What is Network Effect? Network Effect roughly translates as Network Effect to refer to the spread of products and services in the market. Network Effect plays an important role in the Blockchain market. Why is that? Let’s find out in the article below.
What is Network Effect?
Overview of Network Effect
We often hear sayings in the crypto market such as: “Projects developed on Ethereum will be better than other blockchains because Ethereum has a large Network Effect”, “Projects in the payment sector are difficult to replace.” Bitcoin because Bitcoin has such a huge Network Effect.”
So what is Network Effect? NEtwork Effect, roughly translated as Network Effect, is when a product or service becomes more and more useful, it causes more and more people to participate in using it, each introducing the other, thereby creating a network. dense network of users. Network Effect often has great power with social networks.
For example, after a period of development, Facebook began to have many users. Users will interact, chat, and chat through Facebook and usually to be able to maintain relationships, people often use Facebook. The more people participate, the more the value of the Facebook network increases. And many people started joining Facebook to connect with people’s Network.
Network Effect for Blockchain
When the blockchain has its first users or miners, they will begin to introduce others to join. The more people participate in the blockchain network, the more secure, safe and decentralized it becomes. And those who came later wanted to use a secure and decentralized blockchain, so they continued to choose that blockchain. After they participate, the blockchain network is even more secure and decentralized. This is the story of miners and the Bitcoin network.
So what about the impact of Network Effect on an ecosystem like Ethereum in terms of both developers and users?
For developers: In the beginning when developers wanted to work on Smart Contract platforms, Ethereum was considered the most feasible, however after a while when working together they became more and more knowledgeable in developing They build Protocols and DApps on Ethereum, they share them with each other, they save them on the Library for those who need them later.
When a new developer enters the market, they wonder where is the largest developer community, best developer support, and rich documentation, the answer is Ethereum. Then they came to Ethereum to continue learning and contributing as above, thereby making Network Effect grow stronger and stronger. Obviously, Network Effect on Ethereum needs a lot of time to develop to have great results like today.
For users: Similar to developers, users also have some questions such as what is the safest, most secure and decentralized Smart Contract platform today? Where is there a comprehensive ecosystem? Those questions all lead to the answer being Ethereum.
Classification of Types of Network Effects
Direct Network Effects – Direct network effects
A direct network effect is one that can directly increase or decrease the value of the product or service being delivered.
Example 1: In the operating model of Lending Pool platforms, there will be lenders and borrowers. If the loan supply is larger, lenders will receive interest, while borrowers will be able to borrow at cheaper interest rates compared to other Lending Pool platforms.
The more people borrow, the APY on the Lending Pool platform will increase, and as it increases, more people will come to the platform to lend. This has had a positive impact on the network.
Example 2: In GMX’s operating model, it includes Traders and Liquidity Providers (LP). The more LPs lead to larger liquidity pools on GMX, Traders can trade with a large number of volumes leading to increased experience. The larger the volume traders bet, the larger the transaction fees LPs will receive, so GMX’s development model thrives.
Example 3: Traditional AMM models include Liquidity Providers (LPs) and traders. LPs provide liquidity to collect fees, the larger the LP provides liquidity => The smaller the Slippage => The more users swap => The protocol collects more fees, the LP earns more fees => The LP provides liquidity more accounts => … =>
Indirect Network Effects – Indirect network effects
Indirect network effects can directly increase or decrease the value of the accompanying product or service, thereby significantly increasing the value or service being distributed.
For example, typical models for Network Indirect Effects are typically in-market upgrades such as AAVE V3, Uniswap V3 or Ethereum 2.0.
Two-Sided Network Effects – Two-Sided Network Effects
The two-sided network effect is when users can increase or decrease the value of another product or service and vice versa.
For example: A typical example of the Network Double Effect in the crypto market is the model of Aggregator projects such as DEX Aggregator, Yield Aggregator,… For example, if we use OKX Swap which is a DEX Aggregator on the OKX Wallet, then When we trade, OKX Swap collects a portion of the fee and the DEX platform used to swap also collects a portion of the fee. Although it costs a little more, we can find the place with the greatest liquidity.
That’s why when using OKX Swap we are also adding value to DEXs using our own liquidity pool model.
Network Effects And Crypto Investment Stories
Any project in the crypto market is affected by all three Network Effect factors, it can be said that this is the factor that helps the project develop and grow in the future from the short to long term. We need to understand and answer some questions as follows:
- What factors directly participate to create Network Effect for the project? For example, LP and Trader for GMX, LP and User for Uniswap,…
- How does the Network Effect of this project work? How to create a loop?
- How can the project initially create a Network Effect for the project? Are they healthy and long-term? For example, using Liquidity Mining to attract LPs and Traders to the project.
- Does the project have any future upgrades to its products or services? Does the new product have a positive impact and help increase Network Effect for the network? For example, the story from Uniswap from V1 to V2 and now V3
- Is the project integrated into any protocols? Is that project’s ecosystem large? For example, Uniswap from a regular AMM has become an AMM that has many projects inside and outside the integrated AMM segment and has a strong ecosystem.
It can be said that determining the Network Effect of a crypto project is extremely important. Only by determining it can we understand and invest in the project for the long term.
The Future Of Network Effect With Crypto Market
Network Effect has only appeared in a few projects that were actually built and worked. In a forest of crypto projects, the use of Network Effect is mostly used in making ponzi and scams. So using Network Effect also has both positive and negative meanings. Understanding and applying helps us make profits and stay away from scam projects.
Minh believes that Network Effect will be an even more popular concept in the crypto market in the long term.
Summary
Network Effect is an important concept in the crypto market. Hopefully through this article everyone can understand what Network Effect is?
