Cryptocurrency: Quantifying Network Effects

in LeoFinance2 months ago

As we head deeper into a digital world, we are seeing a lot of things changing. Nowhere was there a bigger difference in the valuing of companies that constructed digital platforms. Over the past couple decades, names such as Apple, Facebook, and Google became some of the most valuable companies in the world.

This was coincided with a similar move out of the Chinese firms. Alibaba and Baidu were also able to ascend to the top of the most valuable Chinese companies by doing the same thing.


Each of these firms relied upon the Network Effect to propel them to such massive heights. As more people started to use the platforms, they values were lifted. Things really took off when users were effectively "locked in" to the services provided.

These entities are massive companies that generate a lot of revenues. They went public some years ago, something that is not possible for many smaller firms. This gives them access to capital markets, a move which further fueled expansion.

The valuations are derived via trading on the different stock exchanges. Here is where people can essentially "vote" on what they think about the companies. Investors are consistently entering and exiting positions, based upon what they think about at the present moment.

Of course, markets are not correct. They will either price something too high or low, yet rarely is it accurate. That is alright since everyone should realize this and establishing accurate value is not of great concern to most investors. They are simply looking at where price is now compared to where it will be going. It is also why there can be differing viewpoints on a particular stock based upon the analysis that one utilizes.

Crypto platforms need not experience the "going public" process. Through the technology, the coin and tokens can be traded as soon as they are released. Of course, the more exchanges they appear on, the greater the activity will likely be.

The networks are completely digital in nature. All they do is online. This make it similar to the Internet companies of 20 years ago which passed on a physical presence. Hence, we see how these are dependent upon Network Effects for their value.

Without things such as land, goodwill, or intellectual property, a different mode of valuation takes place. It all comes down to the users and what they are doing on a network. The greater the activity, the more valuable a project is going to be.


Cryptocurrency allows us to quantify what the Network Effect is for a blockchain. Each day, the market decides what the price of a token will be. While this also can be askew, the market will at lease engage in price discovery. This is a big difference compared to how the venture capital world operates. Under that scenario we see a lot of guesswork in terms of valuation, especially when it comes to more capital raises.

The tendency is to focus upon price exclusively. Many feel this is the metric which denotes the value of a project. Sadly, this is not the case. Many find out that projects which people are optimistic about today can often lack staying power. In the technology realm, development is crucial. Even when companies have a large user base, they still need to keep people engaged. Failure to do so will send them the way of Blockbuster.

Facebook is probably the epitome of this concept. Consider the different nuances to that ecosystem and how it came about.

The company started with its flagship site. From there it started to increase the offerings by including little games that kept the users engaged. Millions of invites were sent out for their farm game, as a way to keep people online.

Since Facebook has select appeal, i.e. generational, the company went out and purchased Instagram. This added an entire new layer to the ecosystem. Now they were able to target (and retain) the Millennials, a rather large group themselves.

Couple that with their chat application and they had a broad part of the social media system covered.

They were not done though. Another purchase took place with Oculus. This positioned the company where it could potentially leverage the future of VR technology. It is a move that looks like it is paying off.

Of course, they kept adding to the platform with the addition of things like a marketplace. This allowed for Facebook users to engage in commercial activities, once again while remaining on the platform.

Is it any wonder the company is one of the most valuable in the world?


Ethereum is starting to capture this same idea. That chain has a lot of development on it for obvious reasons. This, in turn, attracts more developers which puts it on an upward feedback loop. Of course, the transaction fees make it difficult for many applications to operate, putting users in a bad position. We will have to see how long this takes to resolve and the impact it has.

Nevertheless, it is also not a great secret why the price of Ethereum keeps moving up. Choose most any metric and we see it increasing with regards to that blockchain. The number of wallets are consistently growing. We are seeing more TVL with its DeFi. In the NFT realm, more applications keep showing up. The ecosystem is expanding at an exponential rate.

Thus we see a massive explosion in the Network Effects that chain is enjoying. This results in massive value creation, attracting in even more money. It is something that every chain is looking to duplicate.

We also see how it is all captured in the price of the token. While it is not 100% accurate in terms of the valuation, it is foolish to argue with the market. Nevertheless, the general trend is in place. We see the metrics on Ethereum expanding in an upward direction, a move that is followed by the price.

This is a case where hype, for the most part, is taken out of the equation. With markets there is always that to a degree yet, here, we can see how the metrics are telling us what is going on. The price is simply aligning with that. We can surmise that is not the case with most projects out there.

In the end, cryptocurrency is ideal for quantifying the Network Effect that is taking place on a platform. This is something that was not the case for most projects over the years. Outside the big ones which were able to go public, access to capital markets was basically non-existent.

With cryptocurrency, we see the situation is opened to all. This will result in a major difference down the road as more projects succeed.

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I think the picture of the network effect. More users means more data and more data means the cash/value of the network increases. As this occurs we naturally have more users.

However what will happen when networks stop growing? Eventually I think some of the networks will fail to keep up with the changes.

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When it comes to guaging the correlation with market and network effect, I feel like the market doesn't always tell the full story. There are too many inconsistencies between valuation of projects and the reality.

When I think about Dogecoin that's only existing because of the Lindy effect and consistent hype, I can't help but feel like the crypto market is very immature and often just filled with knee jerk trades based on the rave of the moment.

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Markets are driven by the dual emotions of fear and greed. Those are always at play. That means there is no logic to them, they do their own thing. That is why trying to outsmart the market is impossible. It is nothing that sensibility can figure out. Yet, this is also what presents opportunity when people understand this.

Long term, many get crushed because they do not understand what is truly taking place. When price reflects what other metrics are saying, as in the example of Ethereum, then it makes sense. When it is the opposite, as with DOGE, then we see how insane things can be.

Of course, DOGE could instantly turn things around with a major use case or two. At this point, DOGE is a great example of Network Effect. It is attracting a lot of people which is key. The question is do they disappear when the mania ends?

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I've been asking myself this same question for a long time. I did some research into Doge and after weeks of study, I concluded that it doesn't make any sense.

At this point I'm thinking: will there be anything out of internet in the next decade?

Socializing is also becoming more of a internet thing thus the network effect for crypto.

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The internet will be ubiquitous in a decade or two. It will be everywhere. Everything, including us, will be a part of it. There is nothing that it will not encompass.

Essentially it will be like the air around us. We are all part of the air since it envelopes all of us. It is on our right, left, above us, and within us.

So yes this is really going to grow into something huge. I think most fail to see how big it can actually be.

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Ethereum is taking center stage and look at all the defi activity going on with it. The dapps are amazing giving people no choice but to interact with it hence increasing its use case and the userbase as well.

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No way to argue against the success there. All metrics are leading to the same conclusion. The question is will the fee structure inhibit what it taking place. Developers flock there for lots of money so their app will be profitable. Will it be successful though? If users reject the platform, which I think they will in time, we will see development move elsewhere since that is not going to be the honeypot for the average developer like it is now.

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If users reject the platform, which I think they will in time, we will see development move elsewhere

There's no doubt there's a chance this will eventually happens, for Pete sake I think a lot of blockchains even does better than Ethereum.

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Ethereum is a unique case and I frankly believe that the only reason it is still number 2 is because it has been around for a longer time.

I mean, Ethereum is awesome and all but when you look at the top 10 coins, you'll find very little utility between them.

It makes me think that the top coins aren't determined by their utility but by speculators and bots that wash trade and shit.

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I mean let's even look at it, hype sells, if it doesn't hive will be top 5. Well apart from the fact that it's around for a long time. At one time or the other we're often swayed but to pay these huge fees whether we like it or not, so this also keeps it 2.

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It makes me think that the top coins aren't determined by their utility but by speculators and bots that wash trade and shit.

I think that is the case. It is based a lot on potential and not really what is happening. That is fine since speculation often turns out to be correct. Then again, it is wrong more often than it is right.

Ethereum does have the first mover advantage, that is for sure. It has leveraged that into a great token value. Will it keep that position especially among the smaller projects in the future. That might not be the case which opens the door for something else.

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Luckily for us, we'll have front row seats to watch and participate as the whole thing unfolds.

I remember how lame the original Facebook was. It was pretty difficult to use. I never would have guessed it would grow into what it has become today. Very impressive. It can be hard to guess which ones people are going to latch onto and spread and which ones are going to be a dud.

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That is the key that I try to convey. People look at Facebook and Google as they are now, after 15 or 20 years of updates. They were not that way in the beginning. People are trying to compare Hive based applications, which are a year or two old for the most part to things that were in operation for 10+ years. It simply is not going to match up.

The difference is the gap can be closed as long as development is taking place. In 14 months, we saw a lot of advancement on Hive and more is coming.

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That is very true! Yeah, FB has come a looooong way in that time. Sometimes it is hard to remember that it is so old!

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Of course, the transaction fees make it difficult for many applications to operate, putting users in a bad position.

There are no transaction fees on the Steem/Hive blockchain.
Why do not they develop for this blockchain?

Even some previously Steem/Hive blockchain dApps left the blockchain. For example DTube, DLive and Musing.

Because the money is on Ethereum. If you are a developer and want to make money, do it on Ethereum. If you want it to succeed, outside of a DeFi app perhaps, that is not the place to go.

Hive is about to get a boost in the next couple months with modular Hivemind. That will make development a lot easier.

Plus, keep in mind that Hive is only 14 months old. That is not a lot of time to roll out development upgrades. It takes time to program stuff.

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Could we quantify the network effect on Hive now and compare it to how it was when steem was at it's peak? because even though Hive is connected to more blockchains now, I feel the network effect is less because there are very few new people and Hive it's not mentioned that often by crypto influencers as steem used to. Or maybe it's just me.

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As always interesting write up! I'm strongly of the opinion that network effect needs to be built into a platform from day 1, make it easy, make it fun, incentivize it even. When done right network effect plus marketing can create a positive feedback loop.

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Blockchain is now like the first times of the internet. It has a lot more way to go.

I agree as keeping the audience entertained or involved in something that gets added ion is the key. Hoping Hive does something similar to Facebook at some point by attracting everyone to our honey pot. We don't need billions but a few million would be a good starting point as then we will see the effect take place.

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