Social trading is a form of investing where investors observe expert traders as well as their peers and follow their investment strategies via copy trading or mirror trading. With little or no knowledge about financial markets required to participate, social trading has been described as a low-cost and sophisticated alternative to traditional wealth managers.
We spoke with the team behind STFX (Single Trade Finance Exchange), a DeFi and SocialFi protocol for short-term asset management, to elaborate on the need for such infrastructure and on the requirements to ensure that all the participants will reap the benefits.
The challenges of the most popular social trading model
While most traders do not realize it, people already do trade socially, and it is the reason why Crypto Twitter or CT, a niche community that talks about crypto assets, exists said STFX's head of community and growth Peach (as his name on Twitter), in our recent Twitter Space.
However, because CT is part of a more extensive social network, it hasn’t fully captured an ideal social trading platform.
“There are loads of different ways to go about it [building a social trading infrastructure] based on what different participants are like, [and] how they engage with trading… right now there's only one kind of really cemented way of trading socially with the capture that kind of make you change how you trade,” he said.
“It's really interesting that Twitter was just acquired by Elon [Musk]. On Twitter, the highest growth sectors are niches… social trading maybe is already the value on Twitter, there's just not much capture of it,” he noted.
The platform STFX envisions is one where participants can share their thoughts and trades fast, at timestamps the activities for transparency, and provides a fast feedback loop.
“Vaultification” as one solution
STFX’s @MustStopMurad said his company sees “vaultification” as a solution. As described by STFX, vaults are pools of funds with an associated strategy that aims to maximize returns on the assets inside the vault. Vaults save investors a lot of researching time that would have been spent looking for optimal on-chain yield farming, earning, or investment strategies. Similarly, vaults can save investors from high transaction fees.
“If we think about it from first principles, what are people doing on Twitter, Discord, Telegram, and a bunch of other platforms? They're trying to figure out what other people are doing. They're trying to figure out kind of what the trends are. They maybe laugh at their failures and essentially whenever they have an investment, they're trying to shill it a little bit with others.
And what we're trying to do at STFX is essentially build a platform that helps people do all of that with the majority of their moves being obviously time-stamped on-chain so nobody can lie about their past performance - nobody can lie about anything because it's literally all on-chain, kind of forever embedded into the course of history,” said @MustStopMurad from STFX.
“We want to focus on directional trades to start and every single one of our vaults represents a completely different trade idea. Our platform is completely permissionless, so anybody with an Arbitrum wallet can create their own vault. We aim for STFX to be as permissionless, decentralized, non-custodial as possible,” he said.
The killer use case for social trading, rewarding skill instead of clout
A large shortcoming of the current social trading infrastructure is the inability to verify quality. The ability to manipulate a Twitter feed to delete your losers and only show your winners creates a false public record and presents a skewed success rate. For example, Peach cited some players on social media who have huge numbers of followers but aren’t actually good at trading. We all know that one influencer uses inspect elements on their PnL posts.
“Instead of it just being generalized clout… tie that [clout] to ‘what did you say, what did you tweet at a certain point and what did you actually do?’ … [There are] traders who don't have the $10 million asset in their portfolio, but they have the skill… we need better infrastructure for people to be able to scale what they're good at trading and be just a wallet,” Peach said.
As part of WOO Network’s efforts to bring this infrastructure, a leaderboard feature was added to allow users to see and follow the top 100 Traders on WOO X. The list can be sorted by PnL, ROI, and Sharpe Ratio in different time periods. The information in the board is calculated from the total trading record, including the GUI trading, and API trading in the main account and subaccounts in the period that you selected on the top right of the board.
“[For the WOO X community], we have a lot of social trading ambitions with the launch of our leaderboard recently, you know, as we move our product suite into that direction… we are very much aligned on this goal towards products and infrastructure towards supporting social interaction while trading,” said Josh Workman from WOO Network’s ecosystem team.
While social trading infrastructure does exist, it is far from perfect- driven by ‘clout’, not by ability. Both WOO Network and STFX seek to create a new standard in social trading, removing the guesswork in recognizing quality, and allowing easier entry for market participants to find and follow the best traders in the industry.
We recently saw the interplay of social trading in the recent crash of the crypto market that was caused by the FTX debacle. Traders went to Twitter to check the latest updates from influencers, news organizations, and crypto companies. The challenge is filtering out noise for sound decision-making.
“I think the next evolution of crypto trading is to the point where it aligns incentives of everyone participating but essentially removes those doing it [social trading] for the wrong reasons,” Jason Brannigan of WOO Network investment team said.
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