Network effects began in traditional industries with network characteristics such as power and communication. The starting point of analysis is that the formation of the network is due to the complementarity between nodes, and the complementarity causes network externalities, or network effects.
Academic research generally distinguishes between direct network effects and indirect network effects. Direct network effect means that as a product or service is used by more and more people, the product or service will be more valuable to its user community, such as telephone, fax, WeChat. Indirect network effect means that the increased use of the product will produce more valuable to complementary products, which will increase the value of the original product, such as the relationship between the computer operating system and the application is a classic example.
With the development of the Internet, the industrial organization has undergone new changes, and the concept of “platform economy” has emerged. The platform economy presents a bilateral network effect: two different user groups of the platform, and an increase in a group of users leads to Another group of users has increased, and vice versa. Platforms such as Taobao and Didi are in line with bilateral network effects.
Regardless of the network effect, it is observed from the demand side of economic analysis. Because the increase in user demand triggers new demand increments, the network effect has a more theoretical name called demand-side economies of scale.
Starting from the above basic concepts, the network effect of Blockchain technology can be found. There are some plausible misunderstandings on this issue.
First, whether the token system presents a network effect is not the same as the network effect of Blockchain technology. Current public accounts are often accompanied by Cryptocurrency. Although academic research has found that the monetary system and the payment system have obvious network effects, this does not mean that the Cryptocurrency has a network effect. Cryptocurrency are not currencies, and most Cryptocurrency are not dedicated to becoming a universal payment system. The token system is more designed as a use credential component of the public Blockchain, which promotes the orderly operation of the Blockchain through incentive mechanisms.
More importantly, the network effect of Blockchain does not depend on whether it is a public or prite, but rather on its own functional positioning and design. The public Blockchain system with the goal of encrypting the economic infrastructure is transparent to the demand-side user community and it is difficult to trigger a direct network effect. For example, Ethereum's positioning is "world computer", implied meaning to become a smart contract "operating system", hoping to present an indirect network effect like an operating system. However, because the complementarity between the nodes is not strong, it is more a production cooperation relationship, which reflects the supply-side economies of scale.
The industry hopes that Blockchain can present network effects, and is intended to seek ultra-linear growth under the control of network effects, with a strong lock on high market share and user stickiness. However, our analysis finds that the Blockchain system itself does not seem to have obvious network effects, and may have to rely on a higher level application platform to mine, which can explain the ecology of the decentralized application (Dapp) of the public Blockchain system. Why is construction highly valued? Of course, similar to the innovation of cross-chain technology, the link channels of different Blockchain systems will be opened at the bottom, which can lay a good foundation for the network effect of the application layer.