Will Decentralized Social Media replace Facebook?

Is all that glitters, gold?

Hi,

This is Ayaan Shah from Nextrope’s Insights. Today’s newsletter takes a look at a use-case of blockchain quite different from the finance-related usage we have uncovered so far. Decentralized Social Networks (DSNs), few of which have been in operation for the last four years, are touted as the replacement for current social media such as Facebook. Will DSNs be able to capture the social media market in the near future?

Today we’ll discuss:

  ❗️   What are the problems with current social media?

🔺  How can social media be decentralized?

📈  Who do Decentralized Social Networks (DSNs) benefit?

❓   What are Decentralized Social Media’s drawbacks?

If you have any questions, please don’t hesitate to ask as I am happy to answer them. Also, if you are working on any fintech or blockchain projects and would like to be featured in our newsletter, please reach out to me - a.shah@nextrope.com

Not financial advice

We have done our best to ensure that the information provided in the Newsletter and the resources available for download are accurate. However, the information contained in this Newsletter and the resources available for download are not intended as, and shall not be understood or construed as, financial advice.

The World of Social Media

I want to start this week’s newsletter with some facts which illustrate the extent of social media usage in today’s society.

-  There are over 3.5 billion active social media users, which is half of the world’s population.

-   91% of all millennials have at least one social media account and spend an average of three hours a day on those platforms.

-   Social media platforms generated $125 billion in advertising revenue in 2019

-   Kylie Jenner was paid $1.2 million for a single post on Instagram in January 2020

Source: World In Data

As shown in the graph above, social media’s success has been quite sudden and shows no indication of slowing down. One exception is that the number of Facebook accounts first decreased in 2018 and the platform lost 15 million US accounts by the end of 2019. The surge in social media came with significant backlash and attention, causing users to be wary of these platforms. The recent Netflix docu-drama ‘The Social Dilemma’ made this conversation mainstream, tackling the problems of censorship, opinion curation, depression, and polarization in relation to social media platforms. Amidst this debate, people have begun to ask for an alternative. The most attractive option currently seems to be that of Decentralized Social Networks (DSNs).

What are Decentralized Social Networks (DSNs)?

I first heard about DSNs when Brittany Kaiser, known widely as the whistleblower of Cambridge Analytic, was invited as a guest speaker to my class. She was working on the board of one such DSN called Voice and described the concept as “paying users to do what they always do anyway.” In addition to Voice, I found some popular ones such as Steemit, SoMee Social, Voice, Hyprr, etc., and researched each platform.

These DSN platforms typically run on the blockchain and incentivize both the creator and the curator to engage by offering rewards in cryptocurrency. While the details vary across platforms, most share the post, repost, reply, and react functions. Posts are then ranked according to the weight (more on this later) of the reactions received. These rankings determine the monetary payout to both the author of the post and those who interacted with it by reacting and replying.

These rewards are generated by advertisements and are a key element in attracting users and content creators. The rewards also incentivize content creators to create posts that would generate more positive reactions and for the content curators to vote on posts with higher earning potential. I have detailed the general process in the infographic below.

Source: Nextrope Insights Research

Who Do Decentralized Social Networks (DSNs) benefit?

Average social media users – Participating in DSNs requires no extra effort compared to the existing social media use. Therefore, users can earn an almost passive income and utilize this income stream to supplement their day jobs. This will help users reach financial goals faster and provide a financial safety net. I, myself, decided to give it a try and joined SoMee Social to understand how the dynamics work and have attached my first post (along with the earnings from the post) below.

Source: SoMee Social

Social Media Influencers - Currently, for influencers to monetize their content, they have to publish sponsored posts promoting products and services. This diminishes the value of their posts in the eyes of the followers since users have become wary of advertisements. This leads to a decline in user loyalty and engagement. Regardless, influencers are forced to monetize this way to gain a return on the amount of time they invest.

DSNs on the other hand, allow content creators to generate money without directly advertising, allowing them to focus on their content and the loyalty of their fan base. This is possible because their monetary return is linked to the number of likes they generate and not on how they sell space on their profile to corporate companies. There are plenty of stories about influencers who have earned thousands of dollars in a few days by posting good quality content. A few people have even posted that they quit their day jobs and took up posting on DSNs full time. I found that the highest income a post has ever generated on DSNs (Steemit) is $47,000.

Advertisers - It has been estimated that social media marketers lose up to $16.4 billion each year by making content that garner views from bots instead of actual users. Additionally, social media is vulnerable to fraudulent ads and malware attacks since target users’ data can be purchased. This has forced most social platform users to use ad blockers, disregarding genuine advertisers in the process.

It is believed that DSNs are immune to these challenges since all information is stored on the blockchain, ensuring transparency, and restricting any scammers from owning the data. Furthermore, real-life peer-to-peer interaction can be tracked to avoid bots. This will lead to significant savings for the advertisers and enhance the overall quality of advertisements.

Criticisms

DSNs have now been active for at least 4 years and have attracted significant attention. Despite the discussions of their advantages and potential, there has been a fair share of criticism as well.

Level of influence – DSNs work around a concept called voting power. The effect of each user’s vote on a post is different and is usually proportional to the number of points a user’s profile has. Therefore, the amount a post earns depends on the voting power of the individuals who post their content and the curators who like or dislike the content. A person who has a high voting power will get a much higher return from the same number of likes compared to a person with lower voting power. Compare the post of another SoMee Social user-posted below to mine (we got a similar number of upvotes).

Source: SoMee Social

There are two ways of generating voting power: (1) organically posting and liking others’ posts, and (2) inorganically buying the coins on a cryptocurrency exchange. Therefore, there is a clear advantage for wealthy and famous users. By this logic, the value of some accounts will increase exponentially while others will face meager gains. I found that it has been estimated that 10% of the Steemit users own as much voting power as the rest and are able to use this influence in various ways on the platform.

Censorship - Although DSNs were created as a push-back against censorship, they are not completely free of it. As previously discussed, the popularity of a post depends on the voting power of the users liking the post. The higher the rating of a post, the more visible it is to all users. Since there are a few users with massive amounts of voting power, they can vote for and popularize posts that interest them or further their agenda. They can also downvote posts that are contrary to their point of view and ensure that those posts are not seen by any other users. This can lead to online bullying, where some users downvote other posts simply because they do not like the person. Therefore, the task of censorship shifts away from social media platforms to users with the most voting power. While some argue that the existence of multiple people with high voting power and opposing views will cause an equilibrium, others think that any kind of censorship is not ideal.

Authenticity – In DSNs, Curators’ interaction may be focused on profit rather than for a genuine enjoyment of the content, which takes away the sincerity in communication. Research found that posts with positive and enthusiastic sentiment received three times higher earnings per post on Steemit, compared to posts with slightly negative sentiments. Therefore, people are incentivized to act positively even if their actual mental state is not, which can be further detrimental to their well-being. This financial motivation is in addition to the societal pressure most social media users face daily amplifying problems of self-image and depression.

Income volatility – The points that users earn on DSNs are directly linked to a cryptocurrency whose value is often volatile since the market size is relatively small compared to other, more mature assets. Therefore, if there is a bull run, users might get a false sense of financial security which would be unjustified.

Level of decentralization - Researchers have found that the level of decentralization on established platforms such as Steemit is less than what is promised to the users. Their analysis revealed that 16% of the cryptocurrency transfers on the platforms were from users suspected to be bots and found an underlying supply network for bots, suggesting a significant misuse of the reward systems.

Conclusion

DSNs’ potential seems limitless and the growth of this industry is the center of many crypto enthusiasts’ attention. Still, DSNs must navigate through their challenges as an increasing number of users demand change. Even if DSNs fail to go mainstream, they will force existing social media platforms to be more mindful of the way they treat their users.