Network Effects
Before we get to Web3 and tokens, we need to understand network effects and solve what Andrew Chen calls the “cold start problem”.
Investopedia: “The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service. The Internet is an example of the network effect. Initially, there were few users on the Internet since it was of little value to anyone outside of the military and some research scientists. However, as more users gained access to the Internet, they produced more content, information, and services. The development and improvement of websites attracted more users to connect and do business with each other. As the Internet experienced increases in traffic, it offered more value, leading to a network effect.”
Wikipedia: “In economics, a network effect (also called network externality or demand-side economies of scale) is the phenomenon by which the value or utility a user derives from a good or service depends on the number of users of compatible products. Network effects are typically positive, resulting in a given user deriving more value from a product as other users join the same network. The adoption of a product by an additional user can be broken into two effects: an increase in the value to all other users ( “total effect”) and also the enhancement of other non-users’ motivation for using the product (“marginal effect”).”
It gives the example of credit cards: “The credit card system at the network level could be seen as a two-sided market. On the one hand, the number of cardholders attracts merchants to use credit cards as a payment method. On the other hand, an increasing number of merchants can also attract more new cardholders. In other words, the use of credit cards has increased significantly among merchants which leads to increased value.”
Harvard Business School Online offers examples of network effects from the US:
- E-Commerce: eBay, Etsy, Amazon, Alibaba
- Ticket Exchange: StubHub, Ticketmaster, SeatGeek
- Rideshare: Uber, Lyft
- Delivery: Grubhub, DoorDash, Uber Eats, Instacart, Postmates
- Social Media: Facebook, Twitter, Instagram, LinkedIn, Snapchat, Pinterest
It adds: “What each of these companies has in common is that the value they provide to customers increases as they scale and acquire more users. Etsy and eBay offer vastly more value to users if one million, instead of 100, sellers use their platforms. Uber and Lyft provide greater convenience and reliability to riders when more drivers join their platforms. When it comes to social media sites, users find the channels more interesting and varied as more people sign up… According to Economics for Managers, the underlying principles of network effects imply that the business, website, or platform with the highest market share will be more successful in the long run. This means that its market share is likely to grow more substantially. For this reason, markets in which network effects play a major role are often referred to as winner-takes-all markets.”
