The Social Finance phenomenon
The Social Finance phenomenon
Delving further into the new social paradigm from an economics standpoint
This Sunday we’re going to delve right into Social Finance — the latest trend that has been fueling innovation and development in the crypto space in the past month or so.
But are those platforms efficient, with a true potential to thrive long-term regardless of the initial hype? Let’s delve right into it.
Since the beginning of times, we’ve never really been able to price how much our friends, or idols, were really worth in monetary terms. Social Finance does exactly that: decentralized financial instruments that let you trade social tokens tied to real identities that signed up on the application(s) — besides speculation, you’ll be able to participate in a private group chat with the profiles of shares you hold, creating fertile terrain for asymmetric information.
Let's run some numbers
The leading player in the scene is no doubt Friend Tech (FT), with a 93.75% sector dominance. The Social Finance (SoFi) segment has grown from barely a million dollars $ in August to the end of September’s staggering $52M, achieving a 2600% monthly growth rate. This suggests an increasing interest from market participants, yet does the game theory (3,3) where everyone holds each other keys waiting for the airdrop work?
Wait, what airdrop?
Social Finance apps have been mostly launched tokenless, whilst teasing users about potential airdrops to the ones using the application. Friend tech, for example, accrues to users so-called “points” every Friday representing one’s activity and volume. It is speculated that those points will be converted to tokens sometime in the future.
High friction in place
The cost of entering the market: SoFi applications have strong exit friction due to taxes up to 10% on each sale (on FT, 5% to the creator, and 5% to FT’s treasury), and entice investors with the chance of participating in its own initial coin offering. We at Stay on-chain believe that whilst the narrative is interesting, there are currently not many use cases for social tokens and the market feels like a Player-versus-player (PvP) situation, where no new money is flowing in and market participants aim to extrapolate the most from others. Friend tech and others have yet to experience a serious drawback in their activity, which could confirm the resilience of their pricing & fees algorithms.
So, efficient markets?
No, definitely not at least for now. The cost of entering the market is too pricey right now making it hard for most users to partake. Moreover, asymmetric information derived by social-token-gated chats puts friction on the rational valuation of one’s token — as you’re unsure whether you’ll get enough bang for your buck buying this or that social token.
How to fix it?
Financial primitives that ought to increase the efficiency and openness of Social Finance applets are in the works.
Velocimeter DEX allows you to fractionalize and LP some social tokens. Reason being that tokens can get expensive (up to 9 ETH, ~ $15000), making the purchase of a whole key a thing for few — until now.
FrenLend aims to become FT’s money market, allowing you to lend & borrow keys, deepening the market liquidity.
HyperliquidX and Aevo let you long or short FT perpetual futures index, with the first based on an average of a selected list of social tokens, and the latter based upon the dApp TVL.
Forks, forks, forks
We mostly refer to Social Finance as Friend Tech alone, but there’s more to it. FT has now a significant lineup of forks posing as potential competitors, let’s go over the main ones:
Post Tech and Cipher have been launched on Arbitrum, one of the most prominent Layer-2s, with both having a Twitter-ish interface that makes the apps easy to use and interact with. Aside from the more friendly UX, both redistribute fees differently from FT — on Post Tech, key holders get 5% trading fees from the keys they’re holding, whilst on Cipher fees are reduced to 5% in total (going to key owners alone).
A pressing issue for Social Finance platforms is, in fact, preventing bot activity. As soon as users register, especially if they have a decent following, bot snipers will immediately buy a handful of their keys for pennies to resell them later to normal users — this can be defined as a negative externality, that hurts everyone and benefits no one but bot owners.
Fan Tech is your Mantle alternative following the same SocialFi model, but trying to prevent bots from sniping keys at their launch with their novel Shares Generation Event (SGE). This doesn’t prevent bot activity, but makes it harder for bots to profit off of it — the way it works is simple: there’s a set auction duration, within which users can place their bids to acquire a key of a newly registered user. At the end of the auction, top bids will be able to buy that key at the bid price.
Stars Arena has perhaps been the louder in the past weeks, with their platform getting exploited twice. The hole has been covered, but the platform is currently down for maintenance and will be back online in a few days.
The list goes on and on, with Friend Room on Ethereum, Friendzy and hub3 on Solana, and NewBitcoinCity on Bitcoin (using Ordinals). The complete list can be found here on Defillama.
Should you ape? "Trend is your friend", they say, and there is clearly a SocialFi trend. Getting involved in some of these forks before they reach the level of FT's growth could potentially offer a good ROI. However, they pose much higher risks, which must be considered; some developers may be capitalizing on the trend without prioritizing product quality, potentially leading to security issues.
With some having a better UX than others it’s clear that it is not the driver of user activity: it’s based on who’s cooler than the other — having popular users is the ultimate driver of activity, as they themselves will often advertise the platform(s) they are on to their users because of the financial incentive they hold.
In any case, success in these apps may be closely tied to the growth of the respective L2 chains and their ecosystems. As the chains expand their ecosystems and communities, it's reasonable to speculate that their SocialFi dApps will also thrive.
To get a real sense of how active are these platforms, you can use this Dune dashboard. Results don’t surprise us, with FT retaining 73% of transactions volume (easier to bot), but 95% of USD volume (with Cipher second, scoring 4.6%).
Conclusion
The three aforementioned financial primitives have the potential to bring efficiency to FT markets, by (1) democratizing access to expensive shares via fractionalization, (2) deepening liquidity of social tokens holders allowing them to borrow against their assets, and (3) enabling an efficient pricing mechanism that lets users short social tokens when deemed overvalued.
Social Finance protocols have yet to be considered battle-tested, in fact, no serious downturn momentum has taken place yet, making it hard to form long-term expectations on their performance.
That and the development of financial primitives on top of social tokens prepare us for exciting times ahead. The way we see it, Social Finance has the true potential of bridging traditional content creators to Web3, possibly being the initial catalyst of the next bull run.