Tokens are the future of social networks
Facebook has now officially announced their entry into blockchains, led by former head of FB Messenger and CEO of PayPal David Marcus. It is time to debate why all online communities may need to tokenize in the future.
Running a community is not free
While the cost of cloud computing has lowered, the cost of running a community hasn’t. With the competition for user attention at all time high, acquiring and retaining members is expensive. The global competition for developer talent combined with the rise of artificial intelligence has increased the cost of developing a competitive set of features significantly.
Assuming an average user acquisition cost of $1.00-1.50, yearly server costs of $0.50-$1.00 per user and a 12 month average lifetime of a member, you have to pay $2 million for every million members you serve before any staff and development costs.
It takes years of development and a market leader status to achieve a low churn and a loyal fan base. Take Facebook as an example. By dominating the social networking space for a decade, they have achieved 10x smaller churn than any of their competitors.
Venture capital is not free
Social networks are risky investments. They usually don’t make money for many years and have to raise massive amounts of venture capital until they reach a critical mass that allows for proper monetization.
If you want to build a large community, you have to make it free to join. To finance a competitive user acquisition campaign, you have to spend millions on advertising, PR, and influencer marketing. Top social networks spend hundreds of millions before they get to start the monetization.
Taking enormous risks, venture capitalists rightfully have high expectations for the return on their investment. They are looking for unicorn returns.
All the largest social networks come from either the US or China. Investors in these markets tend to take higher risks for a shot at market domination. The following chart shows the largest social networks globally during the month of April 2018.
Free use means your data will be sold
As I discussed earlier, it takes massive server farms and large development teams to run social networks with hundreds of millions of members. This massive scale can only be achieved by spending aggressively on user acquisition while keeping the service free.
The main way to make social networks financially viable is to sell the data of their members to advertisers and to monetize the member attention that the networks have captured. It should be no surprise that the largest social networks are also the largest advertising platforms on the planet.
Facebook alone took in 18% of the online ad revenue and 7% of all ad revenue globally in 2017. — Statista
To provide their investors a good return, these social networks have been on a quest to know their members better than they know themselves. This deep understanding is then sold to advertisers for precision targeting.
This spying has gone already way beyond reasonable.
A few months ago, I rode my bike past a Thai restaurant in central Berlin, and stopped at their door quickly to check the menu. I continued my ride home that was about 5 kilometers away from the restaurant. I opened Facebook upon arriving home, and was greeted by an ad from that same restaurant. It creeped me out, as I hadn’t done anything with my Facebook app for a day.
By now, people all over the world are waking up to a realization that their privacy is being violated aggressively by the social networks they use. People are understandably angry. But are there any alternatives?
The answer is yes.
Tokens offer a new model for social networks
Imagine a social network that didn’t have to sell your personal data or charge you money to operate. Wouldn’t that be nice? You might ask yourself — why would anyone build something like that? The most successful entrepreneurs are driven by the business opportunity.
This is possible, because the founders of tokenized communities do not earn through share ownership. They earn by receiving the same tokens that the community members receive.
Cryptocurrency tokens enable a new breed of social networks that pay you for your contributions. Think about it — instead of taking your money or selling your data for shareholder gains, tokenized social networks let you participate to the value created in the network. Of course, you can still sell your data, but this time it is for your own benefit.
Chris Dixon makes a great point in his blog post that tokens enable a new type of network effect, where utility to the founders and early members of a social network comes from the financial upside from the token value rather than from the application itself.
This is exactly why all future social networks must tokenize. It is the best way to provide incentives for early community members, and the best way to share the value the community creates. When people get used to receiving more value from tokenized communities, they will move on from the traditional social networks, which they now see as the blood-sucking vampires that they are.
Members of the new generation social networks will receive so much more value for their membership that building a traditional non-tokenized social network will become prohibitively expensive to build.
But is there any evidence of this?
Telegram: The first major tokenized social network
Telegram is a privacy-focused chat app with 200M monthly users. It was founded by Pavel and Nikolai Durov, the founders of popular Russian social network VKontakte. They ran afoul with the Putin administration for not allowing government access to the private data of their members. As a result, they were forced to sell their stake in the company. Durovs left Russia with an estimated $600M in savings, and started working on Telegram.
So far, Telegram has been offered as a free and ad-free service, funded privately by the Durov brothers. As the network grew to 200M members, it became too expensive to run just by Durov’s savings. According to their ICO prospectus, Telegram’s operational costs were 70M in 2017 with 100M estimated for 2018.
Instead of implementing ads, the brothers decided to tokenize the community to provide long term funding to the project. The idea is to fund and build a large scale decentralized and open platform that runs independently without a single responsible party behind it.
Telegram raised a total of $1.7 billion in two private token sale rounds earlier this year. This is the largest amount raised in the history of ICOs. The funding will give Telegram a comfortable runway for years to come and gives them plenty of time to build token-based business models that enable the platform to stay independent of nation states and remain privacy friendly for its users.
What’s next?
Now that Facebook has kicked off their blockchain initiative, Telegram has raised massive funding, and smaller players like Kik and Steemit have had successful ICOs, it is safe to expect many others to follow suit.
The biggest obstacle for the established social networks is difficult regulatory landscape in the US and China. Chinese RenRen planned an ICO earlier this year, but scrapped it after discussing with the local regulators. The most likely ones to ICO from the US, Reddit and WhatsApp, face similar challenges.
This is an opportunity for social networks from outside China and the US to finally enter the top ranks. Telegram will likely be the first to enter top rankings, but who will be the next?
Disclosure: My startup Inbot in building a privacy friendly challenger to LinkedIn Sales Navigator on blockchain.
Berlin, 10.5.2018
Mikko Alasaarela
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If you liked this story, check out some of my previous stories:
Towards Benevolent Capitalism
The Church of Currency
End of 2017: We are losing control
The Rise of Emotionally Intelligent AI
The Human API
How Humans will merge with Machines
Tokens could give birth to AGI, Artificial General Intelligence
AI offers us a new path to opportunity
