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    Network Effect And How It Pushed Web3 To Success

    Before launching your Web3 project, you must build a community first. This is the number one advice everyone tells you here. And, they’re not wrong one bit. Your audience can make or break your project. In fact, it has been proven across centuries how people talking about a product or service can make its value skyrocket. This concept is called the “network effect”. 

    What Is A Network Effect?

    A network effect is a phenomenon where a product or service’s value depends on how people use and talk about it. Let’s say you launched a project, the wider the audience, the more opportunities there are to grow the project. 

    Process

    The best example of this is the telephone. When it first launched, not many people were using it. And, it generally wasn’t this accessible. It had to be wired to each person’s house and the costs were significant.

    Nevertheless, more people started using it, which eventually led to the development of technology surrounding it. Now we have wireless phones, different phone versions, colors, and diverse phone brand companies. 

    This created “a positive feedback loop” where more people joining created a bigger space to add utility and value to the product. 

    Types of Network Effects

    There are two types of network effects: direct and indirect. 

    Direct

    A direct network effect is when increased usage directly affects the product’s value and utility. Using the same example above, when more people started using the telephone, it directly impacted its value. 

    Indirect

    An indirect network effect makes use of two different but related groups. The increase in usage for group 1 leads to the increase in usage and value of group 2. A good example would be video games and gaming consoles. When more video games launch and expand their network, this leads to an increase in the purchase of gaming consoles. 

    Network Effect’s Impact on Web3

    One can argue that web3 expanded solely due to the network effect. When web3 first became a thing, people weren’t that ecstatic about it. Whether we’re talking about cryptocurrencies or NFTs, we didn’t directly witness a mass adoption. 

    On the other hand, when more and more people started to join, we saw a boom in projects. 

    Cryptocurrencies 

    Bitcoin is the first blockchain and cryptocurrency so it’s fair to say it didn’t have a pre-established audience. However, it built a strong, and continuously expanding, user base that eventually increased its market acceptability, liquidity, and value. 

    When BTC first launched, its value was a couple of cents and now it sits at a whopping 30 THOUSAND dollars

    This goes for every other cryptocurrency. The more people that use the cryptocurrency, the higher its value gets. Because a larger user base means higher liquidity which indicates higher value. 

    Cryptocurrencies Network Effect

    NFTs

    NFTs were also a result of a network effect. Quantum was the very first NFT that came to life in 2014. Again, this technology was unfamiliar to most and didn’t gain immediate insane traction. But, in the two following years, more projects joined the space: Spell of Genesis and Rare Pepes. 

    And right after, in 2017, the infamous blue chip Cryptopunks launched. These were the base years of NFTs. If these projects, alongside the Bitcoin and Ethereum blockchains, didn’t interest people, NFTs wouldn’t have been a thing.

    They would’ve been at the bottom of the Internet’s archive. However, this rising technology managed to gain people’s interest, so more investors and collectors joined the space which lead to a boom in NFT projects.  

    We now have NFT projects in various fields like art, music, and gaming. Another great example of NFT’s network effect is the Bored Ape Yacht Club collection. It started as a collection of bored apes and now we have mutants, kennel club, and even a game in the sewers. Because BAYC’s holders continuously expanded, it gave the founders great ground to build upon. 

    But It’s Not All Rainbows and Sunshine

    The network effect did indeed push Web3 to success as it lead to the mass adoption of blockchain technology as well as NFTs and cryptocurrencies. That being said network effects can have a negative impact on the project.

    Instead of each user adding value to the project, it’ll end up subtracting value. For example, the Ethereum gas fees system. You have to pay a fee, called a gas fee, for each transaction you do on the Ethereum blockchain. 

    But, as more people are using it, these gas fees increase. And, if these fees become unexplainably high, users will simply ditch the blockchain because it won’t be worth it anymore. 

    This is why blockchains, or any project for that matter, should be designed in a way that an increase in usage would lead to a positive network effect. 

    All things considered, the question that we must ask ourselves is the following:

    Is a strong network effect enough to discourage the adoption of new cryptocurrencies and projects in the years to come?

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