Foresight Ventures: The Monopoly of Web3 Social Media & SoulBound Token

Alice@Foresight Ventures

TL;DR

1. The essence of social media is matchmaking. Web3 maximizes the matchmaking ability of applications and improves the efficiency of information acquisition by building a unified database.
2. The changes in quantity cause the changes in quality. Before such innovation happens, there has to be a sufficient accumulation of high-quality relationships and network effects. Web3 infrastructure precisely allows such instant iteration for any new economic models.
3. 「Fat Protocol, Thin Application」 theory is not necessarily applicable for web3 social media. Both protocols and applications are faced with the pressure of homogeneous competition. It is difficult to form a complete monopolistic ecology. Uniqueness is of great importance in the competition.
4. Compared with the existing Web3 identity protocol, SoulBound Token (SBT) has more advantages in the scenarios like untransferable reputation, airdrop, negative reputation, and wallet recovery. Currently, there are many problems to be solved(privacy, security, and storage). In the future, DIDs are likely to have multiple solutions with SBT being one of the important pieces of the puzzle.

The last article “breakdown walled-garden” outlined the panorama of Web3 social media, but due to limited spaces, there hadn’t been any in-depth discussion about more controversial topics. Therefore, this paper will further discuss three topics: How will Web3 social media evolution, the monopolistic, social protocol, and SoulBound Token (SBT)

Evolution of Web3 Social Media

The essence of social media is matchmaking, to be specific, social media provides users with matchmaking for information and high-quality networks. For example, people are willing to pay a high price to join a high-end club in order to obtain better network resources; Users are willing to spend more time on Twitter than on others because it feeds them with the knowledge that is interesting or needed most.

Compared with web2 products, the core advantage of Web3 is to build a high-performance, unified database, maximize matchmaking ability and improve the efficiency of information acquisition by using composability.

As described in the previous article, in Web3, everyone’s identity, relationship, social networking, and content creation data should belong only to themselves, instead of being separated in the wall gardens. Such data sovereignty will greatly reduce the barrier of storing and indexing data, and everyone’s on-chain identity will become open and transparent. As a result, Dapps can find high-quality contacts much more efficiently.

However, there is a need for the accumulation of such high-quality relationships and network effects. Before that, web2 social networking will still be a better choice for most users.

From the user’s point of view, we really can’t ignore the elephant in the room — everyone is very used to web2 App. This does not mean that Web3 has no chance at all. Just as Gamefi challenges the gaming industry and Defi challenges the banking industry, social networking can also attract users and rewrite the rules of the game through tokenomics. Furthermore, compared with Defi and Gamefi, the value of SocialFi is the lower entry threshold, a universal reward (anyone can get rewards by reading/posting content). Thus we believe web3 social media may have the greatest potential to onboard the next 1 billion users.

Of course, the accumulation of high-quality relationships and network effects needs to reach a critical point to form a qualitative change. This process will be tortuous. Only companies who can continuously update their products and business models and cater for customer demand can survive. Web3 infrastructure allows for such instant iteration of new economic and governance models.

The Monopoly of Web3 Social Media

In August 2016, Joel Monegro put forward the “fat” protocol theory. He suggests that in web2 , most of the value is captured by the application layer, such as Google, Facebook, Amazon, Alibaba, Tencent, etc. However, the underlying protocols such as TCP / IP and HTTP, which provide support for the Internet, cannot capture much value. In web3, the value will be concentrated in the shared protocol layer, and only a small part of the value will be distributed in the application layer, thus the “fat” protocol and “thin” application theory are born.

For most protocols, there are two factors leading to this result:

1. The shared data layer — the underlying data and blockchain transactions have equal and free access rights, and the applications will compete in a low-cost and homogeneous manner;
2. Tokens can help capture the value and enhance the security of the system (the higher the token price, the higher the security), and generate revenue.

Personally, I don’t think this theory fully applies to web3 social media. There are many reasons for it:

a. Data is not the whole story of competition

First of all, a shared database does not equal homogeneous products. User data are important, but they are not the whole story of competition. Looking back at the social product KSF of web2 (apart from user data), we can conclude that:

1. Telegram: Censorship-resistant
2. Twitter: Short tweets
3. Tiktok: Swipe & Recommendation Algorithm
4. Snapchat: Self-destruct

Therefore, there are many other competitive advantages one can build, such as product functions, user experience, matchmaking efficiency, and community atmosphere.

b. Homogenous Competition also applies to protocol

In fact, homogeneous competition caused by composability also applies to the protocol. Due to the open-sourced nature, protocols can be reused to build an optimized product. For example, Lendf took Compound’s source code and made rapid progress, its TVL quickly mounted to top10 in the industry; The same thing could happen to social protocols.

c. Applications may capture value more easily than protocols

The token incentive is an important way to capture value. In practice, tokenomic design for many protocols is far from satisfying. The problem is that issuing a token for protocol would inevitably increase the entry barrier for any social network, making it hard to attract users& developers to maintain network effect.

As Jacob’s hyperstructure theory proposed, to onboard the next 1 billion users the ideal protocol layer should be free-to-use. The protocol layer should act as **Minimally Extractive Coordinators “**The less the protocol is extracted from the coordination exchange, the more economic user exchange will occur.”.

However, this vision leads to another problem: after accruing value, how can Web3 protocol capture part of the value. Ideally, the protocol charge gas fees from projects build with its infrastructure, and the social Dapps can charges its user. It is worth noting that the protocols need to achieve a certain scale before commercialization. From this point of view, the application layer may capture value more easily: Dapps are closer to the community than protocols, thus are able to establish trust and gain user recognition through sharing profits.

d. Dynamic bargaining power between social Protocols and Applications

The bargaining power of applications and protocols is dynamic. When an application occupies most of the traffic and yet has to pay a lot of fees to the protocol, the application will tend to fork the agreement to reap more profits. For example, large-scale Gamefi games have set up their own app chains.

e. Uniqueness is the ultimate moat

In conclusion, both social protocols and social applications are facing competition, and it is difficult to maintain a monopolistic position in web3. In such an environment, uniqueness is the ultimate moat for competition.

1. Composability: Think of building a project as cooking, there are various ingredients (storage scheme, data model, identity did) on the table. Each chef has different choices of ingredients (demand scenarios, technical paths), cooking methods (product design, tokenomics), flavor (core customers, community atmosphere), skills (commercial landing ability), and innovation ability. In the end, the dishes will change. Moreover, in the dynamic changes of food materials (data accumulation, technology upgrading), how to capture the best state of ingredients for your own use will also determine the final quality of dishes.
2. Token design: how should we design a token model to capture the value creation of the community？ Combining with the idea of the Gamefi, such as randomised reward and strong externality, users can actually enjoy social interaction and become community builder.
3. Community atmosphere: as an open platform, user data and relationships may be easily copied, but community atmosphere, product experience, and first-mover advantage are more difficult to replicate. The two-sided platform naturally has user stickiness — if developers switch to another protocol or Dapp, they may not have such a high-quality user base, and ordinary users will not have such a high information matching efficiency.
4. Team : good teams are very scarce resources in Web3. Building a great social media product requires the team to work closely with each other, understand user pain points, and have a keen insight as well as strong executive power.

Soul-bound token (SBT)

1. What is Soul-bound Token

The concept “Soulbound” comes from World of Warcraft where SoulBound items mean that they can only be used by themselves and cannot be traded, mailed, or given to other players. SoulBound Token is a nontransferable token bound to your wallet address. Any online or offline institution or individual can issue SBT to a wallet, such as a university you graduated from, the enterprise you work for, the non-profit organization you have participated in.

b. What are the use cases of SBT?

Identity credentials without use cases are of no value to users.SBT has advantages over other Web3 identity solutions in the following scenarios:

1. Nontransferable reputation: SBT cannot be transferred by transactions, which add value and trust to the identity itself. By contrast, lens NFT, Poap medal can be sold in NFT marketplace, and anyone can purchase an OG identity easily.

1. Governance & airdrop: select core early contributors through SBT and distribute governance rights to make community governance fairer and return to the essence of democratic governance, preventing it from becoming a capital battlefield. Also, identity authentication can help the project accurately giveaway airdrops and efficiently match more real, effective, and high-value early contributors.
2. Negative reputation: Users can use social reputation to get loans. The agreement can conduct a background investigation on users before lending, such as using ZK zero-knowledge proof to verify that the customer has no debt default history, Or there is no excessive leverage taken.
3. Wallet recovery: if the wallet’s private key is lost, it can be recovered by obtaining the approval of most SBT community members. BY contrast, the ordinary wallet recovery method (if any) is to appoint several wallet guardians, so there is a single point of failure risk.

c. Do all user data has to be stored on-chain?

Ideally, we want an identity protocol that stores all information on-chain, however, there are many problems with implementation:

1. Cost-efficiency: storing all data on-chain is very difficult and costly; possible solution: only upload the hash.
2. Data Modification: Due to the nature of the blockchain it’s hard for users to delete chat history and contents once uploaded to the blockchain.
3. Information disclosure: the data on the chain is transparent and has no privacy, especially the negative reputation containing sensitive information of users; Solution: ZK zero-knowledge proof.
4. Data providers: not all web2 institutions are willing to upload their data to the blockchain, they would have stricter demands on

To sum up, instead of uploading all data to the blockchain we believe SBT is likely to be stored in a hybrid way, using both on-chain and off-chain databases.

d. What will the competitive landscape of SBT & other identity protocol looks like in the future?

For the off-chain identity, identity standards such as W3C verifiable credentials have been implemented and promoted for half a decade, with mature solutions and wide coverage among institutions. Examples include Unipass and Disco; For on-chain identity, projects such as galaxy and Poap cut into different niche markets and have built up their own communities,

Compared with the existing solution, the landscape for SBT is rather immature, while there are first movers such as Firstbatch and Marry3. Moreover, we expect Ethereum foundation to put forward its own SBT token or standards in the future. However, many problems need to be solved before the large-scale implementation, such as storage solutions, institutional cooperation, and privacy concerns. Even if the foundation announces its own SBT solution, identity projects are still likely to co-exist in the long term catering to different user demands. It may be very similar to what we have seen in the L1 scaling space, where Dapps could potentially choose from app chain, subnet and rollups as they represent trade-offs from various aspects.

Reference

https://jacob.energy/hyperstructures.html

https://www.placeholder.vc/blog/2019/10/6/protocols-as-minimally-extractive-coordinators

https://foresightnews.pro/article/h5Detail/7671

https://jacob.energy/hyperstructures.html

https://www.varunsrinivasan.com/2022/01/11/sufficient-decentralization-for-social-networks

https://www.panewslab.com/zh/articledetails/D99422028.html

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4105763

https://vitalik.ca/general/2022/06/12/nonfin.html

https://www.youtube.com/watch?v=TbyVyVNsyys

About Foresight Ventures

Foresight Ventures is dedicated to backing the disruptive innovation of blockchain for the next few decades. We manage multiple funds: a VC fund, an actively-managed secondary fund, a multi-strategy FOF, and a private market secondary fund, with AUM exceeding $400 million. Foresight Ventures adheres to the belief of “Unique, Independent, Aggressive, Long-Term mindset” and provides extensive support for portfolio companies within a growing ecosystem. Our team is composed of veterans from top financial and technology companies like Sequoia Capital, CICC, Google, Bitmain and many others.

Website: https://www.foresightventures.com/

Twitter: https://twitter.com/ForesightVen

Medium: https://foresightventures.medium.com

Substack: https://foresightventures.substack.com

Discord: https://discord.com/invite/jYtyfxfB

Linktree: https://linktr.ee/foresightventures