The surreal overvaluation of Farcaster

Incredible: Web3 Twitter Clone Farcaster Receives a $150 Million Investment – Valued at 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, while most actions, like posting tweets called „casts“ or new followers, reactions, and profile pictures, remain off-chain. For this, users need to use a special wallet called Warpcast.

Due to this combination of on-chain and off-chain actions, Farcaster calls itself a „sufficiently decentralized“ social network.

Farcaster was founded and developed by Dan Romero and Varun Srinivasan a few years ago, but it was only made publicly accessible last October, allowing anyone to participate. In February, there was a small hype around the app; according to their own statements, Farcaster now has 350,000 registrations.

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

150 Million Dollars – For What Again?

So Farcaster has received $150 million. The investment round was led by Paradigm, with participation from Andreessen Horowitz’s a16z, among others. According to Romero, the money will be used to attract more users and further develop the protocol, such as introducing channels and direct messages.

That such a young social media protocol, which currently operates like Twitter with fewer users and without direct messages, receives a valuation of one billion dollars seems odd.

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, all of which stagnate. To be successful, a social media platform must 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

The critical tech observer Liron Shapira mocks the deal. He cites a dashboard on Dune Analytics, which doesn’t count on 350,000 actual users but rather 45,000 daily active users.

For comparison: Twitter has approximately 245 million daily active users, about 5500 times more. Even the Twitter account of Farcaster has three times as many followers as Farcaster has active users.

But even this number, 45,000, Shapira says, is „massively“ inflated by spam bots, thanks to generative AI. Considering the content „casted“ by real people – according to Liron, at most 5,000 – Farcaster seems more like a Discord server specializing in crypto but looking like Twitter.

Large Discord servers for popular games, by comparison, have more than 800,000 users, and large crypto servers have more than 80,000.

Buying a Pig in a Poke?

Given these numbers, one might think the venture capitalists have bought a pig in a poke. In terms of user numbers, they would have been better off investing in a Minecraft server.

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

Shapira offers several theories. The more favorable one is that it is similar to Clubhouse. Clubhouse is a social media audio app that a16z valued at 4 billion dollars in 2021. The bet didn’t pay off – Twitter introduced Spaces, almost immediately killing the hype around Clubhouse – but it made sense: social media platforms have the potential to grow rapidly and extremely. If there is a 10% chance that a platform will be worth 100 billion dollars, a one-billion-dollar valuation is a good bet.

However, Shapira considers other explanations more likely – and they are much less favorable for crypto and the venture capitalists.

If You’re Deep Enough in the Hole, You Can Only Keep Digging

Shapira speculates that the venture capitalists might have excess capital from their investors that they don’t want to return. Much like authorities preferring to invest in luxury coffee machines rather than admitting their budget was too high.

For the managers of the capital providers, it pays off. If they highly value an app and invest a lot of money, they also receive high management fees. The fact that they didn’t find a better app than Farcaster and had to inflate its market capitalization to such an unrealistic level is, well … unfortunate.

Even more unfortunate but psychologically more interesting is a third explanation: Shapira claims that „everyone has realized that Web3 is a logically incoherent idea.“ They tried it; they drowned the startups and dApps in money, but nothing came of it.

The venture capitalists who have sunk billions of dollars into Web3 do not want to admit it. They fear being sued, and perhaps some of them are also in denial of the unpleasant truth. With Farcaster, they are trying to keep the ball rolling, at any cost, just to give the appearance that something is happening in Web3.

For Fairness‘ Sake…

To be fair, Shapira’s estimates are speculative, and his opinion on Web3 is overly pessimistic. It is hardly possible to systematically distinguish between real users and spambots. There are indeed users on Farcaster with 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 sort 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 Web3 has long sought. It could not only, like Twitter, serve communication and opinion-making but also merge with decentralized finance, becoming a mix of Twitter and SWIFT, perhaps what Elon Musk dreams of with „X.“

Since Farcaster only went live openly in October, it would be wrong to write it off as a failure or uninteresting just yet. However, the valuation of one billion dollars still raises questions that mere potential does not satisfactorily answer.