Can GDPR and Facebook Losses Boost Decentralized Social Media?

When the European Union’s GDPR (General Data Protection Regulation) went into effect last June, analysts expected the regulation will affect social media giants like Facebook. Before GDPR, Facebook used to have a better legal ground to aggregate its users’ data and use it for targeted advertising. Currently, almost all of Facebook’s huge revenue comes from advertisement. While it was pretty clear GDPR was going to affect Facebook’s revenue, Facebook in their Q1 earning call tried to downplay these expectations. However, fast forward 3 months in Q2 earning call, Facebook CFO informed investors they should expect a significant decline in Facebook’s revenue growth rates. The expected decline is due to a combination of factors like increasing data security expenses, Cambridge Analytica privacy scandal and the decline of the number of European users because of GDPR.

These news led to an immediate 20% drop in Facebook shares wiping off more than $100 Billion from the company’s market cap. This loss marked the largest one-day loss by a company in the US stock market history.

Facebook stock 20% drop after Q2 earning call(source: TradingView)

Of course, Facebook and other social media giants are expected to figure out ways to fix the situation. However, the question here is whether the newly found privacy concerns accompanied with a revenue drop in major social media platforms could help the growth of the decentralized alternatives. Would these recent events nudge investors to consider the new trend of social media decentralization? In addition, are the decentralized platforms ready to benefit from the current situation?

To answer these questions we need to first understand what advantages decentralized platforms bring to the table, what challenges they face to achieve mainstream adoption and what changes are needed to attract investors and customers/advertisers.

What advantages can decentralized social media offer?

Decentralized social media are built around a philosophy that is centered around censorship-resistance, improved privacy and users owning their content. This philosophy makes it difficult for companies to aggregate users’ data and use it for targeted advertising or political campaigning. Users can engage on decentralized social media without being afraid their information is being leaked to the companies that pay for it. On the other hand, it could allow users to make financial returns if they decide to share some of their data with advertisers or market research companies. It may also allow high-quality content creators to pocket some of the advertising money if they allow ads to appear on their content.

Building on this philosophy, Steemit was one of the first efforts to build a decentralized social networking/blogging platform. Steemit was launched in March 2016 and is supported by the Steem Blockchain which also supports other decentralized media apps like dTube. In order to encourage user engagement, Steemit uses a monetary system to reward content creators using the platform token, Steem Token. Steemit along with its innovative monetary model has gained growing interest specially in 2017 and the beginning of 2018, probably affected by the wave of popularity of cryptocurrencies. Steemit currently receives about 30M visits per monthwhich is a great success for a two years old platform. However, this is only about 0.1% of Facebook’s 22B visits per month.

Steemit interest over time (Google Trends)

Other interesting platforms are continuously being developed with censorship resistance as the main goal. PeepEth, for example, is a decentralized Twitter built on top of the Ethereum blockchain. Your micro-blogs/peeps are permanently saved to the Ethereum public blockchain and cannot be censored. The interesting observation here is that the newer projects have recognized the importance of a seamless user experience. They are trying hard to make it as easy as possible for new users to use the service. This is tackled using beautifully designed and intuitive user interface in addition to the possible financial incentives.

What are the challenges for decentralized social media to succeed?

So far, the main challenge for decentralized social platforms is the user experience. There is a significant educational and technological barrier for new users to join and use these platforms. All the decentralized platforms now are based on blockchains and require some knowledge about cryptocurrencies and how to use them. For example, signing up to use Steemit requires paying a fee in Steem tokens or waiting for two weeks to be verified by the Steemit team. After signup, users have a significant barrier to understand how the Steemit financial reward system works and how to possibly benefit from it. Other platforms like PeepEth, require users to own Ethereum to use the service. In addition, the user needs to have some Web 3.0 infrastructure like MetaMask to be able to signup for the service. These barriers are huge barriers for new users compared to email-sign-up method used by current social media platforms.

The other major barrier is the economic barrier. Decentralized social media platforms does not have incoming cash flow from advertisers. The current platforms does not allow ads even if users are willing to accept ads on their published content. In platforms like Steemit, good published content is rewarded using native tokens created through supply inflation. Every year the Steem token supply is inflated by a certain percentage. The created tokens are used to reward token vesting (staking), content creation and also the users who curate the content. However, this inflation-based economic model may have some side effects. If the network is not attracting new users, the overall network value would not increase leading to token devaluation through supply inflation. In other words, for a relatively-fixed network value, the whole Steem community is paying the reward money through a slow devaluation of the token value. In such a case, users of the platform are not rewarded using new money coming to the system like advertising money. Instead, active users are being paid through the token devaluation that all users undergo. The only way for the token to maintain its value or accrue value is by attracting new users to the platform which creates additional demand on the platform token.

Are decentralized social media platforms ready?

In the current state, decentralized social media platforms does not seem to be ready to benefit from the issues facing Facebook, Twitter and other social media platforms. Investors will not jump Facebook’s boat and use their investment money in tiny decentralized platforms. Advertisers “currently” do not have a way to advertise on Steemit or other similar platforms and may not see it profitable to do so. Decentralized platforms need to figure out ways to accrue value to the platform and create demand for the native platform token.

On the other hand, these platforms are slowly but consistently building popularity, on-boarding users, improving the user experience and teaching users the importance of privacy and owning their content. When these concepts gain critical mass, decentralized platforms will be ready to chip away part of Facebook and Twitter revenue. In addition, GDPR is very likely to accelerate the adoption of decentralized social media and blockchain technology in general.

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