentralized network for social interactions. It operates like traditional platforms like Facebook but it is decentralized.
• Censorship: SocialFi users can protect their data without any censorship. SocialFi platforms are structured as decentralized autonomous organizations, which prevent centralized censorship decisions.
• Monetization: SocialFi lets users earn tokens for engagement, enabling incentive sharing through social interactions on these platforms.

Popular SocialFi Projects

Social Finance is not a new concept. The launch of Friendtech on Aug. 10, 2023, lit the fuse for the explosion we are witnessing today. Popular SocialFi projects include Lens Protocol, Theta Network (THETA), and Hive (HIVE), among others.

These SocialFi apps are experimenting with providing financial rewards for online activity.

Friend.Tech is Coinbase’s Layer 2 “Base,” which features chatrooms linked with an individual’s Twitter account gated through “keys.” Anyone can get these keys to access the chat, and a bonding curve mechanism decides the price.

On the other hand, Lens Protocol is a blockchain-based open-source social graph. Lens Protocol follows the decentralization trend. It allows content creators to reclaim ownership of their digital presence. Creators have full control over the social media interactions. This leads to a sustainable economic model.

Hive is similar to most social media platforms. But, it is decentralized like other SocialFi apps. It uses its blockchain technology, enabling users to earn crypto rewards. Users can earn rewards while creating, consuming, and voting on the quality of content.

It's decentralized, and the blockchain has improved scalability and allowed for fast transactions. This crypto social media platform offers incentive sharing to users with HIVE tokens.

How Does Web3 Connect to SocialFi?

63.9% of the world's population uses social media every day. On average, each user spends 2 hours and 21 minutes daily on social media. Yet, a few centralized entities have access to the data as they make money through user engagement. Web3 provides freedom for online creators, allowing them to become their owners.

SocialFi balancing incentives are a key design principle of Web3 applications. This is possible through the decentralized autonomous organizations (DAOs) model.

"SocialFi marks an entirely new way we interact with each other as individuals. It's the next iteration of platforms like X or Instagram, where you can not only share your experience with the world but also truly own, control, and monetize your digital presence. So you're not creating value for the social media platform any longer — you're creating value for yourself,” said Alice Shikova, marketing lead at digital identity platform SPACE ID.

Shikova further added, “Examples include Lens Protocol, which allows people to own their social media profiles as NFTs, or Farcaster, the decentralized alternative to established social media platforms. It's all about proof of ownership and authenticity, and blockchain plays an important role here.”

Web3 empowers users to take control of their data and funds. This concept aligns with SocialFi, allowing users to monetize content without a third party.

Fusing social media and DeFi creates an open-ended base layer for a new creator economy. In this economy, creators are not limited to what gets them the most “clicks.” They achieve a flexible layer of financialization without censorship. This improves their skills, personalities, and products, creating their communities.

How Social Media and NFTs Changed Digital Ownership

Social media has accelerated the content creation cycle and increased engagement. In the DeFi space, the emergence of NFTs has created a new form of digital ownership like never before. Bored Ape Yacht Club, Moonbirds, and CryptoPunk are some of the famous NFT collections. They have massive communities on social media platforms. Fans trade these NFTs in large marketplaces. The global NFT market is worth $4.09 billion, as Coingeck data shows. While the total NFT sales volume is around $8.94 million.

Popular YouTuber Nas Daily launched his token, $NAS, on Rally back in 2022. Fans who invest in NAS gain access to exclusive content and even have a say in future projects. This is a prominent example of how SocialFi changes the game in DeFi.

Challenges for SocialFi: Is It Scalable?

While in the early innings of the Friendtech movement, this isn’t the first iteration of SocialFi.

In March 2021, BitClout launched a SocialFi-focused blockchain called DeSo. DeSo raised $200 million from top investment firms. It proved to be rather clunky and initially attracted interest. Later things slowed down throughout the rest of the year.

Many Friendtech skeptics refer to BitClout as a sign of the second coming of SocialFi. There is doubt over organic activity on Friend.tech. Are participants looking to capitalize on another Paradigm-led airdrop? These are the questions that need to be answered.

All the aspects we highlighted about SocialFi are still under development on a small scale. SocialFi advocates are keen to improve large-scale social interactions. The core focus remains on solving key design issues. But, some of them have concerns about its scalability.

“As good as all of this sounds, however, the biggest issue in SocialFi is scalability. This is a niche area - to say the least - and is up against some of the biggest, most powerful platforms in the world. There is also a question of how content is moderated in a decentralized SocialFi world, and as we know, this is a chief concern of all global governments and regulators,” said James Beck, Labs Head of Growth at ENS.

Memecoins: A Driving Force for SocialFi

Memecoins have surged in the crypto space in the past few years. Since Elon Musk started talking about Dogecoin, memecoins have become a new sensation. Recently, memecoins gained popularity with influencers, celebrities, and even politicians. Everyone is leveraging their social media presence to launch their own tokens.

For instance, U.S. President Donald J. Trump launched his memecoin to celebrate his presidential victory. At least fifty of the largest investors in the coin made profits of over $10 million, according to Chainalysis.

This shows how SocialFi enables viral engagement. Communities rally around tokens and creators in ways traditional finance cannot. Memecoins have given creators the freedom to promote their tokens on social media platforms. This is the principal motive of SocialFi.

The Future of SocialFi: What’s Next?

Venture capital and Web3 participants continue to bet on SocialFi. The community continues to believe past failures and valid concerns over SocialFi's sustainability,

But like all previous “killer dApps,” strong execution is necessary for the idea to come to fruition. It remains to be seen which platform, if any, will crack the code to mainstream adoption of SocialFi. The excitement surrounding its growth and infrastructure indicates clear demand from the market.

In its current state, Friendtech is hardly fit for retail adoption. With such a concentrated focus on the airdrop, it is difficult for social consensus to move towards a competitor. Also, the bandwagon effect, the transaction fees set all investors back 10% on every sale and an extra 10% if they wish to sell. Many are unwilling to take the 20% hit on the chin without at least breaking even.

SocialFi and its potential as a crypto sub-market goes far beyond one platform.

The desire for a new, more liberating creator-led economy will likely grow stronger amongst Web3 and Web2 participants.

SocialFi Frequently Asked Questions (FAQ)

What is SocialFi Tokens?

SocialFi is a concept that revolves around crypto and digital tokens. There are several SocialFi projects with their crypto tokens that are traded on DEXs. These projects also use their tokens within their network for incentives and contributions. Some prominent SocialFi tokens are Hive (HIVE), Steem (STEEM), and UXLINK (UXLINK).

The SocialFi tokens market cap is around $1.18 Billion, as CoinGecko data shows.

In SocialFi, What is a Creator Token?

Creator tokens such as $NAS are linked to one person. The creator of the token grants fans access to exclusive content. Community tokens are used for decentralized governance and allow holders to participate in DAOs. Platform tokens engage users to participate on certain platforms.

How Does SocialFi Operate?

As with any platform, the social finance market is a social network that has suppliers of capital, recipients of capital, the institutional framework, and financing flows. The only thing that differentiates it from other social platforms is its autonomy.

What makes SocialFi platforms different from traditional social media?

As we have discussed to some extent in the article, SocialFi platforms offer complete control and ownership to users. Traditional social media networks have control over user data and they sell it to advertisers and other authorities for money. SocialFi empowers control and data governance by allowing users to participate in platform decision-making.