Network effects in the cryptoverse
Why we are still at the very beginning of a crypto era
What is a quick way to determine which of the above ICOs will be run-away successes, or atleast stand a chance?
Satoshi Nakamoto gave the world bitcoin in 2008. Even though it has taken a decade for bitcoin and its siblings to truly burst into mainstream consciousness, innovation and experimentation has been rife all along bringing us to the current paradigm of the ICOs. Ethereum was born in 2014 out of such early bitcoin experiments, and it proved a run-away success because it departed from the precincts of thinking prevalent at that time. Ethereum was conceived as a platform, not as one of those products trying to improve some bitcoin feature!
Given that most of the current crop of ICOs are developed from ideas expressed in the paper — “A next generation smart contract and decentralized application by Vitalik Buterin”, we are still at the brick-laying stage of the cryptoverse. Just as most innovation in the early bitcoin years was around bitcoin features, most current innovation is around ideas expressed as Ethereum’s future applications in Buterin’s white paper.
So, how do you determine which of the above ICOs stand a chance of being run-away successes?
Easy. Just assess which of them are products and which are platforms. Ceteris Paribus, of course!
Since I have jumped ahead and laid bare the conclusion without leading you gently to arrive at your own, let me explain the very obvious rationale for my conclusion that platforms are better than products.
Network effects: Network effects refers to the impact that the number of users of a platform has on the value created for each user. Positive network effects refers to the ability of a large, well-managed platform community to produce significant value for each use of the platform. Negative network effects refers to the possibility that the growth in numbers of a poorly managed platform can reduce the value produced for each user. Positive network effects are the main source of value creation and competitive advantage in a platform business.
Supply-side economies of scale prevailed in the industrial era.
Demand-side economies characterise many of the current platform businesses.
While intellectual capital has emerged as the predominant competitive advantage distinguishing the modern firm, we can observe that capital has always played a substantial role in giving winners the edge in achieving early dominance. Capital plays an even more critical role in economies with network effects and two-sided marketplaces, where winner takes all! Because, networks are natural monopolies!
Examine each of the platforms below, and see how many of them are monopolies!
Uber, Airbnb, Paypal, Apple’s Appstore are all examples of two-sided networks. There is place for only one all-encompassing network to serve the consumer most efficiently, if done right! This explains the success of each of these platforms.
Apple’s ability to hoard its cash reserves of over $150 billion in anticipation of any surprising opportunities that may manifest, and face book’s ability to bid close to $10 billion dollars for WhatsApp — in what appeared then to be a jaw-dropping valuation for something that posed only a tangential threat to facebook — are revelatory of the peculiar attributes of platforms and network economies. And, as revealing of Apple and facebook’s ability to spot that their competitive advantage lay in building more network effects.
How to distinguish a platform 1.0 from platform 2.0?
Let me define Uber 1.0 for you, and distinguish it from Uber 2.0 which we have to imagine at some point in the future. Well, Uber 1.0 is Uber in its current form, that can be construed as a platform business applied to real world constraints. Theoretically, in Uber 1.o, you are only going after converting potential rides in the current scenario to Uber rides, no matter how magical the Uber formula is, and how much of a magician you believe Travis Kalanick to be!
Now think of Uber 2.0 as something that also sought to capitalise on derivatives of Uber — say a combination of rides to the skies (Spacex), cargo deliveries on Uber (Fedex), Drones that hovered over touristic spots (Lets call it DroneX), Random blind dates on Uber pools driven by a matching algorithm (Lets call it DateX) and so on, and imagine how much more difficult it is (for a linear thinking academic or traditional VC atleast) to comprehend the market size of such a thing and value such a complex platform!
Now apply that to an abstruse science. Well, make that a potpourri of discrete technologies, humanities, arts and sciences — cryptography, computer science, econometrics, behavioural finance, mathematics, databases, monetary policy, theory of money, socio-economic theories, social welfare, governance etc …
We have Bitcoin 1.0 and Ethereum 1.0 (Founded and conceived by Satoshi Nakamoto and Vitalik Buterin respectively)
Now extend the same analogy of derivatives to Ethereum — and imagine current and new applications extended across existing industries and then to some yet-to-be-invented new industries..
Imagine Blockchain-based Public Goods : like new encyclopaedias, wiktionaries and compendiums of inventions, patent searches and databases of inventions, legal challenges and case law, disease symptoms and remedies, Genome project, global DNA experiments, Search results for Alien life etc, atleast some of which are currently non existent because of vested interests and active censorship.
Imagine Blockchain-based new platforms for markets involving complex processes and multiple layers of intermediaries. Financial Markets, Global Oil supply — OECD, Running a Government
Imagine Blockchain-based platforms and market places with network effects : Financial Markets, E-commerce platforms, Decentralised 2-sided market places like Uber , Airbnb, currency exchanges, Auctions for US Treasury Securities, Derivatives market places, Global Energy Exchanges, Token Economy etc..
Imagine new fraud-free schemes for employment insurance, disaster-relief distribution, primary education, disease control and vaccinations.
Imagine new protocols such as community driven governance, community influenced corporate actions, community elected public funding, electing UN Ambassador, G-20 deliberations.
Add more applications which we have not collectively conceived yet, and derivatives of all of the above applications and similar.
You get Ethereum 2.0
Now imagine several such Bitcoin 2.0’s and Ethereum 2.0’s because blockchain economy is an open source economy.
Welcome to the new Crypto Economy!
Congratulations, you are still at the very beginning of this curve, so plenty of room ahead for creating any number of platforms you want. We are going after the capital markets. That’s a platform, which to my knowledge, has not been thought of or built before!
With the advent of decentralised databases that can technologically replicate the network effect gains off a single monopoly, everyone can join and align for their benefit, without actually creating a monopoly with all the negative consequences that it brings. — Vitalik Buterin quote from The Business Blockchain by William Mougayar
Arifa Khan, the author is inventor of DGCAMP, a decentralised global capital markets platform, a two sided network. DGCAMP is a project of Himalaya Labs. ICO is coming soon!
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