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Network Effects and Blockchain

Do you ever wonder how the big tech giants that oversee most of our web nowadays could get as big as they are?

The likes of Apple, Google, Microsoft, Facebook, and Airbnb all benefitted from network effects. And they’re not the only ones. A study monitoring the growth of companies between 1994 to 2017 suggests that 70% of the value creation in tech comes down to network effects. It seems that companies that leverage network effects have an asymmetric upside over their competitors.

But what are Network effects, and how do they apply in blockchain?

Direct and indirect network effects

The literature broadly distinguishes between direct and indirect network effects when looking at network effects.

Direct: These are the simplest type of network effects where an increase in usage increases the value of a network. One good example of such a network effect is the growth of telephone services. The more users used the telephone services, the more valuable it became, as they could now call their friends and family. More recent examples of direct network effects include Whatsapp and sharing economy platforms like Airbnb and eBay, which became increasingly more valuable the more people used them.

Indirect: Indirect network effects occur when the value of a service or product increases as more and more complementary products are created. Examples of these include Windows Software and Android for Google.

Within these broad categories of network effects, there are a variety of more specific network effects. The following paragraphs will cover the four most relevant to the Blockchain space more broadly and Minima in particular.

Protocol Network Effect

Protocol network effects happen when a communication protocol or computational standards are declared that all nodes can use to access the protocol. A modern example of that is Ethernet which quickly gained market share resulting in more compatible products being developed, further cementing its growth. Once a protocol is adopted, it’s extremely hard to replace; just think about how difficult it’d be to replace TCP/IP.

An interesting feature of protocol network effects is that value generated by them is often not captured by their creators (as for other network effects). Additionally, their adoption strategy is usually not just due to their technology but about finding and growing a niche market.

Tech Performance Network Effects

When the technical performance increases with an increased number of users, we speak of Tech Performance Network effects. Peer-to-peer file-sharing platforms like BitTorrent’s performance increased the more users were on the network. Similarly, IPFS is gaining resilience with every new instance running its software.

Tech Performance Network Effects are different from mere technological advantages. They create a runaway advantage for a product that tends to lengthen over time. That’s why in this case, being the first mover can be a massive advantage.

Personal Network Effects

Personal network effects happen when people’s identity or reputation are tied to the usage of a product. Often people start using a product or service because their friends are using it. If it’s a platform where everyone isn’t just there as an audience member but also as a potential content creator (Facebook, Instagram), the value grows exponentially.

Among networks that experience such effects, we can further distinguish between

  • Personal Utility Network: As the name suggests, a personal utility network is something people cannot easily live without because it helps them execute a critical function in their life. An example of that are messaging applications that help us stay in touch and enable teams distributed across the globe to communicate effectively.
  • Personal networks: These are the type of networks we can live without. They are nice to have, but people can probably survive without access to Twitter, Facebook, and LinkedIn. What propels users to join regardless of that is often a tribal impulse.

Like Personal Network effects, the following network effects rely on human psychology and our desire to be part of a bigger group.

Bandwagon Network Effects

You might have heard of the Bandwagon effect. In this psychological phenomenon, people do something because many other people are doing it, regardless of their own beliefs. Financial markets and crypto are particularly susceptible to Bandwagon effects which explain the commonly asked question “Wen Twittershill?”

Bandwagon network effects work as the general bandwagon effect. When users begin to aggregate, others jump on because of a notion of “The cool kids are using it.” — without necessarily understanding why or how this helps them. Google in the early days benefited from Bandwagon Network effects, and so did slack, to the point where all Startups that made something of themselves started using slack.

Blockchain freeing economic value

If you followed the names of the companies mentioned in this post, you might have noticed that all of them have one thing in common: they either have a near-monopoly in their market or at least a significant share of the market. According to economists, companies growing through network effects leads to natural monopolies because value grows exponentially the more users use it. The more users use it, the more other people will start using it, and we’ve seen it play out with the likes of Uber and Facebook.

However, most of the value created has been captured by these few big companies, causing significant inefficiencies such as not having viable alternatives, having to consent to giving away one’s data to use it and paying fees.

Truly permissionless and decentralized networks could change that. Instead of having few platforms that exert market power, no one entity will have control. If no one has control, no one can exercise market power. This, in return, will unlock all the economic value that’s currently being lost due to inefficiencies. It will also empower people to build, what they want to develop, and communicate what they want to express without fear of censorship.

How does this relate to Minima?

At Minima, we’re building the most decentralized network to date. Many blockchains claim to be decentralized, but few have the numbers to back them up. We’re aiming to launch our main net with 1 million nodes and the network effects will be crucial in getting us there.

The more nodes are running Minima, the more decentralized we become. And the more decentralized the network is, the less control any single entity has.

Already, more than 24,000 nodes in 94 countries hold up our test net, which makes attacks hard to coordinate, if not unrealistic.

The more people are using Minima, the more other people will want to use it as well — be that to communicate without censorship, store value, or send the latest NFTs they created.

The more people are on Minima, the more developers will start building on it. And to build on Minima, they can use the technologies and languages they’re used to JavaScript, HTML/CSS.

Eventually, businesses will take note as well. But they will not have control over the underlying network. They can build apps, and do their commerce, but the underlying network is and will always be free of any entity controlling it.

To continue building this truly decentralized network we need your help. Help us grow the network, and benefit yourself, not only through rewards, but also through the increasing decentralization, security, and apps that will be built.

Join our Discord Server to become part of our growing community.



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