At a certain point of critical mass, the network becomes a “one stop shop” for just about anything, which is what makes it so valuable and dominant, and hard for a smaller start-up network to displace.Īnother example of a two-sided network is the payment card, which can take a few different forms like a charge card, debit card, or credit card. If you have a merchant network with 5,000 sellers and 10,000 buyers, there are 50 million possible connections.Īs the number of users grows into the millions and consequently the number of possible connections reaches into the trillions, the odds of a seller finding buyers for her products, or a buyer finding sellers of things he wants to buy, even if the products are rare or niche, increases. This table shows how it scales, assuming for simplicity an equal number of nodes on each side: Where “c” represents the number of connections, “a” represents the number of nodes on one side, and “b” represents the number of nodes on the other side, the equation for the number of possible connections is c = a*b. If you have 10 sellers and 20 buyers, you have 200 possible connections. If you have 3 sellers and 3 buyers, there are 9 possible connections. If you have 2 sellers and 4 buyers, there are 8 possible connections between buyers and sellers. The number of possible connections in the network equals the number of nodes on one side multiplied by the number of nodes on the other side. The equation for a two-sided network is also exponential. An advertising network like Google AdSense is similar there are websites that want to make money with ads, and there are advertisers that want to advertise on popular websites, and a marketplace for them to come together is exponentially valuable to find an ideal match, whether by human selection or by algorithm. eBay (EBAY), for example, exploded in value by getting a critical mass of buyers and sellers onto its online platform. A type “a” node wants to connect with a type “b” node, but doesn’t generally want to connect with another type “a” node.Īn example of a two-sided network would be buyers and sellers. Some networks are two-sided, meaning there are two very different types of “nodes” on the network. There are also infrastructural elements like switch operators in the middle, but those services grow as necessary to support the userbase of nodes, which are all similar to each other. The telephone and internet are both examples of one-sided networks, meaning that users could connect with other users, and each type of user or “node” is basically the same. ![]() With billions of mobile telephones in the world (which now are combined with the internet), there are quintillions of possible connections between them. With 100 telephones, there are 4,950 possible connections. If we jump to ten telephones, there are 45 possible connections. If there are four telephones, there are six possible connections. ![]() If there are three telephones (A and B and C), there are three possible connections (A to B, A to C, and B to C). If there are two telephones or “nodes” on the network, there is only one possible connection between them. A single telephone is useless, but as more and more telephones began to exist, the telephone became one of the most important inventions of its era.Īnd we can mathematically derive why the telephone network gets quadratically more valuable as more people use it, rather than just linearly more valuable. One of the early examples of a network effect was the telephone. Network Effect Examplesīefore I dive into details on bitcoin, we can isolate a few examples of different networks. In the short-term, bitcoin can move up or down significantly based on sentiment and broad macro factors. Rather than being about the short-term, this is about longer-term fundamental analysis on the protocol. This article takes a look at how bitcoin derives its value from its network effect, why that network effect is difficult for a competitor to displace, and what some of the risks are to be aware of so that investors can continue to assess the health of the network. It’s one of the strongest economic moats that a system can have against competitors. One of the most powerful things to look for in an investment is a network effect.Ī network effect is an attribute of a company or other system such that as more people use the network, the network becomes exponentially more valuable for each user. This article was originally published on.
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