Why Social Media Companies Should Embrace Blockchain

Blockchain makes it possible to securely store and transfer digital information without the need for centralized servers. Its first application was in cryptocurrencies, such as Bitcoin and Ethereum, which enabled the exchange of money without the need for brokers and gatekeepers such as PayPal and banks. But blockchain isn't limited to monetary transactions, and many companies are employing it to create all kinds of decentralized applications in various domains.

Facebook CEO Mark Zuckerberg mentioned "cryptocurrency" and "decentralization" in his New Year's Resolution post, but without giving away details. To me, it seemed like a ploy to take advantage of the current hype (and money-making opportunities) surrounding blockchain. Similarly, messaging startup Telegram's well-documented plan to transition to blockchain looks more like a scheme to get its founders richer than they already are.

In the past year, many blockchain startups made fortunes by launching Initial Coin Offerings (ICOs), in which companies sell their proprietary crypto-tokens to raise funds for their projects. But many of these companies failed to deliver anything of value. According to a Deloitte report, of the 27,000 projects launched on the open-source code-sharing platform Github in 2016 alone, only 8 percent have survived.

In all fairness, blockchain is a very interesting technology, and it can surely solve many of the issues with which social media platforms are struggling. But are those the problems that social media companies want to fix?

Transforming Social Media With Blockchain

To understand how blockchain can transform social media, consider how a centralized service like Facebook works. Under its current architecture, Facebook is the sole proprietor of all its users' data, including profile data, connections, posts, interactions, preferences, chat logs, device information, and geolocations.

The sheer amount of information Facebook has about its users enables it to run a very profitable ad service—its main source of income. Facebook is also in exclusive control of the software that runs on its platform.

Facebook users, on the other hand, have practically no ownership of their data or control over the content they consume. They get none of the money that's made from their data. If Facebook closes their account, they can't retrieve their data. If they decide to register with another service, they can't port over their Facebook data, unless Facebook allows it. The situation is more or less the same with other centralized platforms.

“We are no longer in the era of “blockchain = Bitcoin,” and the indirect benefits

This imbalance of power could become dangerous by enabling social media companies to influence users by manipulating the content of their feeds without obtaining their consent or even letting them know.

Instead of centralized servers, blockchain-based social media networks store users' data on decentralized storage networks and encrypt it so that only users can access it. A few blockchain startups such as ONG and Nexus have deployed decentralized social media networks that put users in full control of their digital profiles, giving them the power to decide when and with whom to share it.

In this model, advertisers pay users (and not the company that owns the platform) in cryptocurrency to gain access to their data and display relevant ads to them. Users' ownership of data would also let them port their information and digital profiles to other applications and networks, without seeking permission from anyone. This gives users more choice and prevents social media companies from locking users into their platforms.

Another plus for users: Blockchain applications run on smart contracts, which are transparent, meaning you can examine their functionality. Social media companies wouldn't be able to secretly change how the application works without getting approval from the communities that support them.

Social media companies could also benefit from transitioning to the blockchain, though. For one thing, they could cut the huge cost of maintaining platforms. Some blockchain applications function on shared economies, where users can share their storage and compute resources with the network in exchange for cryptocurrency rewards. This could be a boon to companies such as Snapchat, which pay hundreds of millions of dollars in cloud server costs every year.

Companies could also relieve themselves of the responsibilities that come with handling user data, especially considering looming regulations such as Europe's General Data Regulation Protection (GDPR) and constant requests from governments to shut down the accounts of dissidents or to hand over user data for surveillance and espionage purposes.

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Social Media Giants and Blockchain

Despite the clear benefits of decentralizing social media networks, I don't think Facebook would be willing to give up the immensely profitable empire it has built on user data to give power back to users. But just the idea of endorsing cryptocurrencies and blockchain might make Facebook even richer than it already is. Large brands and established companies have reaped huge benefits simply by using blockchain terminology.

One example: In December 2017, an iced tea company managed to triple the price of its shares after it changed its name from "Long Island Iced Tea Corporation" to "Long Blockchain Corporation." And Kodak, which has been struggling since the advent of digital photography, doubled its stock price after announcing a plan to launch its own cryptocurrency, called "KodakCoin."

To be fair, Zuckerberg hinted only at cryptocurrencies and not at a full-blown blockchain platform for Facebook. But a "FacebookCoin" used only to pay for services in Facebook would be a minimal improvement—not the radical "decentralization" vision Zuckerberg also referred to.

Telegram, the other social media company that has been touting its upcoming blockchain upgrade, relies on a considerably different business model. The company doesn't display ads or sell users' data to other companies, so it has a lower barrier to entry when it comes to blockchain. The company will hold an ICO in late January for its decentralized platform, which it calls the Telegram Open Network (TON), and will launch its product in multiple phases.

Telegram's plan and white paper has everything you'd expect from a blockchain application. But I'm perplexed at why it aims to raise $1.2 billion to develop a service that won't pay for cloud servers. Moreover, it will be distributing half its tokens in a subsidized presale to large investors. This will effectively give those investors—undoubtedly including its own super-rich founders—too much sway over the application and the revenue resulting from the rise in value of its token. So while TON will technically be a decentralized social media network, it will likely end up being dominated by a powerful few.

In examining the landscape, when a startup professes to decentralize some aspect of the internet with blockchain and cryptocurrencies, I take it with a grain of salt. When an established company makes the same claim, I take it with a whole bucket.

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