What went wrong with Friend.tech and what’s next for SocialFi

When Coinbase-backed BASE publicly launched on August 10, one app quickly became viral before eventually crashing back to earth: Friend.tech.

Friend.tech launched as a platform that lets users issue shares (now called keys, more on that later) of their social media presence and capitalize on their followers’ investment in said shares. Users create an account on the Friend.tech Dapp through their accounts on Twitter (now called X, but that’s a story for another day). The value proposition lies in the potential rise in a user’s shares/keys.

From August 10 to 21, Friend.tech grew its user base rapidly, with some notable personalities joining in on the hype, including esports influencer FaZe Banks and NBA player Grayson Allen, as well as Web3 influencers Cobie and Hsaka. At its peak, on August 21, Friend.tech recorded $9.59M in daily transaction volume and $843,760 in single day fees. The project also recorded 1.5M cumulative transactions and connected with 34,800 unique active wallets.

The next day, Friend.tech suffered a major downturn across all metrics.

How did the Friend.tech bubble burst?

On August 22, Friend.tech started its decline, logging a 67% decline in daily volume, a 56% drop in daily fees, and a 40% fall in daily transactions. This sharp swoon coincided with a few revelations about the project.

The day before, an anonymous contributor to Yearn Finance shared a briefly leaked database of more than 100,000 wallet addresses connected to Friend.tech. According to the leak, these addresses are connected to Twitter/X usernames, resulting in discussions about security and privacy.

Some users encouraged others to revoke Friend.tech’s access to their Twitter/X accounts, claiming that the app can make posts and retweets on their behalf. While some users alleged that the leak was not a cause for concern, others suggested that Friend.tech should have been more upfront with its users about their addresses being exposed to the public upon linking their Twitter/X accounts to the app.

On the same day, Web3 researcher nix.eth claimed that the Friend.tech team was also behind the launch of the Kosetto wearable NFT sticker collection that launched at the end of 2022. The researcher claimed that Kosetto encouraged its users to spam referral codes before becoming totally silent in January 2023. A quick Scopescan search into the wallet address that minted the Kosetto NFTs reveals that the latest transaction was made in January 2023.

Meanwhile, Friend.tech’s rise in popularity has potentially put it in heightened scrutiny from regulators. After all, if individuals in the Web3 community are able to investigate some red flags about the app within the day of the leak, regulatory institutions will have the power to unearth more and put a project into serious legal risk. As a response, the Friend.tech team changed the name of Shares, the core asset that is being traded on the app, to Keys, perhaps in an attempt to sidestep the potential difficulties of being tagged as securities by government agencies such as the U.S. SEC, which is in the middle of cracking down on several Web3 companies.

While the link between the leak and the decline in activity at Friend.tech is speculative at best, it is undeniable that the app has failed to recapture its early success as the hype waned. By the end of August, daily fees collected by the Friend.tech team were already below $100,000, daily transactions were under 25,000, and less than 3,000 active wallets were using the app regularly.

Ultimately, Friend.tech failed to sustain the daily activity and transactions it enjoyed during its brief period of hype. To be fair, Friend.tech showed the Web3 industry the potential of social network-driven decentralized finance (DeFi), also known as SocialFi, even for a brief period.

What is SocialFi and what can we learn from Friend.tech’s brief rise and fall?

Friend.tech is not the first app to explore the use of Web3 on social media. Even back in the ICO boom of 2017, startups like Steemit have tried establishing social networks on the blockchain. But with the rise of DeFi in 2021, the term SocialFi started being used as a shorthand for Web3 projects that combine social networking with decentralized finance. These projects aim to provide a more rewarding user experience for social media by giving its users various opportunities to capitalize on their content and connections in a decentralized manner powered by Web3.

Friend.tech leveraged the concurrent hype of the BASE launch and the added traffic brought by influencers to show a convenient way for users to profitably connect with their followers, who also gain from trading their Keys. But, as with any Web3 subcategory that has captured widespread attention, SocialFi as an industry has its fair share of apps with rapid but short-lived successes.

Web3 community-driven apps such as Hooked and Galxe showed peaks that are reminiscent of Friend.tech. Hooked, a SocialFi project on BNB Chain that also deals with NFTs and games, experienced a rapid peak in November 2022 with as many as 464,000 wallets connected to the app before quickly falling to as low as 43,500 wallets just a month later. Galxe, a multi-chain app that is used for Web3 community promos and airdrops, has seen wild fluctuations in activity, logging more than 100,000 daily active wallets on multiple occasions over the past 12 months before seeing that number fall to below 20,000 just days after moments of peak activity. It seems like SocialFi apps that have experienced moments of virality and quick growth ended up failing to hard to maintain their traction.

We will keep monitoring whether this is a recurring pattern. Another SocialFi project has risen quickly after the Friend.tech hype died down. CyberConnect, a project that allows its users to create apps for content, social connections, and digital identity, was recently highlighted in our Smart Money report following the rapid rise of its token price over the past week, driven by active trading and investments by notable entities such as DWF Labs. It remains to be seen whether the project can sustain this trading-driven rise, users will have the last word.

As for the BASE blockchain, where Friend.tech launched, the Coinbase-backed network has fared well despite the decline in activity at Friend.tech, as it continued gaining TVL (total value locked) from new DeFi products built on the new platform, as well as the added support of already established apps such as Uniswap and Stargate. In addition, since its inception, BASE has shown the capability to ride the latest trends in Web3 to pad its bottom line, as shown by the recent rise of meme coins on the platform.

Ultimately, SocialFi apps need to sustainably build upon opportunities provided by the initial hype being generated upon their launch. There are many possible paths towards a decentralized social media landscape, whether it’s through a Web3-native app that is supported across multiple popular blockchains or a non-Web3 social network that is increasingly adding Web3 characteristics. Nevertheless, SocialFi is still in its early phases, and we will continue watching out for potential killer apps in the space.

How to detect the next big thing in SocialFi?

The recent rise of Friend.tech and CyberConnect has undoubtedly led some Web3 investors and traders to seek the next trending SocialFi project. Web3 analytics play a crucial role in spotting emerging trends in the Web3 market. An effective analytics platform needs to be able to tune out data noise and zero in on the interconnections between addresses and in-depth assessments of projects and their related entities and addresses.

With 0xScope’s proprietary clustering algorithm, users can easily spot trends by verifying the comprehensive behaviour of users connected to the projects that they are keeping their eyes on. The ability to find out the number of real users, down to their activities across multiple addresses and chains, will become crucial in assessing the next big thing in SocialFi, whether you’re an individual trader looking for trading wins (Scopescan) or part of a corporate firm searching for its next killer alpha (ScopeVC).

Additional Sources: Coindesk, TechCrunch, Dune Analytics, DefiLlama, DappRadar, CoinTelegraph

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