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Will the Web3 social track be the next bull market engine?

HuoBi Research

23-09-12 11:25

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Original title: "Will the Web3 social track be the next bull market engine?": Huobi Ventures' latest research report

Original source: Huobi Research

Every bull market has a different ignition engine, and behind every bull market engine is a long and arduous bear market development process, like a tangled web of grass snakes and gray lines.

Crazy MEME, DeFi summer... With the development of Web3 technology and infrastructure, the social track has also ushered in new development opportunities.

Will the Web3 social track be the next bull market engine?

As a track that requires developers to fully utilize their imagination at the application layer, social, identity, NFT, DAO, fans, and more can all be classified under the category of Web3 social. The social track is still in its early stages, and with the launch of Cyber tokens, Twitter's renaming, and creator incentive plans, the market heat of the social track is gradually increasing.

The social application Friend.Tech on the L2 chain BASE has quickly become popular since its launch on August 10th. In less than 20 days since its launch, it has already had over 120,000 registered addresses and over 20,000 active addresses.

CyberConnect, Lens Protocol and other application tools have also attracted a large number of users and market attention.

This article discusses the current development status and product characteristics of Web3 social networking, as well as analyzes several leading projects in this field. In addition, the risks and challenges faced by this field are also studied. Overall, the future of the Web3 social networking sector looks promising, with good investment potential and development prospects.

This research report is produced by Huobi Ventures, the global investment department of Huobi. Huobi Ventures integrates investment, incubation, and research to identify the world's best and most promising projects.

Why should we pay attention to social media?

The encryption industry has always been regarded as an interdisciplinary science that combines computer science, finance, cryptography, mathematics, and other fields. However, due to its short history, incomplete infrastructure, inconsistent regulatory standards, and certain learning barriers and costs, it has yet to achieve widespread popularity and use on a global scale. With the development of smart contract public chains represented by Ethereum becoming increasingly perfect, the development of on-chain Dapps has exploded since 2020, as shown in the figure below. Currently, the cumulative number of Defi user addresses has exceeded 40 million. Defi has led users to interact on the chain, and its real and convenient application scenarios have driven the construction and development of the on-chain economy, attracting and cultivating a group of on-chain Degen. Since 2021, chain games and NFTs have begun to lead a new wave of users. The new on-chain gameplay, token economic design with Ponzi effects, and diverse value systems have helped the Web3 field attract a large number of new users. In terms of chain games, due to their gold-making effects, they have attracted a large number of Web2 game players and low-income people in the third world, while NFTs, due to their identity value, collection value, and brand value, have attracted a large number of collectors, art enthusiasts, and traditional brand merchants to enter.

The cumulative number of Defi user addresses across the entire chain.

Source: https://dune.com/rchen8/defi-users-over-time

Since 2022, the market has entered a long bear market. The previously popular gaming and NFT sectors have cooled down, and the Ponzi economic model has rapidly collapsed due to insufficient incremental growth. The growth of Web3 users has reached a bottleneck. Currently, Web3 innovation is still ongoing, with developers constantly exploring new possibilities in various fields such as infrastructure, zero-knowledge proofs, payments, identity, and Defi2.0. However, the lack of users is still one of the core problems facing the development of the Web3 industry. Today, in the midst of the bear market, many ecosystems and their projects are facing the dilemma of having completed construction but lacking real users. Excluding various airdrop studios and multi-wallet users, the number of real on-chain users may not be optimistic.

From the supply side, the development of Web3 currently requires expanding more application scenarios and creating more ways to attract new users. Currently, the social track is expected to become the next track to explode Web3 users. From the demand side, the social track has been proven to have strong potential in the traditional Internet field, with a huge user base and commercial value fully realized in this track, from early MSN to mid-term Facebook, Instagram, and later Tiktok, each iteration of the social track technology is accompanied by the birth of Internet giants, and has spurred a large number of upstream and downstream employment opportunities in the industry chain. With the increasing recognition of the privacy value and commercial value of data ownership, more and more voices are calling for users to control their own social information and data through Web3, and to enjoy the value of their own identity and behavioral data. Therefore, the exploration of social projects in the Web3 field is one of the most promising and commercially valuable issues in the future.

With the maturity of ecosystems such as Cyber Connect and Lens Protocol, the entire social sector ecosystem is becoming more and more magnificent. Currently, the entire social sector is in the early stages of an explosion, and some social projects have recently attracted market attention. For example, the largest KOL in the cryptocurrency circle, Elon Musk, took over Twitter, and his behaviors such as repeatedly promoting Dogecoin and including Bitcoin in Tesla's official documents have brought global traffic to the cryptocurrency field. Although he stated that Twitter will never issue tokens, speculation surrounding Twitter's social identity, token rewards, and payments has been discussed in the market for a long time. In addition, Lens Protocol completed a $15 million financing, and internet social giants such as Instagram issued NFTs. Cyber tokens were also simultaneously listed on multiple leading exchanges, expanding and developing the industry.

Social Track Characteristics

For Web3 social networking, there is currently no unified definition. We can classify all products that involve the publication, exchange, and characterization of information between people into the field of social networking. From the current development achievements, this mainly includes social public chains, social graphs, social identities, various types of social applications, service tools, etc.

In the Web2 field, traditional social platforms such as Twitter, Instagram, and Tiktok already have a large number of users and have developed mature and rich business models. When we talk about Web3 social, it is necessary to verify the necessity and feasibility of Web3 social development. Compared with Web2, Web3 has a smaller user base in developing social aspects and is currently in the stage of technical exploration. In general, this article believes that the key factors for the development of Web3 social include:

1. Anonymity and Anti-censorship

One of the biggest advantages of Web3 social networking compared to Web2 social networking is anonymity and resistance to censorship. This feature has already been proven to be one of the user's needs. In the Web2 field, data is controlled by centralized institutions, and users may be arbitrarily censored, forced to delete or modify their social speech, etc. Essentially, Web2 social networking is still a social model under a regulated system, and users cannot protect their privacy. Decentralized Web3 naturally has the characteristics of protecting user privacy and resisting centralized institutional censorship, which can meet the user's demands for protecting privacy and maintaining their own safety.

2. User Ownership of Data

Under the social model of Web2, the ownership of user data belongs to centralized platform institutions. By mastering user data, platforms can create user profiles, analyze user behavior preferences, and then deliver corresponding advertisements and products to achieve maximum traffic monetization. The data itself also has certain commercial analysis value. In the Web3 field, users can obtain commercial value of data flow by owning data ownership. From the user's perspective, projects that enable users to easily realize the value of data are attractive. In fact, this model has been attempted in the business model of Web2 and has achieved certain results. For example, Pinduoduo provides cash rewards for watching videos and inviting friends to participate in "chopping" (essentially social network promotion) to achieve user traffic monetization. Currently, there have been many attempts in the Web3 field, such as Nostra based on the Bitcoin Lightning Network, Lens based on Polygon, and multi-chain protocol CyberConnect, all of which are trying to return data ownership to users. This article believes that in Web3, due to the diversity of tokens, the volatility of token value, and the richness of token economic design, many interesting gameplay that attract users can be derived from the commercial value realization of data ownership, which may even surpass the wealth effect and promotion effect created by the previous round of chain game bull market.

3. Easy to use

One of the elements of social projects is to achieve abundant and free flow of information within the circle, and abundant information relies on a large number of users. How to introduce a large number of users is the biggest challenge and opportunity for Web3 social projects. One of the important reasons for the limited development of the current encryption field is that the user base is too small. Firstly, there is a certain learning threshold for users to enter the encryption field. Users need to master certain computer and encryption knowledge to participate in on-chain interactions. Secondly, compared with Web2 user tools, current encryption projects are more complex and less simple and convenient. For example, the EOA wallet has complex mnemonic words and storage methods, potential risks of phishing and stealing private keys, software updates and compatibility issues, all of which affect the user experience. Blocking a large number of Web2 users outside the encryption world also means that once the problems of learning costs and entry barriers are solved, once there is a social project that is easy to use and allows users to operate without feeling, it will bring huge user traffic.

4. Composability

In Web2 social networking, due to the existence of various centralized organizations, a large number of data islands have actually been formed. The Internet giants formed by these huge data islands have data access and pricing rights. Other projects in different categories need to obtain permission from all data organizations to use the data or build applications on it. At the same time, there are compatibility issues and potential competition among these huge data islands, which ultimately results in many Web2 applications not being interoperable. Users often have to register a new account and start accumulating information and data when using a new platform. This article believes that an ideal Web3 social product may have the opportunity to solve the problem of data islands. The depiction of user portraits by POAP, ENS, and other similar projects can be seen as an attempt to solve the problem of data islands. In the future, there may be simpler and more accessible standard protocols that help users easily control data ownership while being compatible with most protocols. This is one of the key exploration directions of DID.

Header Project Overview

According to different project types, social projects mainly include several categories such as social graph, social applications, and tool projects.

Social Graph

The social graph serves as the infrastructure for Web3 social applications, providing common standards and data sources for other application projects. The social graph should have rich data sources, wide composability, and low barriers to entry. In this sense, the necessity of standalone new public chain social projects or native social projects built on obscure public chains is not significant, as it increases isolation from other mature ecosystems. Currently, the mainstream choice for the development of the social graph is to build a universal standard for social identity on mature chains, including Lens Protocol, CyberConnect, and RSS3, among others.

CyberConnect

CyberConnect is a multi-chain social graph that can verify and deposit user interaction data, providing users with personal business cards, social graphs, and smart contract wallets. It also provides standard API data interfaces for other Dapp developers to achieve user data migration across multiple Dapps. Currently, CyberConnect has been integrated with Polygon, Linea, and Optimism, and will soon be integrated with other networks such as Arbitrum, with the potential for further user growth. As shown in the figure below, as of August 8, 2023, the cumulative number of accounts has reached 368k, and the cumulative number of user operations has reached 738k, while the total number of user profiles has exceeded 1.25m.

CyberConnect user data

Source: https://dune.com/cyberconnecthq/cyberaccount-cyberconnects-4337-smart-account

And in the current sluggish market situation, CyberConnect's daily active users (DAU) still maintain above 10k, with overall traffic being relatively high.

CyberConnect traffic data.

Source: https://dune.com/cyberconnecthq/cyberconnect-link3-metrics

Lens Protocol

Lens Protocol is a social project developed by the well-known Defi lending project AAVE team. It is a social graph protocol built on Polygon that allows anyone to create non-custodial social profiles and build new social Dapps. Users can create their own social profile NFTs by accessing their wallets and interact with other users using their social profiles. Users can also build interactive Dapps on top of Lens (users can log in using Lens, interact within the Lens ecosystem, and interaction records will also be recorded in the Lens social profile).

The following figure shows some of the projects in the Lens ecosystem. Currently, there are over 100 projects built on the Lens ecosystem, including various social, gaming, streaming sharing, DAO tools, advertising management, information transmission, knowledge payment, and lottery Dapps. Although most of the ecosystem projects are still in the early to mid-stage of development, the overall richness in terms of quantity and type is very high, even surpassing some public chains. Overall, the on-chain social ecosystem created by Lens is very friendly to creator economics.

Lens Protocol ecosystem projects

Source: https://twitter.com/rekktguy/status/1582288617229406209?s=20

As of July 2023, over 110,000 addresses have obtained Profile social name cards. As shown in the figure below, Lens has accumulated more than 360,000 users, with a total of 21.93 million transactions. The peak of transactions and user numbers occurred in February 2023, with a large number of retail investors or airdrop studios participating in the layout. Currently, the daily on-chain transaction volume is between 15,000-20,000 transactions, and the number of users participating in interaction daily is between 3,000-5,000 wallet addresses. Even in the bear market, there are still a considerable number of users participating in the interaction of the social track, showing good user data performance and growth potential in this field.

Lens Protocol User Data

source: https://dune.com/sixdegree/lens-protocol-ecosystem-analysis

Generally speaking, social graph is the infrastructure and common tool of the entire social track. A unified, simple, and convenient social graph helps to reduce the user's usage threshold, reduce the usage barriers between different Dapps, and accumulate more users and data. In comparison, Lens Protocol is built on Polygon, focusing on building its own social ecosystem, while CyberConnect does not have its own content platform and ecosystem. It supports multiple chains and interacts with multiple applications, while actively exploring the entry of Web2 users in the wallet, focusing on building an open social business card. Both projects are currently the top projects in the social track. With the further construction and launch of Lens Protocol, the social track led by the two projects may usher in an outbreak period.

社交应用

translates to

Social Applications

Farcaster

Farcaster is a decentralized social platform created by Dan Romero, a former executive at Coinbase. It is built on Ethereum and is comparable to Twitter. Currently in beta testing, Farcaster generates and stores user identity information on the blockchain, while providing a database hub for storing other information off-chain. This allows for a fast and low-cost decentralized social interaction experience similar to Web2. Additionally, Farcaster allows users to use self-hosted mode to send and receive messages without a gateway, ensuring decentralized implementation. Currently, nearly 20 derivative projects have been built within its ecosystem, including data analysis, image beautification, popular topics, related topics, and search engines.

As of August 9th, 2023, the total number of wallet addresses on Facaster has exceeded 13k, with multiple crypto industry Degen including V God registering accounts. The weekly user growth rate is 2.2%, and there have been 2.5k posts in the past seven days. As an independent social application, its user base and activity level are quite good.

Currently, in addition to the advantages of decentralized anonymity, how to attract Web2 users to migrate from Twitter to Farcaster is an important research direction for the project's future development.

Facaster User Data Statistics

Source: https://farcaster.network/

Nostr

Nostr is a decentralized open-source social transmission protocol that allows developers to build Dapps based on Nostr. There are no centralized servers on Nostr, and the protocol achieves information transmission through the design of clients and relays. Compared to Web2 social media, the protocol achieves complete decentralization, which can resist censorship and protect user privacy. Damus is a decentralized Twitter-like social product built on Nostr. Users can enjoy the product features of decentralization, anonymity, and no ads while experiencing a social platform similar to Twitter. The product is currently in the early stages of development and has also received recommendations and support from Twitter founder Jack Dorsey.

As a completely open, anonymous, and decentralized anti-censorship product, Damus has strong competitiveness in privacy and security compared to traditional social products, with clear markets and target customers. However, in order to attract a wider range of Web2 users or to introduce new product designs and features, there is a need for further development.

Friend.Tech

Friend.Tech is a social application deployed on the Coinbase L2 chain BASE, invested by Paradigm. The application is similar to traditional fan token/creator economy projects, providing creators with fan communities and token issuance services. Users can join the creator's community by holding the tokens issued by the creator. Since its launch on August 10th, the product has quickly become popular. As of August 29th, 2023, in less than 20 days since the product was launched, there have been over 120,000 registered addresses and over 20,000 active addresses (users who viewed the user space on that day).

Source: https://dune.com/domo/friendtech

Source: https://twitter.com/friendtech/status/1696599323637846444/photo/1

For each transaction, users need to pay a transaction fee of 10%, of which 5% belongs to the creator and 5% belongs to the protocol. As shown in the figure below, as of August 28, 2023, the protocol has accumulated revenue of more than 4 million US dollars.

Source: https://dune.com/cryptokoryo/friendtech

The rapid rise of Friend.Tech products has to some extent sparked market attention and speculation on the social track. How did the product attract users so quickly and on such a large scale? This article believes that, in terms of the product itself, Friend.Tech has not yet deviated from the original design of social products and token models. However, its success in this stage is traceable, mainly including the following points:

1. Design of Ponzi economics for fan tokens

Currently, there are two main modes of fan token design: one is to issue fan tokens, and users can enter the creator community by holding a certain amount of fan tokens. Fan tokens follow the price fluctuations of the market economy, and there may be designs for functions such as repurchase, destruction, sharing, and pledging of fan tokens. The other is to issue fan NFTs, and users can enter the creator community by holding NFTs. Fan NFTs also follow the price fluctuations of the market economy, and there may be designs for mapping new tokens, airdropping new NFTs, or implementing other rights and interests.

Generally speaking, in the token economy design before Friend.Tech, the buying and selling of fan tokens was mainly driven by users' love for creators, and the attraction of token price fluctuations was neutral. The user invitation mechanism + fan token economy introduced by Friend.Tech has subverted the previously lackluster token economy mechanism. Friend.Tech stated that it will distribute 100 million points within six months, and the distribution rules have not been disclosed yet. However, user points are generally believed to be linked to token airdrops. The combination of this mechanism and the user invitation mechanism promotes the motivation for users to attract new users, and also promotes users to purchase more shares of different creators to brush transaction fees and data. This strategy is similar to Blur's airdrop strategy, which attracts users to use the product through long-term point incentives + airdrop expectations. At the same time, because the cycle is long enough, it can increase user stickiness to the product and continue to occupy market share after the airdrop cycle ends.

In the design of token economics, due to the fact that the official has not disclosed the relevant calculations, according to the calculation statistics of the price model by Laurence Day, which is widely recognized, as shown in the following figure, the price of Friend.Tech's fan token follows the price curve of P=suppy^2/16000. Under this pricing model, the rise and fall of prices will show exponential fluctuations. Early investors have the opportunity to enjoy huge profits. The design of this Ponzi economy will continue to cause price spikes before the buying and selling users reach equilibrium, attracting more speculative users to participate in the buying and selling of tokens. This is also one of the most important reasons for the short-term explosion of the project. Similar designs are also reflected in the Meme project XEN, which uses the Ponzi economy token design and early user dividend incentive mechanism to ignite the market hotspot in a short period of time.

Source: https://onedrive.live.com/view.aspx?resid=C078415A103A3F40!1094&ithint=file%2cxlsx&authkey=!ANE0-sqb5hAftiI

2.BASE The early benefits of on-chain red envelopes

Friend.Tech was originally built on other chains, and its recent launch and popularity in the BASE and L2 tracks are closely related. Since the launch of Arbitrum in early 2023, the overall performance of the L2 track has been very impressive in the bear market. The subsequent ecosystems of Zksync, OP Stack, and BASE have also caused a market frenzy. It is expected that this year, the launch and issuance expectations of Starknet, Scroll, and Zksync, combined with the approaching Cancun upgrade, make the entire L2 track the most important and eye-catching track in the 2023 cryptocurrency market. BASE is also backed by Coinbase, a listed exchange in the cryptocurrency market. Friend.Tech chose to launch during the early stages of BASE issuance, cleverly capturing the market's hotspots and timing dividends.

3.Paradigm Top VC Endorsement

As a top investment fund in the cryptocurrency industry, Paradigm's endorsement naturally adds a lot of points to the project. Despite the fact that Friend.Tech has not yet developed a web version and only has a rough beta version, and lacks various project white papers and explanatory materials, the market still trusts the project and invests a lot of enthusiasm, which is closely related to Paradigm's endorsement. At the same time, the incentive design of the project's scoring mechanism is similar to Blur, and there may be a shadow of guidance from Paradigm.

Generally speaking, Friend.Tech is relatively traditional in terms of product mechanism, but more daring in token economic design, customer acquisition strategy, and marketing tactics than traditional social projects. In the short term, Friend.Tech may replicate Blur's user growth path, but as a social product, the realization of long-term social attributes needs to be observed after the product is launched.

Tool Project

Social tool projects mainly serve as service functions, and currently most of them are positioned to serve projects that serve Dapps, such as Lenscan for browsing data under LensProtocol, LensDAO for organization and community management, Alertcaster for information reminders under the Farcaster ecosystem, and FarQuest for launching surveys. Others, including various general auxiliary tools, can also be classified into the category of social tools, such as the Debank Hi module that helps with social promotion, Utopia that helps with DAO treasury governance, and various NFT design tools, account management tools, wallet management tools, etc.

Generally speaking, the social track is a field where developers can fully unleash their imagination at the application layer. In addition to social graphs and application tools, there are particularly diverse social platforms, fan platforms, and streaming media platforms in the field of social applications. Currently, this track is still in its early stages, and the enthusiasm and efforts of developers and investors will continue to help accumulate achievements in this field.

Risks and Challenges

The current encryption social track has attracted the participation of many developers and capital. While seeing the opportunity, we should also be aware of the risks and challenges that currently exist in this track. The current problems mainly exist in the aspects of technology, user growth, and compliance.

Technical Challenges

Social products as a whole are at the application layer level, and their development requires mature infrastructure and technology. As the number of users grows, more and higher requirements will be put forward for social products. At the same time, the development of social applications depends on the solution of problems such as data storage, cross-chain information transmission, information transmission costs, network congestion, etc. However, the current infrastructure is not yet sufficient to accommodate the emergence of large-scale user social software at the level of Web2.

用户增长

translates to

User Growth

in English.

除了匿名性、抗审查性外，为什么 Web2 用户愿意转换到 Web3 的社交应用？可以明确地是，并不是每个用户都对隐私有着极高的要求，有大量的用户在现有的中心化社交平台上仍然能实现其社交诉求，除开这部分用户，如何吸引更多的用户，亦或是目标用户仅专注在有隐私需求的用户上？如果考虑用经济回报来激励用户，该如何设计经济模型同时又避免陷入经济闭环或庞氏经济困境？在用户层面，目前 Web3 社交已经取得了不错的市场热度和流量，但目前热度仍停留在加密圈内部，未来是解决现有社交产品的问题还是创造新功能和需求是 Web3 社交产品提升用户数量需要直面的问题。

Compliance

The selling points of Web3 social products that differentiate them from Web2 products mainly include three aspects: decentralization, resistance to censorship, and privacy protection; users have ownership of their data; and users can benefit from owning their data. The advantages of Web3 social products may also become their risks to some extent. It is foreseeable that the product features of Web3 are highly attractive to black and gray industry practitioners, as well as regulatory agencies. As the Web3 track matures and the user base expands, developers need to consider security issues and potential regulatory inquiries in advance.

Summary

Web3 social track is in the early stage of development, relying on the maturity of other infrastructure construction, including but not limited to cross-chain information transmission, data storage, reduction of transaction costs, and compliance issues. Currently, social track products mainly include social graphs, social tools, and social applications, among which social graphs are the most basic and social applications have the largest number of categories. Currently, a large number of developers are trying to develop Web3 social products, and capital is gradually paying attention to and investing in this track. The launch of Cyber token, Twitter's renaming, and creator incentive plan all demonstrate the gradual rise of the social track market. While social presents opportunities, it should also be fully aware of the challenges faced by the track, which the article believes mainly include the current imperfect infrastructure technology construction, bottleneck in new user growth, and potential compliance issues. Overall, the article believes that Web3 social track performs well in terms of development prospects, development trends, and market heat. With the improvement of infrastructure, project development, capital accumulation, and token listing, this sector has good investment potential and development prospects.