SocialFi is a web3 industry attempt at solving the problem of monetizing digital content—the genuine issue affecting millions of talented creators worldwide.

From the perspective of daily users, it might be hard to see creators struggling. However, despite producing quality content daily, the overwhelming majority do not make any money at all. Many SocialFi projects have been launched in the last couple of years, aiming to solve this very monetization part by rewarding every digital interaction for both creators and users. Unfortunately, most seem to have missed the mark by leaning too heavily on aspects of decentralization rather than offering real-world solutions to existing problems. 

The origins of mass interest in this space occurred during the pandemic lockdowns. With the idea of pursuing a passion-based career becoming more mainstream, the future of social monetization was catapulted into a new growth phase. This was also a time when the crypto industry saw a mass influx of retail investors, with industry narratives steering towards building pragmatic, real-world solutions. This led to significant advancement in the SocialFi movement, and plenty has been achieved since then in terms of on-chain innovation, tokenized community governance, integration of NFTs, and other DeFi products that authentically bridge issues around creator monetization and user rewards. 

Yet, as a sector claiming to be the future of the trillion-dollar creator and freelancer economy, the modest market cap of SocialFi tokens is over $2 billion. This indicates that the sector has a long way to go in establishing itself into a global financial ecosystem. Contrast this with DeFi’s market cap (around $70 billion) or even of NFTs (around $62 billion), and it’s clear that SocialFi has a long road ahead. 

Thankfully, there are signs that SocialFi platforms and the utility tokens that power them have a bright future. This is seen in the significant volume of new users willing to join a newly launched SocialFi platform. Sure, many of these users are only there for the free rewards, but that’s the current norm for web3, whether they like it or not.

The benefits of SocialFi

To benefit from such early user traction, builders in SocialFi must be real with themselves when designing a product. The reality is that very few creators care about (or will even benefit from) decentralized content ownership or on-chain proof of IP rights. Although this is a USP widely marketed in web3, it only benefits the top 1% of celebrity creators in the world. 

What about the masses? What USP will win their attention and loyalty? The answer to this holds the solution for how SocialFi platforms can finally win market share from Big Tech’s platforms, and central to this is building hybrid ecosystems. This means fusing blockchain features (such as tokenization) with non-blockchain architecture, providing an intuitive and seamless user experience for the masses. 

While DeFi and blockchain technologies have a variety of clear benefits and value, mass adoption won’t happen if web2 users are required to get past the web3 wall of creating a digital wallet, store a 20-word seed phrase, and interact with an unfamiliar user experience. If creating an account is harder than starting an Instagram account, you’ve already lost 95% of all potential users. From a user experience standpoint, people cannot be held back by the intimidating web3 gates. 

Appealing to the masses

The winners in this space will focus on the narrative that appeals to the masses, building a community of real creators, empowering them with web3 education, and implementing real-world token utility into a seamless user experience. That’s the formula for SocialFi’s success. 

Without a doubt, the SocialFi community is tackling these challenges, and 2024 remains a crucial year for projects in this space. The current wave of innovation is the most exciting one, as projects roll out user-centric features that focus on user experience and build upon the value that traditional platforms have already created for the creator community. Tokens matter, but as a secondary driver of growth, and should only exist as a medium to enhance the user experience. This realization will shape the sector moving forward.

Dave Catudal

Dave Catudal, co-founder of Lyvely, is an accomplished entrepreneur in tech and wellness with an extensive background in product innovation and e-commerce. Credited with founding several successful wellness ventures, Dave is building the future of SocialFi at Lyvely, integrating various aspects of web3 to deliver transparent monetization and engagement tools for the creator and freelance economy. Dave previously founded one of the GCC region’s fastest-growing D2C health supplement brands. He also holds a patent for his best-selling fitness machine and online program in the US.

Traditional software-as-a-service-based multi-party computation custodians are often seen as the “convenient” solution in the crypto universe, managing a staggering portion of decentralized assets. But the reality is that the convenience quickly wears off, revealing a host of limitations, unexpected risks, and challenges as you dive deeper into the technological aspects of protecting digital currency. 

Regardless of your decentralization versus centralization stance, it is essential to recognize that the appearance of private key control can be skewered by a lack of control in policy governance and infrastructure you do not run yourself.

The rise and risks of SaaS-based MPC wallets 

The emergence of SaaS-based MPC wallets has significantly impacted the crypto landscape, allowing businesses to manage digital assets with convenience and perceived security. These wallets are typically provided by tech companies that are currently positioning themselves more and more as non-custodial service providers. However, despite this label, these solutions still require users to trust a centralized party to coordinate signing and key generation securely, placing them high on the custody spectrum in terms of control over assets. 

This reliance on a centralized service provider creates a situation where control and security are not entirely in the hands of the institution using the service. While these tech providers do not operate as traditional third-party custodians, such as BitGo or Anchorage—highly regulated and offer fully managed custodial services—they still introduce a central point of control and potential vulnerability. As used by both SaaS-based providers and traditional custodians, MPC technology involves splitting cryptographic keys required for transactions into multiple parts distributed among various parties to enhance security. 

However, in the case of SaaS-based solutions, the centralization of these services within a few dominant players introduces new risks. One of them is that these providers become attractive targets for hackers due to their significant control over many clients’ assets, creating a vulnerability similar to that of centralized exchanges. Two, the concentration of control in these SaaS-based models not only increases security risks but indirectly limits the autonomy of crypto businesses.

By relying on an external provider to manage critical aspects of digital asset security, institutions may find themselves constrained in managing policies, procedures, and the overall governance of their assets. This centralization stands in contrast to the decentralized ethos of the crypto industry, where individual sovereignty over digital assets is paramount.

The challenges of dependency and trust in MPC custodians 

While MPC wallets often claim to be non-custodial because the institution holds part of the key, the reality is far more complex: the heavy dependency on third-party vendors for day-to-day operations, security, and service availability introduces significant risks. Despite the customer institution holding a key share, all other components affecting the use or potential misuse of key shares remain under the vendor’s control. This setup creates vulnerabilities around key signing integrity but, even more importantly, introduces friction into the customer experience, an operational risk that should be accounted for.  For instance, any policy change can take up to a few weeks if it is not prioritized by the vendor, posing significant delays and operational inefficiencies​.

Analyze this potential impact further. MPC wallets can have longer transaction times, and their reliance on vendors for routine account changes and maintenance can be problematic. If a team member leaves, revoking their access is done at the vendor’s tempo. It can take considerable time, resulting in a period where the security of assets may be compromised. Additionally, service downtimes for maintenance during business hours can disrupt operations. Plus, in disaster scenarios, asset recovery can take up to 48 hours—a period that is far too long for any organization dealing with high-value transactions. These operational dependencies can be highly inconvenient. Ultimately, they pose security risks that contradict what decentralization stands for—namely, running your own wallet infrastructure.

For regulated financial institutions or firms with stringent security requirements, these dependencies are deal-breakers. That’s because the operational risks and costs associated with relying on third-party MPC wallet solutions are often unacceptable to internal risk teams. These teams are unable to get comfortable with the inherent uncertainties and potential for delayed response times that these products entail. Consequently, many MPC wallet solutions fail to pass the rigorous scrutiny of risk assessments, preventing them from being adopted by institutions that require the highest levels of security and operational control​.

A new paradigm for crypto custody

If the incumbent SaaS solutions represent the ‘trust us’ model, the ideal solution should transition towards a ‘trust but verify’ approach and, ultimately, a ‘never trust, always verify’ model. This shift empowers customers to partially or fully host the software, granting them control and ownership of critical IT infrastructure. By eliminating the opaque operations inherent in black box SaaS solutions, institutions not only mitigate operational risks hidden in the friction of operating in a third party’s sandbox but also enable more agile and flexible infrastructure management.

This enhanced control supports better risk management and allows institutions to adapt quickly to market demands, ultimately driving revenue growth and positively impacting the bottom line.

A practical solution integrates critical management and policy controls into a comprehensive platform, allowing institutions to manage their digital assets within a zero-trust security framework. This architecture continuously validates every interaction, eliminating implicit trust and enhancing security. By adopting a service-oriented architecture, institutions can tailor the system to their unique requirements, ensuring scalability, high performance, and robust security. 

Current market offerings, which rely entirely on SaaS-based MPC wallets, place undue trust in vendors who control all components, including cryptographic processes, keys, policies, and transaction data. By moving towards solutions that enable institutions to own and control critical parts of their digital asset infrastructure, the industry can mitigate risks and reduce vulnerabilities while operating more closely to the principles of decentralization. Such a transformation is essential for fostering trust and security in the rapidly evolving crypto landscape​.

Now is the time for institutions to take control of their policies. By adopting models that provide partial or complete control over key management and policy enforcement, institutions can better align with the correct treatment and oversight of service providers or outsourcing arrangements. This paradigm shift is essential for the industry’s future, and it’s something that is poised to safeguard crypto’s core values while paving the way for continued innovation and trust.

Haden Patrick

Haden Patrick is the director of business operations of Cordial Systems, a provider of institutional-grade self-custody software using a zero-trust security model.  Haden has executive experience in team leadership, engineering, and education originating from his 24-year career as a Naval Officer. After co-founding SoloKeys, the first open-source security key company, he managed projects connecting web3 to traditional finance at a cryptocurrency trading firm before joining Cordial Systems.

When forgetting their online banking credentials, individuals only need to visit their local bank branches with the necessary documents to identify themselves and recover access to their accounts. The same goes for traditional brokerages; they can reset their password online or contact support for assistance in the recovery process.

But while recovery is easy for custodial services like online banking and brokerages, things can get rather complex in crypto. On the one hand, self-custody significantly reduces counterparty risks and prevents a loss of funds in cases like the infamous Mt.Gox hack and the FTX bankruptcy. On the flip side, it also comes with more responsibilities for investors.

If crypto investors’ private keys or seed phrases go missing, there is no customer support team that can help them recover their self-custodial wallets. At this point, the funds are lost forever. In fact, a Chainalysis report estimates the loss of 3.7 million Bitcoin (BTC), worth over $220 billion at the price of $60,000, which accounts for 18.74% of the current circulating supply. At the same time, the personal research of Coinbase Director Conor Grogan reveals that more than 912,000 Ethereum (ETH) is lost forever (worth $2.41 billion). While it represents only 0.75% of the total circulating Ether supply, lost keys account for 27.5% of the cases.

The most common scenarios of losing access to crypto wallets

In which cases do veteran crypto users, web3 builders, and business owners lose access to their cryptocurrencies? Let’s look at some example scenarios to better understand the events that could lead to lost keys.

In Scenario One, a crypto user stores the private key on his desktop and backs up his seed phrase on the same device. After upgrading to a new device, he wipes his old computer’s hard drive clean, forgetting he stored his keys and seed phrases there. Consequently, his crypto holdings are gone forever.

Scenario Two presents another nightmarish case of human error. This time, an investor backs up his recovery phrase offline, printing it on a sheet of paper and storing it in his home along with other documents. However, after moving to a new apartment, the sheet with the seed phrase goes missing, and the investor fails to recover his wallet.

In Scenario Three, the founder of a crypto startup trusts the organization’s chief operating officer to manage the company’s finances. In addition to the business’ bank and exchange accounts, the COO controls all the private keys belonging to the project’s digital asset wallets. After a heated dispute with the founder and other team members, the chief operating officer resigns, refusing to provide access to the startup’s crypto wallets.

While the organization can regain control over its custodial accounts, it can’t interact with its digital asset holdings because the COO left with the private keys. In this case, a criminal investigation is the only reasonable course of action the startup can take to recover its assets. However, the case can take multiple years to conclude, and success is not guaranteed.

The above are only a few examples of how experienced crypto users can lose access to their digital asset wallets. Other cases of lost crypto may involve data corruption, hardware failures, malware, hacks, counterparty risks, mortality, and fraud.

Prevent locking users out of their crypto wallets

If crypto investors have neither access to their private keys nor their seed phrases, the only hope for them is wallet recovery solutions. However, the chances of success are tiny in most cases, and many fraudulent providers operate in this space, asking for upfront payments without providing any real service.

That is why a more efficient alternative to wallet recovery services is a decentralized trust. When creating a decentralized trust, crypto investors designate a backup wallet in case something happens with their main wallets. Suppose they accidentally misplace their private keys and seed phrases, losing access to the digital assets stored in their main wallets.

In that case, after several months without activity, the decentralized trust’s recovery mechanism automatically transfers users’ assets from their main to their backup wallets. As investors have access to their backup wallets, they can now interact with their cryptocurrency wealth, which would otherwise be considered lost.

There’s also no need to worry about a loss of funds due to the owner’s mortality. A decentralized trust can be configured to pass on inheritance to heirs based on the terms and predetermined conditions set by granters.

The next step in the evolution of crypto wallets

With multisig technology, decentralized trusts require multiple private keys to sign transactions. This eliminates single points of failure (like the case with the crypto startup’s COO in Scenario Three), reduces the chances of human error, and safeguards funds against unauthorized access.

Thus, a decentralized trust is the perfect choice for decentralized autonomous organizations, distributed Web3 teams, non-profits, and other crypto organizations to collectively manage their assets efficiently. Business owners and DAO members can even configure signature rights in a flexible way to secure the project’s assets and prevent funds’ misappropriation.

Available at a fraction of the costs of their traditional counterparts, decentralized trusts provide an effective solution for recovering access to lost wallets. As the next step in the evolution of crypto wallets, they have the potential to become popular solutions for storing cryptocurrencies. When more investors replace their old wallets with decentralized trusts, fewer digital assets will be lost to human errors, fraud, hacks, counterparty risks, and single points of failure. Eventually, this will help create a more secure and resilient crypto industry.

Ruslan Tugushev

Ruslan Tugushev is a seasoned entrepreneur and investor with over a decade of experience in business management and web development. He is the founder and CEO of UBD Network, a professional multisig platform designed to enhance security and collaboration in the cryptocurrency space, as well as the DeTrust Wallet. Ruslan has a strong background in investment capital, having previously established a successful crowdfunding platform that helped blockchain startups secure funding. Furthermore, he was also the CEO of Tugush Capital Partners, a venture advisory firm that focused on assisting companies in achieving investment-ready status, with a special focus on the blockchain sectors.