With the era of Web 3.0, the third-generation of the Internet revolution, services utilizing blockchain mechanisms just cannot be ignored by their significant existance.
In 2021, when DeFi (Decentralized Finance) and <a href="../../blogs/nft-development-the-ultimate-guide-from-nft-game-widiland" target="_blank" rel="noopener">NFT</a> (non-fungible tokens) attracted a lot of attention, <a href="../../blogs/metafi" target="_blank" rel="noopener">Metaverse</a> began to come into the spotlight. Furthermore, there is a <a href="../../blogs/pros-and-cons-of-dao" target="_blank" rel="noopener">DAO</a> (Distributed Autonomous Organization) in the administrator-absent blockchain platform that supports the Metaverse.
DAO shows the best value of decentralized ecosystem based on blockchain that does not depend on centralized entities such as governments or large corporations, and the financial mechanism that applies DAO is SocialFi.
SocialFi can be said to be the newest blockchain service, and as in the first half of 2022, there is still no clear definition about this. However, the concept formation is definitely progressing, and if SocialFi spreads globally, there is possibly a crustal movement that will occur in the monetization method using SNS and blockchain.
<div class="mce-toc">
<h2>Table of Contents</h2>
<ul>
<li><a href="#mcetoc_1ga0ubvsk36">What is SocialFi?</a></li>
<li><a href="#mcetoc_1ga0ubvsk37">How it was created?</a></li>
<li><a href="#mcetoc_1ga0ubvsk38">SocialFi - The main mechanism</a></li>
<li><a href="#mcetoc_1ga0ubvsk39">Example</a></li>
<li><a href="#mcetoc_1ga0ubvsk3a">Future Potential</a></li>
<li><a href="#mcetoc_1ga0ubvsk3b">Summary</a></li>
</ul>
</div>
<h2 id="mcetoc_1ga0ubvsk36" style="text-align: justify;">What is SocialFi?</h2>
SocialFi is a concept that combines SNS (Social Networking Service) with Blockchain and Finance. In other words, it is an SNS platform where individuals can earn money.
Traditional SNS such as Twitter and Instagram have been used as tools for individuals to send various kinds of content. Since those services are provided by administrators of Social Companies such as Twitter and Meta..., profiles, comments, images and videos have all been managed on corporate servers.
SocialFi makes it possible for users to privately manage those things through a decentralized mechanism that applies blockchain technology in the absence of administrators. In addition to sharing contents it is also possible to monetize with crypto assets by exchanging them.
In other words, the comments, likes, images, and videos that have been posted on SNS until now will become the target of business and will be able to make them assets.
<h2 id="mcetoc_1ga0ubvsk37" style="text-align: justify;">How it was created?</h2>
The transition from Web 1.0, where the Internet was simply browsed, to Web 2.0, which made it possible to build interactive relationships on the Internet such as SNS, whose dramatic growth was encouraged by the huge tech companies (known as <a href="https://www.statista.com/topics/4213/google-apple-facebook-amazon-and-microsoft-gafam/#topicHeader__wrapper" target="_blank" rel="noopener">GAFA</a>).&nbsp;
FaceBook in 2004, YouTube in 2005, Twitter in 2006, and other SNS and video sites were launched one after another, and the building of interactive relationships and the formation of communities on the Internet began to spread explosively. Along with this movement, the growth of Amazon, which has built a major global economic zone in e-commerce, and Apple, which has enabled a major digital shift through the development of smartphones, has been remarkable. The market capitalization of only four companies, including Google and Meta, has grown to such as high level that exceeds the total capital of approximately 2,170 companies listed on the First Section of Tokyo Stock Exchange in Japan.
And the hidden side of this is the control and utilization of big data focused on personal information by giant techs. With the spread of SNS, the act of monopolizing enormous profits by accumulating and selling profiles, behavior histories, tastes and preferences data, regardless of the person's intentions, eventually came under worldwide criticism. Content, retweets, and personal data on SNS are not fully owned by users themselves, and if individuals can freely use these for business purposes, the profits are immeasurable.&nbsp;
Based on the background of such social dissatisfaction and needs, SocialFi was developed as an ideal system that anyone can join in without an administrator and can monetize while managing personal information and content by themselves. So, how SocialFi can help people meet these needs?
<h2 id="mcetoc_1ga0ubvsk38" style="text-align: justify;">SocialFi - The main mechanism</h2>
DAO is an organization built on blockchains equipped with smart contracts, such as Ethereum, where each member is involved in the operation without a central administrator.
All transactions in DAO are automatically executed by smart contracts and recorded on the blockchain, so third parties is impossible to view and make any action. DAO members have the right to vote on project policies by obtaining their own community tokens, while earning rewards through staking and trading.
SocialFi mainly adopts the method of converting content into NFT and exchange it on DAO. If you use crypto assets such as Ethereum, Solana, and Polygon, you can link comments, retweets, images, videos, etc. Let's look at an example to make the story easier to understand.
In 2021, the news that Twitter founder Jack Dorsey's first tweet in the world was sold at auction for $ 2.9 million (about 310 million JPY) spread all around the world. It was NFT which made this possible.
NFTs can usually be traded by being listed on a dedicated marketplace. When digital content is purchased with cryptocurrency, ownership is transferred to the buyer and continues to have unique value. In this way, digital art, videos, images, music, and the contents of tweets are traded.
It would be easy to understand if SocialFi is to shorten this process further and buy and sell NFTs as they are within DAO without using the marketplace. In other words, in the above example, you can not only send comments tweeted on Twitter, but also sell them as NFTs on the spot. Not only that, likes and retweets will also reflect token rewards.
With DAO, there is no administrators and you can trade using your cryptocurrency wallet address, so your information will not be exploited by anyone, and your data will not be sold without permission. It also has the advantage of significantly lower fees.
Even if YouTube distributes videos, most of the advertising fee is Google's revenue. However, when SocialFi becomes real, it will no longer be a dream to create excellent content and receive advertising fees directly from companies. With this, SocialFi is sometimes called &ldquo;Write to Earn&rdquo; or &ldquo;Social to Earn&rdquo;.
Just as celebrities and actors appear in commercials and earn a guarantee, it can be said that SNS will be used to invest in your own content and earn rewards. It is no exaggeration to say that if this business model is established, there will be a major shift in monetization methods using SNS and blockchain.
Related article: <a title="Pros and cons of DAO &ndash; Next generation organization" href="../../blogs/pros-and-cons-of-dao" target="_blank" rel="noopener">Pros and cons of DAO &ndash; Next generation organization</a>
<h2 id="mcetoc_1ga0ubvsk39" style="text-align: justify;">Example</h2>
One example of SocialFi is "Lens Protocol", the alpha version of which was just launched in May 2022.
Lens Protocol is a service that allows individuals to freely build decentralized social media networks. It runs on Polygon's blockchain, and you can develop your own worldview with content such as long texts, music, and games, and decide the distribution range and monetization method yourself.
User IDs work by linking cryptocurrency wallet addresses and NFTs, rather than using real names and email addresses like traditional SNS. Shortly after its release, over 50 projects have already been built on the Lens Protocol.
<h2 id="mcetoc_1ga0ubvsk3a" style="text-align: justify;">Future Potential</h2>
&ldquo;Fi&rdquo; in SocialFi means &ldquo;Finance&rdquo;, which means the reason why SocialFi exists is to earn money.
If it becomes possible to monetize through SNS, which was not in the past, it will become an incentive, and we can expect to see the emergence of attractive content that has never existed before, such as valuable texts, epoch-making digital art, and rare videos. If that movement becomes a prime mover, and companies as well as investors actively invest in SocialFi projects, the future will be greatly enhanced.
However, the revenue based on SocialFi is crypto assets, and if the tokens in the service rise, the reward amount will increase significantly, but if it crashes sharply, the remaining revenue will be insignificant. Therefore, it can be said that the unstable value compared to fiat currency is a major concern for SocialFi.
In the case of YouTube, which was mentioned as an example earlier, most of the advertising fees are certainly collected by Google, the administrator. However, content creators are paid in fiat currency, so the value is incomparably more stable than crypto assets.
SocialFi's examples are still limited, so it's unclear how much revenue can actually be expected. However, even MANA, a crypto asset that can be used in the NFT game <a title="Decentraland" href="https://decentraland.org/" target="_blank" rel="noopener">Decentraland</a>, which is popular as a DAO representing the Metaverse, is currently experiencing extreme fluctuations. Even looking at price trends since the beginning of 2022, there are examples where prices have fallen to less than one-third in just one month.
Even Decentraland, which is like a descendant of the Metaverse, which has been attracting worldwide attention after being requested by FaceBook to change its name to "Meta" in October 2021, is in this state. Therefore, even if the raison d'etre of SocialFi is recognized, it may take some time before it actually gains citizenship as a method of monetization.
<h2 id="mcetoc_1ga0ubvsk3b" style="text-align: justify;">Summary</h2>
SocialFi is a noticeable concept as a monetization method that utilizes blockchain, along with &ldquo;Play to Earn&rdquo; that earns from NFT games and &ldquo;Move to Earn&rdquo; that acquires crypto assets by moving the body such as walking.
However, at the present, the theory is somewhat preceding, and even if the scheme for practical use has been constructed, it is thought that many of them will still take time before they are released. Therefore, future trends will be under tight observation.
At Relipa, we help our customers build blockchain services step by step. If you are considering DX using blockchain such as NFT, DeFi, and IDO, please contact us.&nbsp;
Relipa exists to enhance growth mindset for modern young generation, create a positive, knowledge-sharing environment and people-first attitude for all members. By doing so, we provide professional and reliable services to our customers.

MetaFi - The game changer in digital world

<div class="mce-toc">
<h2>Table of Contents</h2>
<ul>
<li><a href="#mcetoc_1g6a0l7463c">Liquidity is key in DEX Operation</a>
<ul>
<li><a href="#mcetoc_1g6a0l7463d">Liquidity Pool</a></li>
<li><a href="#mcetoc_1g6a0l7463e">Liquidity Mining</a></li>
</ul>
</li>
<li><a href="#mcetoc_1g6a0l7463f">AMM is overwhelmingly effective in DEX</a>
<ul>
<li><a href="#mcetoc_1g6a0l7463g">About AMM</a></li>
<li><a href="#mcetoc_1g6a0l7463h">Mechanism of AMM&nbsp;</a></li>
</ul>
</li>
<li><a href="#mcetoc_1g6a0l7463i">Variation loss is possible in AMM Method</a></li>
<li><a href="#mcetoc_1g6a0l7463j">In conclusion,</a></li>
</ul>
</div>
DEX (Decentralized Exchange) allows users buy, sell and exchange crypto-assets without managers or intermediaries。As everyone can join DeX at a low price, process speed is significant without identity verification, the usability of DeX is highly evaluated, and its presence among all the DeFi services is now becoming more and more noticeable.&nbsp;
The liquidity of DeX is supported by AMM (Automated Market Maker). Since AMM autonomously provides liquidity in the market, users can freely trade crypto-assets whenever they want. Conversely, programming a high-quality AMM is essential for developing a reliable DEX.
In this blog, we will find out more about the important role of AMM, and the reasons why it has been used widely in DEX development.&nbsp;
<h2 id="mcetoc_1g6a0l7463c" style="text-align: justify;">Liquidity is key in DEX Operation</h2>
Knowledge about DEX liquidity increase mechanism is essential for a deep understanding about AMM. How to increase liquidity turns out to be the key point in developing a high quality DEX. The first things to mention are Liquidity Pool and Liquidity Mining, which are the core principles of DEX Liquidity.&nbsp;
<h3 id="mcetoc_1g6a0l7463d" style="text-align: justify;">Liquidity Pool</h3>
DEX is an crypto-asset exchange, which allows users buy and sell directly from their wallet without&nbsp; centralized managers. In order for DEX to operate smoothly and continuously as a trading market, it is essential to guarantee the liquidity.
Liquidity refers to the ease of selling crypto-assets. Liquidity is high if users can sell cryptocurrencies they own easily and fast in the market. Otherwise, liquidity is low if there are no buyers and transitions are hard to form. Of course, with high liquidity, the market will reach its complete growth and attract a great deal of attention from investors. Therefore, all DEX developers are seeking the way in which they can increase liquidity.&nbsp;The level of liquidity depends largely on the popularity of crypto assets, but "Liquidity pool" in DEX has a average effects on liquidity. When launching DEX, the investors, called Liquidity Provider (now LP), form the market by offering token in form of equal sets. This token is provided to a "Liquidity pool", a type of smart contract that is programmed to automatically form a transactions without an intermediary or administrator.
As later introduction, in order for DEX to operate, it is important that tokens provided by LP in pair or a set of multiple tokens are accumulated in the liquidity pool with a certain volume. In the transactions on DEX, users put the token they want to sell into the pool and then withdraw another token they want to buy. All of these transactions are done automatically by smart contracts, which is called AMM (Automated Market Maker). If there are many tokens in the liquidity pool provided by LP, it will be easier to form the transactions, but if it is too few, the trade can not be formed.
In other words, the more plentiful the tokens provided by LP are, the higher liquidity will be.&nbsp;
<h3 id="mcetoc_1g6a0l7463e" style="text-align: justify;">Liquidity Mining</h3>
The price of the tokens that LP provides to the liquidity pool do not always keep the upward trend, so LP carries a considerable risk of losing assets. LP provides token under the awareness of these risks, because the only thing they can do is hoping for a reasonable return. Each DEX project provides attractive incentives to make sure of the stableness of liquidity and encourages many investors to become LPs. The main axis is "liquidity mining".
Liquidity mining specifically includes free distribution of LP tokens, distribution of transaction fees within the service, and even thousand percentage of extraordinary interest. LP tokens are evidences that the tokens have been put into the pool and are used for exchange when provided tokens are withdrew from the liquidity pool. If you deposit LP tokens on an exchange farm, you will earn farming income. Transaction fees are structured so that they can be received in suitable proportion to their share to the whole liquidity.
In other words, if the liquidity of DEX is sufficiently secured and many users trade frequently, the value of LP tokens will increase and the commission income to be distributed will also increase. If you raise the time when the price of the provided tokens increase, you can gain income, and if you sell them, you can get capital gains. This is the real pleasure of liquidity mining, and the results will decide the true value of the DEX project.
Also see: <a href="https://relipasoft.com/blog/dex-amm/">https://relipasoft.com/blog/dex-amm/</a>&nbsp;
<h2 id="mcetoc_1g6a0l7463f" style="text-align: justify;">AMM is overwhelmingly effective in DEX</h2>
<img class="responsiveImage" src="http://api.relipa.global/storage/463/2.jpg" alt="AMM - DEX" />
<h3 id="mcetoc_1g6a0l7463g" style="text-align: justify;">About AMM</h3>
In CEX (Centralized Exchange), order book model is used to match traders who want to sell tokens with those who want to buy them. The order book model is the same as stocks and government bonds, in which the intermediaries search for a buyer who meets the condition presented by the seller of "How much you want to sell for ~ JPY" . In other words, the price at the time of trading is fixed.
On the other hand, AMM, which is often used in DEX, uses a pre-built formula to automatically calculate the price according to the amount of token that the user puts in and withdraws from the pool. In other words, at AMM, smart contracts are autonomously determined, rather than traders setting prices and selling. In addition, there is an advantage that transaction fees can be reduced and speedy transactions are possible because no intermediaries are involved. The order book method requires the intervention of an intermediary for each transaction, which is time-consuming and tends to slow down the transaction speed. For Ethereum, the scalability problems of increasing fees and delays in transactions are serious, and in order to solve these problems, there is an increasing demand for the AMM method, which enables cheap and speedy trading.
<h3 id="mcetoc_1g6a0l7463h" style="text-align: justify;">Mechanism of AMM&nbsp;</h3>
As a basic pattern of DEX, it is common that two types of tokens are stocked in the liquidity pool. When a trader adds one and buys the other, AMM's algorithm is programmed to lower the price of the token of which the quantity increased and increase the price of the other token.
To make the case easier to understand, let's assume a simplified fictional DEX and explain it in detailed.
Supposing that LP provides two types of token to the liquidity pool, A and B.
The price is "1A = 200 yen" and "1B = 500 yen".
The quantity of A is represented by "a", the quantity of B is represented by "b", and the program is set so that "a x b = 4,000". This means that the trader is required to maintain a constant of "4,000" for the quantities of both tokens at all times, no matter what the transaction is. By the way, the formula defines constant quantities of these two types of tokens was introduced in Uniswap V2 of DEX.
In DEX, when LP provides tokens, it is a rule to provide two tokens in the same amount. Therefore, supposing that the total value of tokens A and B is the same amount of "20,000 JPY". Then you can see that the amount of asset is "a = 100A (20,000 JPY&divide; 200 JPY= 100)" and "b = 40B (20,000 JPY&divide; 500 JPY= 40)". DEX will probably start from this state.
If the trader adds 100A to the pool, the token amount a will be 200A because 100A is added to the original 100A. Here, in order to maintain the constant "4,000", the token amount b of B is reduced to 20B (4,000 &divide; 200 = 20). And the price of 1A will drop to 100 yen as a increases (20,000 JPY&divide; 200 = 100 JPY), and the price of 1B will increase to 1,000 yen as b decreases (20,000 JPY&divide; 20 = 1,000 JPY).
So all transactions are maintained by the autonomous work of smart contracts built into AMM.
Actually, DEX is not as simple as this. The higher the liquidity, the more complicated the movement, because there are more tokens in the pool and the number of trades will increase.
There are examples of the order book method being implemented in DEX, but the current situation is that the AMM method is overwhelmingly more common. The main reason is that the Ethereum blockchain, as mentioned above, emphasizes low fees and speedy trading, so it is inevitably impractical for the order book method, which may take time and effort.
<h2 id="mcetoc_1g6a0l7463i" style="text-align: justify;">Variation loss is possible in AMM Method</h2>
When adopting the AMM method in DEX development, a risk to consider is &ldquo;variation loss&rdquo;. With AMM, tokens in the liquidity pool are constantly changing in price. Then, in some aspects, the value of the token may drop excessively, and for LP, the phenomenon that the price was higher before being provided may occur temporarily. This is "fluctuation loss".
For example, if the price of Token A was 1,000 JPY per unit, but if there are unexpectedly many users who sell Token A, the price will drop to 800 JPY, 500 JPY, and so on.&nbsp; This is the mechanism of AMM, so intervening is impossible. However, in this case, if the LP withdraws this token from the liquidity pool by cutting the numbness when the price drops to 500 JPY, a variation loss of 500 JPY per unit will occur . However, if you keep following, it is quite possible that another token will be sold and the value of token A will be pulled back to nearly 1,000 JPY. On the contrary, the loss may exceed 1,000 JPY depending on the situation.
This is considered to be an unavoidable bargain to be a LP. At the same time, as a DEX developer, it's important to keep in mind that it's important to have an attractive incentive that can be remain to compensate for the loss of LPs.
<h2 id="mcetoc_1g6a0l7463j" style="text-align: justify;">In conclusion,</h2>
The key points of DEX development are "Presentation of a project that stimulates investment motivation", "Development of a liquidity pool equipped with excellent AMM", "Selection of crypto assets with future potential", and "Preparation of incentives to attract LP". Developing DEX that meets these requirements is not easy, but if it is successful, a very attractive market will be created.
If you are thinking of enhancing DeFi services such as DEX, feel free to contact us, we will help you to gain success. Our experienced engineers are looking forward to hearing from you.

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