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New Digg CEO Kevin Rose is wasting no time in changing the direction of the site. He’s killing the DiggBar and welcoming back previously banned domains. But the big challenge he faces is to restart Digg by making it more social, real, personalized and engaging.

The DiggBar is a controversial tool that framed content with Digg branding when a user clicked through from a link on the Digg site. Though Digg had publicly defended the bar in the past, Rose was none too kind in a blog post:

Framing content with an iFrame is bad for the Internet. It causes confusion when bookmarking, breaks w/iFrame busters, and has no ability to communicate with the lower frame (if you browse away from a story, the old digg count still persists). It’s an inconsistent/wonky user experience, and I’m happy to say we are killing it when we launch the new Digg.

Further, Rose said all previously banned domains would be unbanned, another concession to Digg’s critics. The site had previously drawn fire for capriciously targeting sites for various infractions but now Rose said the only filtering will be done automatically and be targeted at malware, virus and terms of service violations. Both changes will happen at a later, non-specified date when Digg launches its version 4.0 redesign.

But these tweaks are only the start of bringing Digg back to its previous heights of growth and influence. In the last day I’ve been thinking about what Rose can really do to change Digg for the better, but it strikes me that Digg’s big problem is it’s a last-generation social site. I’m not trying to be harsh, but the company is experiencing declining traffic and influence, it missed its chance(s) to get bought, and just swapped CEOs. Digg, founded in 2004, sits somewhat awkwardly between the search era and the social era.

Sure, users have friends and posses and there are popular kids, but the dynamics of the site prevent it from harnessing the kind of active link sharing that Twitter and Facebook have run away with. I’ll admit I’ve never been in the Digg in-crowd, but the closest thing I’ve seen to a community on the site is a mob or a gathering of Diggnation groupies at a live taping.

A place where you use a silly moniker as your user ID just doesn’t feel like true socializing in these days of Facebook, Google, OpenID and (to some extent) Twitter. There’s a value to anonymity, but true social interactions are the kind of powerful things that keep you coming back. Endorsing a piece of content with your own name in the context of your known interests for an established group of friends or readers is quite powerful. Digg has already integrated with Facebook Connect, and Rose could probably do more with social norms to encourage users to be themselves on the site.

Digg actually has a lot in common with YouTube (s GOOG). Both sites are plagued with crude and unproductive semi-anonymous comments (though Digg users were rather nice to departing CEO Jay Adelson yesterday). They are user-generated content sites rather than social networks. That’s not a bad thing, but it’s accentuated on Digg because the user groups have dramatically different goals. Active users control the content. Readers come to get a sampling. Publishers hope they can game the system or at least benefit from it. Neither Digg or YouTube has really been able to cultivate a community of user-generated content consumers. YouTube, however, has the benefit of hosting videos that people actually watch, while Digg users click off site to go experience linked content. Digg had previously tried to grab for departing users with the DiggBar, but now it will have to figure out better ways to keep them around.

And in that respect, I do think Digg’s big long-awaited relaunch is a good idea. It’s supposed to make the site more personalized — so each user would see a customized news feed of stories he or she is likely to be interested in. That could go a long way towards more useful and real interactions and sharing around the site. And that, in turn, would bring back the quality traffic and network effects that a modern social web experience offers. I’m not sure if a social retrofit is even possible, but at least Rose seems motivated to chuck out past efforts and, hopefully, try something new.

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Feature image courtesy of Flickr user ojbyrne