The surreal overvaluation of Farcaster – BitcoinBlog.de – the blog for Bitcoin and other virtual currencies

Unbelievable: The Web3 Twitter clone Farcaster receives an investment of 150 million dollars – at a valuation of one billion dollars. But why and for what?

Farcaster is like Twitter, but on Ethereum. Critical operations, such as registering a username, happen on-chain, but most things, such as posting tweets called “casts” or new followers, reactions and profile pictures, remain off-chain. For this, users must use a special wallet, Warpcast.

Because of this combination of on- and off-chain, Farcaster calls itself a “sufficiently decentralized” social network.

Farcaster was founded and developed by Dan Romero and Varun Srinivasan a few years ago, but only made it publicly available last October so that anyone can participate. There was a bit of hype about the app in February; Farcaster now says it has 350,000 registrations.

As an open protocol, Farcaster allows other developers to build on it and create so-called “frames”. This means that you can introduce your own features, such as polls, live feeds, interactive galleries and so on. This means that Farcaster claims to be not just a Twitter clone, but a new base protocol for many social networks. Ideally all of them.

150 million dollars – what for again?

Farcaster has now received $150 million. The investment round was led by Paradigm, with Andreessen Horowitz’ a16z among those taking part. According to Romero, the money will be used to attract more users and further develop the protocol, for example by introducing channels and direct messages.

It seems strange that such a young social media protocol, which is currently like Twitter with fewer users and no direct messages, receives a valuation of one billion dollars.

In any case, pure clones of other social media platforms are never successful. There are already half a dozen Twitter clones, including decentralized ones like BlueSky and Nostr, but they are all stagnating. To be successful, a social media platform has to create a new user experience. Instagram was like Twitter, but with photos, TikTok with videos, to name two examples.

Not 350,000, but a maximum of 45,000 active users

Critical tech observer Liron Shapira scoffs at the deal. He cites a dashboard on Dune Analytics that does not assume 350,000 actual users, but rather 45,000 daily active users.

For comparison: Twitter has around 245 million daily active users, which is about 5,500 times more. Farcaster’s Twitter account alone has three times as many followers as Farcaster has active users.

But even this number, 45,000, says Shapira, has been “massively” inflated by spam bots. Thanks to generative AI. If you look at the content “cast” by real people – a maximum of 5,000 according to Liron – Farcaster seems more like a Discord server that specializes in crypto, but looks like Twitter.

By comparison, large Discord servers for popular games have more than 800,000 users, while large crypto servers have more than 80,000.

A cat in a bag?

These numbers give the impression that the venture capitalists have bought a pig in a poke. In terms of the number of users, they would have been better off investing in a Minecraft server.

The interesting question now is: Why? Why are experienced venture capitalists willing to value a Twitter clone the size of a medium-sized gaming server at a billion dollars? Because they don’t know any better?

Shapira puts forward several theories. The more favorable one is that it’s similar to Clubhouse. Clubhouse is a social media audio app that a16z valued at $4 billion in 2021. The bet didn’t work out – Twitter introduced Spaces, which almost immediately killed the hype around Clubhouse – but at least it made sense: Social media platforms have the potential to grow rapidly and extremely. If there’s a 10 percent chance that a platform will be worth $100 billion, a $1 billion valuation is a good bet.

But Shapira believes other explanations are more likely – and they are much less favorable for crypto and venture capitalists.

When you are deep enough in the hole, you can only dig further

Shapira speculates that the venture capitalists may have excess capital left over from their investors but were unwilling to give it back, just as government agencies would rather invest in luxury coffee machines than admit that their budget plan was too high.

It’s worth it for the investors’ managers. If they value an app highly and invest a lot of money, they also get high management fees. The fact that they couldn’t find a better app than Farcaster and had to inflate it to such an unrealistic market capitalization is, well… unfortunate.

A third explanation is even more unfortunate, but psychologically more interesting: Shapira claims that by now “everyone has realized that Web3 is a logically incoherent idea.” They tried, they drowned the startups and dApps with money, but nothing came of it.

The venture capitalists who have sunk billions of dollars into Web3 don’t want to admit it. They fear being sued, and perhaps some of them are just trying to hide the unpleasant truth. With Farcaster, they are now trying to keep the ball rolling, whatever the cost, just to give the impression that something is happening in Web3.

For the sake of fairness…

To be fair, however, Shapira’s estimates are speculative and his opinion of Web3 is overly pessimistic. It is hardly possible to systematically distinguish between real users and spam bots. There are users on Farcaster who have more than 100,000 followers, and there are tweets or “casts” that trigger long threads and receive many replies and likes.

The concept of creating a kind of Twitter based on Ethereum and ENS domains, making it an open protocol and allowing direct messages, has its charm. It could become the communication and identity layer that has long been sought in Web3. This would mean that it could not only serve as a means of communication and opinion-making, like Twitter, but could also merge with a decentralized financial system, becoming a mixture of Twitter and SWIFT, perhaps what Elon Musk dreams of with “X”.

Since Farcaster only went live in October, it would be wrong to dismiss it as a failure or uninteresting. But the billion dollar valuation still raises questions that the pure potential only unsatisfactorily answers.