Issue #58: Social Trading 3.0

Shout out to @dh and @tomscaria for inspiring this week’s issue.

Last April I wrote about social trading. My observation was that the collision between social media and retail investing was accelerating, creating an experience that combines the stakes of investing with the engagement model of social media.

DeFi was uniquely suited to support this because all the assets and trades are on-chain for everyone to see. We know what’s in your portfolio and your performance.

My prediction was short sided though. I didn’t account for things like DAOs and multisigs, and the unique investing models they enable.

The Web 2 social trading experience is defined by group communication but individual decision making with individual capital. I have access to more information than I know what do with with, but at the end of the day, I make a decision with my own money. The Web 3 social trading experience will be defined by group communication, and group decision making and group capital.

So with another year of perspective, my new mental model assumes that crypto has gone through two phases of social trading in the last five years, and is entering a third. We can call them Social Trading 1.0, 2.0 and 3.0.

Let’s zoom in…

Social Trading 1.0 - “Capturing attention”

If you’ve been around crypto since 2015, you might remember Poloniex’s legendary chat box. It was a giant group chat for Poloniex users, and it was insane…ly entertaining. You weren’t going to get a sliver of alpha from anyone but the banter was Grade A. And they did it without memes.

The chat box kept me and thousands of other users on the Poloniex website longer than we otherwise would have. I wasn’t even trading. I was hanging out, and that was the genius of the chat box. It was a truly degen-Crypto Twitter before Crypto Twitter was a thing.

(It was also a moderator and customer support nightmare, but that’s another story).

Platforms like Coinmarketcap later adopted similar features. Even fintechs (e.g. Robinhood) embedded social features into their investment apps. And it’s a no-brainer. These companies are fighting for our attention and these features keep you engaged.

As amazing as Polo’s chat box was though, it was one-dimensional. It was a chat feature awkwardly bolted on to a crypto exchange, completely separate from the investment process of making a decision and deploying capital.

This is Social Trading 1.0. Group communication, but disconnected from the decision making and trading process.

Crypto Twitter and a zillion private Telegram and Signal chats are in the same boat. The social component is there primarily for engagement and entertainment purposes.

Social Trading 2.0 - “Finding Signal in the Noise”

Now we’re back where I left off in my last issue.

The next phase of the collision between social and retail investing is represented by things like eToro’s social investing product that allows users to copy the portfolios of the most successful traders on the platform. Whereas 1.0 was social for largely entertainment purposes, 2.0 is about providing signal in a noisy market based on real data and performance metrics.

See what the pros are actually doing.

For regulatory reasons, this kind of social investing hasn’t taken off in the US, but I still think there is a lot of design space here to be explored.

You’re seeing analogies to this in the NFT market now too. Apps like Context offering a social feed for NFT trading activity and allowing you to follow people and groups you think have their finger on the pulse.

Again, finding signal in the noise.

This is an incremental step forward in the investing experience, but the decision making and capital allocation process are left unchanged. It’s still ultimately your decision and your money.

Investing is a largely individual experience as a result of the structures in place around financial services, taxes and property law. They are focused on a legal person - an individual or an entity. The bank account is in your name. The investment account is in your name. This money belongs to you.

DAOs and multisigs enable something new.

Social Trading 3.0 - “We’re in this together”

Before we unpack 3.0, here’s a backdrop…

Investing has become THE hobby for people 18-35. An abundance of free time and stimulus checks during the pandemic accelerated this trend, but the ingredients were already there. Fintechs and mobile apps have made the investing experience as easy as ecommerce or social media, and meme stocks, crypto and NFTs have become embedded in pop culture, and “trend” the same way a piece of content does The result is main street capital being injected into “low hanging fruit” opportunities as fast as something goes viral online.

Ok, now for 3.0.

It started with investment DAOs - one-off groups, largely made up of influential founders and investors, that pooled capital together and purchased valuable NFTs.

DAOs give groups of people who were previously limited to communicating with each other online the ability to control capital together online. Some successful examples have emerged over the last year and half.

• FlamingoDAO was incubated inside of another DAO (theLAO) and officially launched in 2020. It’s mission is to acquire NFTs, commission work from prominent NFT artists, and otherwise support the NFT ecosystem. In the last 18 months, FlamingoDAO has acquired an NFT portfolio worth an estimated $1B, including 215 CryptoPunks and 22 Bored Apes. FlamingoDAO membership units were sold publicly in exchange for 60 ETH ($23,000 at the time). There are currently 70 members, mostly influential crypto and NFT founders/investors. The charter allows for up to 100 members. Membership is now selling for 3,000 ETH (roughly $8M).

• Another example, PleasrDAO, was formed in 2021 for the sole purpose of purchasing the NFT of a Uniswap v3 ad. The DAO purchased the NFT for $500k, and over the last year has acquired a number of other “culturally significant” NFTs, including the only NFT Edward Snowden has ever created.

If you strip away the DAO label, Flamingo and Pleasr are (i) collectives of individuals, that (ii) pool capital into a multisig wallet, and (iii) allocate the capital based on group decision.

These two DAOs are doing it professionally and at scale, but the underlying components of people, multisigs and capital are everywhere and the model can be applied whether your collective has $10,000 or $10,000,000.

This has inspired platforms like Prysm, whose new NFT Squads product lets you buy, sell and manage NFTs with your friends.

This is a leap forward from an experience standpoint and leads to a new social trading model - based on shared capital and shared decision making.

Where do we end up? Prysm’s website offers some insight. Likely…every group chat has a bank account (multisig). You and your family, college friends, coworkers and professional network will own things together.

Parting Thoughts

DAOs like Flamingo and Pleasr represent a new class of influencers. If you’re a new artist, you want one of these influencer DAOs to buy your NFT. It’s like getting a retweet or a like from a celebrity online today. Keep an eye on how these large investment DAOs monetize their position and influence in the market.

Thanks for reading,

Andy

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