What is the Network Effect?
Today, the “network effect” translated from the English language actually means that the value of a product increases even more with the use of more than one individual. It has a great importance especially in this crypto money ecosystem we are in. It should not be ignored. The more active users on the network, the more important it is that the network becomes functional and useful. It continues to exist in a directly proportional relationship or terminates it. The positive attitudes of new users towards a particular blockchain network, for example, will support the network to offer fundamentally more utilities. As a result, the network effect refers to the “economic” effect that a product or service adds value to the network due to the increase in the number of users.
Classically, an example of a telephone network is usually given. It is widely known that this increasing number of users increases the value of the entire telephone network as it leads to greater affordability. It should not be forgotten that one of the important factors that direct the preferences of users is that a network is easily available at a given time.
What Are the Types of Network Effects?
These are evaluated under two headings as direct and indirect. The direct network effect is the effect we mentioned in the telephone network example. Increased usage increases the value for all other users. The indirect network effect is that increased usage from one set of users adds value to another set of users. For example, because many cryptocurrencies are open source, developers tend to audit the underlying code due to a strong network effect.
What Are Network Impact Examples?
We can easily observe the network effect in many places with widespread use. The first is social media platforms. For example, it is the tendency of users to participate more in the services used by their existing social networks. As a result, the positive orientation towards the same platform in the form of a mass encourages other people to turn to the same platform. To give a second example, it would be more appropriate to give car sharing. Competing with the network effect that the companies we call giants have achieved over the years is very difficult for newer services with a smaller user base. At the same time, Wikipedia is an open source project that has gained a strong network influence.
Network Effect and Crypto Coins
It is worth reiterating that network effects are an important factor in the blockchain and
cryptocurrency
ecosystem. The best example is bitcoin. Bitcoin has a strong network effect as well as useful features that attract most users. Here, miners support network security with their high liquidity. Let’s assume that another network similar to bitcoin is set up at this stage. Miners may earn higher incomes here, but the liquidity will not be the same. By taking risks, they can expect that liquidity can rise in the future,
or they can
continue to mine bitcoin for guarantees. Basically, this is how the network effect works. Even if the offers and alternatives offered are superior or offer more rewards, it may not always make sense to switch to the new service.