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What is a Network Effect?

What is a Network Effect?

Without a connection to others, a telephone “is one of the most useless things in the world.” That was the conclusion AT&T came to way back in 1908. And it’s still true. 

But it’s not just true of telephones. Think about social media apps. Without others, they’re nothing but empty platforms. It’s the network that makes all these things valuable. And as their network grows, so does their value. That’s the basic idea behind the network effect.

The network effect is a phenomenon where a product or service’s value increases as the network of people using it grows. As the user bases increases, it becomes possible to leverage more of its potential. 

Take a video sharing platform like YouTube as an example. If there were only a handful of content creators putting out videos, you’d be able to experience everything it had to offer rather quickly. But as the platform grows and attracts new users, the amount of content available to watch also increases. Eventually, a critical mass can be reached where the platform has such a massive amount of people connected to it that it almost becomes invulnerable from competition.

While network effects are definitely valuable to companies, they’re also beneficial for users and consumers. Larger networks provide them with more opportunities and experiences. Network effects can make a platform, product, or service exponentially more valuable for users than they would be without the network. This is the power of network effects.

What’s the connection between network effects and cryptocurrencies?

A currency is only as valuable as the number of people willing to use it. If I can’t use it to buy a burger or a gallon of gas, it doesn’t matter how much it’s worth in theory. 

This is why understanding network effects is essential for wrapping our minds around how cryptocurrencies might enjoy widespread adoption.

Imagine there are ten businesses in an imaginary town. If one of those businesses accepts a cryptocurrency like Bitcoin as a form of payment, few of the town’s citizens will have an incentive to start using it. After all, there’s only one place accepting it. So, the only people dabbling in it are early adopters. And there likely won’t be many. 

But what if those early adopters could convince their friends to start using crypto? And what if those people started asking other businesses to accept crypto? As the crypto user base increased, more businesses might start to think that accepting crypto would be worth it. Once they made the leap and started advertising, more people would see its use and wonder whether it would be worth trying. And so, the snowball would start rolling down the hill, growing as it goes.

That’s how a network effect could lead to cryptocurrencies being more widely adopted. As the network of users and businesses invested in the idea grows, so too does its momentum.

What about network effects and NFTs?

Network effects don’t just have the potential to increase the cryptocurrency user base though. They could have an even more powerful effect on NFTs.

When NFTs first appeared on the scene, most investors bought them because of their potential rather than their practicality. They didn’t have much use outside of bragging rights. If that’s where they stayed, they likely wouldn’t truly move into the mainstream. There simply aren’t enough people out there who care that much about bragging rights.

But what if businesses started incorporating NFTs into their products and services in more creative ways? What if video game businesses made it possible to use NFTs in-game? What if every social media platform featured ways to incorporate NFTs into its online experience? What if they could be used with thousands of apps?

crypto network effect
The notion of the network effect holds significant importance in cryptocurrency. Essentially, it denotes that the value of a cryptocurrency increases in proportion to the number of individuals who adopt and utilize it. This is due to the fact that a more extensive user base leads to greater liquidity and trading activity, which in turn enhances the level of acceptance and utilization.

If NFTs reached that kind of critical mass, it would be almost impossible to avoid them.

This is how network effects could lead to the widespread adoption of NFTs. But it’s got to begin with individuals taking the leap. It requires businesses to start incorporating them into their services and products before they’re widely used.

The ball has to get rolling before it can get going down the hill.

DeFi, Web3 & Network Effects

Over the past several years, the terms DeFi (also known as decentralized finance) and Web3 have been getting thrown around more and more. But most of that talk has happened among technological trendsetters. They haven’t fully broken into the mainstream.

This doesn’t mean they won’t though.

DeFi and Web3 are big ideas that encompass dozens of technologies and have an incredible array of uses. They’re poised to upset nearly every industry out there. And there’s little doubt that they’ll start throwing things around sooner rather than later.

Related content: How Web3 Will Reshape Digital Marketing 

Consider the way ChatGPT has entered the public consciousness over the past several months. A year ago, most people hadn’t even heard of ChatGPT. The idea of feeding questions into an AI and getting human-sounding answers still seemed like nothing more than science fiction.

But then, early adopters got wind of ChatGPT’s capabilities and started sharing their conversations on social media. Soon, every teenager with a writing assignment knew what it was. Then, teachers became aware of it. And now, there are think pieces on ChatGPT and its potential uses and misuses on every news or opinion site in the world.

How did this technology go from unknown to a central part of public consciousness in less than a year? Through the network effect. That’s why ChatGPT’s owners have finally decided to start charging for it.

The same will happen as businesses and organizations leverage the power of DeFi and Web3 to create innovative solutions to problems. The best of those solutions will inevitably spread through social and other networks.

Read also: Complete guide on DeFi Marketing

Closing thoughts

Network effects have the power to take something obscure and transform it into a core part of culture within the span of days. This is what makes the idea so powerful to businesses, non-profits, and other organizations.

Business leaders who understand how network effects work and can leverage them will be able to create businesses that are nearly invulnerable from competition.

In today’s world, networks are everything. What are you doing to build yours?

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