The Network Effects: Private Network & Open Network
Overview
What is the meaning of network effects?
The network effect is a fascinating phenomenon in economics where the value of a product or service increases as the number of users who use it increases
The bigger the network, the more valuable it is for everyone involved
What is network congestion?
Congestion is a negative network effect whereby too many users can slow a network down, reducing its utility and frustrating network members
The Story
This story is inspired from the book “Read, Write, Own” by Chris Dixon
I recommend this book for you who want to dig into more detail about the story of the Internet, the Web3, and blockchain.
A potent exploration of the power of blockchains to reshape the future of the Internet — and how that affects us all — from highly influential entrepreneur and technology investor Chris Dixon
About this book
The book walks through the history of the internet, showing how it has gone through three major design eras: the first focused on democratizing information (read), the second on democratizing publishing (write), and the third on democratizing ownership (own).
Many things have been described by Chris in his book, and one of them is about The Network Effects, especially the relation between Private Networks like from some specific centralized corporation, and also The Open Networks like what has been done through public blockchain networks like Bitcoin and Ethereum.
The Private Network (a.k.a Corporation)
Before blockchain networks or the Web3 era, we were living in an era where almost all human activities have been moved from physical connection to digital activities. The most visible example is the social network, like
- MySpace
- Friendster
- Flickr
- Path
- YouTube
- etc
You can get a more detailed list of social networks from this list
The social network is a good example to describe the network effects through the private network. A private network means it’s a network that has been built and managed by a single centralized entity or company. They (the company) usually provide free services whatever it is to make people interested to join the network.
There is a good explanation from Chris in his book:
They provide free tools, to make people join them as long as they can
More people joining and interacting within the network will make their networks more valuable. This centralized entity has full authority, rights, and power to control the data, the content, and anything inside their networks.
They will make people or their users really hard to leave their networks. For example, for a content creator, let’s say who joins YouTube. YouTube as a company that has a very big and valuable network, provides free tools to make their users create and manage their videos. A user is able to create a video and share it with others inside the YouTube Network. Once they (content creators) get their viewers or audiences, maybe 10–20M subscribers, and an average of 1M views per video, the question is what will happen when all of their statistics are someday gone or missing? Or, will they think about moving to other networks (companies)?
If they moved their content to some specific network, would they get the same result? Maybe they can, but it means, they need to start all over again.
As a user, once they join some networks, it means, all of the contents, stories, and media (video, image, audio) will belong to the company. Maybe the company gives their users features to manage their content, but whatever the policy made by a company, a user doesn’t have any rights or power over it. If YouTube has been contacted by a Government to take down a video, they (YouTube) will be able to do it, even without the need to notify their users or the video’s author.
In private networks, there may be shared revenues between the company and its users. YouTube, users are able to upload videos, and when they have a large number of viewers, they will be able to gain revenue as a profit sharing between the network provider (YouTube) and content creator.
Is it possible for a user to build some application on top of this private network? Yes, it’s really possible, like building an application on top of Facebook API. The first time, this kind of application, will give more advantages for Facebook, like bringing more users to join their (Facebook) networks through this application. But what will happen when this application becomes bigger, and even almost equal to the provider itself (Facebook), the answer is simple, shutting down the API key.
Building an application (or business) on top of some private networks, means, we’ve put 99% of the faith of our application or business to this kind of private network. And I think it is not worth it because once our “connection” has been shut down, we cannot do anything.
The only possible solution for this kind of business or application is to expect that the provider (Facebook) is willing to acquire them.
Does this mean this network is not viable? Well, the answer is, it depends. In the era of the “Write Era”, where people were finally able to interact with each other through an application, this kind of network or business model makes sense, especially if we’re looking at it from the perspective of a provider (not user).
The Open Network
Before we talk about the public blockchain network, this book ( Read, Write, Own ) also tells us the history of the Internet, a long way ago before even Amazon, Facebook or Google existed.
The Internet today is a result of collaboration between people, and everyone is able and allowed to participate in the network (Internet). There is no centralized entity and the results are some network protocols like Email. The email itself is a form of federated network that was already built in the first time era of the Internet.
Let’s take a definition of the federated and decentralized network
A federated network is a set of linked networks that not only have the capacity to transfer data and messages between parties but also have the ability to continue operating even when a connection is broken, making it such that all of the networks function as if they were one
Now, let’s talk about public blockchain networks, as Bitcoin
Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network
On this open network, everyone can use and participate in the network. Everyone is free to use the network, like for sending or receiving BTC through their wallets, and they are also able to participate in joining the network as miners.
There is one thing in common with the private network that is already described above, which is, that they are both free.
But the difference is, if, in the private network, there is no way for the external entity party or user to participate in the network, the network itself will be managed by the only entity which is the provider or company.
The openness in the open network also talks about open-source software. The source code is also open and everyone and entity can review and even participate in the software development for the network, and even, the network itself is possibly to be forked. This model, will not be possible to implement in the private networks model like Facebook or Google.
I’ll give examples of some of the L1 blockchain networks
Which One?
Which one is better? I don’t know because the right answer is it depends. I’m not a fan of centralized maximalism or decentralized maximalism. It depends on our needs and goals. Each network type has its own pros and drawbacks.
Outro
This story tries to describe two kinds of network types, private and open (public) networks. For people that pro to decentralized maximalism, everything must be decentralized with no centralized entity controlling it, although what I’ve seen today is not like that. Even some of the famous L1 networks today, are actually behind some of the corporation networks. Until today, I think that only Bitcoin and Ethereum deserve to call themselves “truly decentralized networks”.
