Network Effects
Agents behaving honestly is critical to inducing the positive feedback loop required for a cryptoasset to generate network effects.
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A network effect is generated when each new user increases the value of the platform exponentially. When someone opens a Bitcoin wallet and uses it to obtain and send Bitcoin across the network, the value of the Bitcoin network increases exponentially because existing users can now potentially connect with the new user.
If a network is able to reach a critical mass of users the value it provides new users begins to exceed the costs of joining. Prompting explosive growth as new user growth becomes self-sustaining as a result of the value the network is providing.
Fundamentally, most cryptoassets are networks and need to generate network effects to succeed. Projects need to identify at least one and hopefully multiple avenues to leverage network effects to grow their user base. These include:
Setting a Communication Standard – Typically the focus of payment networks, creating a standard for users to broadcast and conduct transactions across the network.
Monetary – Increasing the value of a cryptoasset by expanding the potential investor base. The most common example of this is obtaining a listing on one of the major exchanges such as Binance. If users can’t obtain a token, they can’t use a token. Accessibility is the foundation of usage.
Listings on exchanges are also important because they provide market depth. Allowing you to move into and out of a position in a cryptoasset with minimal price impact due to the larger volume of liquidity available on the larger exchanges.
Usage – Power users can drive the success of cryptoasset projects. A small cohort of dedicated users can drive the adoption of the protocol forward through technical contributions and evangelism. Daily usage continuously trending up is more significant than absolute address growth.
Identity – Cryptoassets giving users the ability to maintain a reputation tied to their identity are the natural destination for future activity from users once they’ve established their identity in a positive way.
Platform – Generally the tool builders of the cryptosphere. Drawing in developers to build applications using the platform’s tools. Leading to user growth as more people access the platform to access the applications.
Information – The more information flowing into, out of, and around a project, the more likely people are to be aware of it, use it, and come back to it. Especially powerful are projects making uncommon knowledge common. Unlocking formerly proprietary information being artificially suppressed by rent-seekers, think home values before Zillow, and unlocking it for public use.
Given the open-source nature of the cryptosphere. Catalyzing network effects is vital. Imposing a switching cost on users considering defecting if a project is forked.
Further Reading Network Effects
Making Uncommon Knowledge Common