Cryptocurrency: Huge Wealth Will Be Created Through The Network Effect
Some of the biggest names in the world are in the technology industry. Actually, when we look at Google, Amazon, and Facebook, they all benefited from the same thing: the network effect.
This is one of the reasons why we are going to see the value of cryptocurrencies hit levels that few people are imagining.
Since some of the most valuable companies put this to use, it is time for the average person to get involved.
In fact, Raoul Pal, the macro-economist and long time Bitcoin supporter tweeted this out.
For those who do not know, Metcalfe's Law was an observation made by Robert Metcalfe, the inventor of the Ethernet. He concluded there was a relationship between the number of nodes on a communication system and the value of said system. The greater the number of nodes, obviously, the more valuable.
This is common sense of course. However, Metcalfe's idea was breakthrough because he determined that value was the square the number of users. This is due to the fact that as the number of nodes grows, the number of connections increases at more than a linear scale.
As you can see, if you picture the connections as creating value, the numbers can get insane very quickly. This is why Metcalfe believed communication, and later social media, systems were so valuable.
Taking things on step further was David Reed, the one behind Reed's Law. He determined that since people can form subgroups, that Metcalfe's Law understated value. His formula concluded that subgroups will grow at a rate greater than the number of nodes, this taking over the economic system.
Detractors of both Reed and Metcalfe feel their theories fall short because they value each node the same. In a communications system, the node connecting a small town in Maine to one in Texas is valued the same. However, the one between New York City and Philadelphia is going to get a lot more traffic, thus having greater value to the system.
Some have created their own system of valuation that accepts the increase at greater than a linear rate. However, the question is how much?
If Metcalfe’s mathematics were right, how can the law be wrong? Metcalfe was correct that the value of a network grows faster than its size in linear terms; the question is, how much faster? If there are n members on a network, Metcalfe said the value grows quadratically as the number of members grows.
We propose, instead, that the value of a network of size n grows in proportion to n log(n). Note that these laws are growth laws, which means they cannot predict the value of a network from its size alone. But if we already know its valuation at one particular size, we can estimate its value at any future size, all other factors being equal.
Without getting into heated mathematical debates, we can conclude that the value of systems of this nature will grow at some rate greater than linear. Thus, each new user is work more than +1 to the system.
Fortunately, as Raoul Pal alluded to, blockchain and cryptocurrency operate according to these same premises. Whether one buys into Reed or Metcalfe isn't as important as understanding how the growth rate occurs. This is why a seemingly small amount of users can carry great value.
When we look at Hive, we see the same subgroup formation that Reed observed. There are many options in terms of applications one can use on the blockchain. A user could be involved in many different projects, adding greater value to the whole.
Of course, we know that not all users are the same. Those who are involved in many different groups, posting and commenting there, are worth more to the system than one who just shows up occasionally. This is why most networks require high volume users. They tend to have the largest following which can further the numbers according to the abovementioned "laws".
If we step back and look at this from a bit larger perspective, we see the same thing. Using cryptocurrency in general, how many people utilize just one token? The answer is very few. Instead, most people are involved with many, placing themselves on many different networks. This again, adds to the entire value of the whole.
This is something that is uncommon in the existing currency world. Most people transact in one currency, for most of their lives. This changes when they travel but outside of that, it is one, perhaps two, currencies.
We also see similar things in social media. Many will use a few different ones but for the most part, one is going to gravitate towards a preferred application. Businesses might cover all basis yet the average user will mostly live on Twitter or Facebook. This is why those companies work so hard on keeping their walls up and locking people in. The classic example of this today is Apple.
It is what happens in the world of competitions. However, if we remove that from the equation and understand the power of the network effect, we can see how blockchain and cryptocurrency stand to benefit.
No matter what level we analyze things from, the more users the better. Not only that, the value of the whole is increased the more that each person does. This is what helps the growth rate. If a person is using 5 different cryptocurrencies, that adds greater value than just using 1. At the same time, using 5 applications will help the rate of growth as compared to using just a couple.
Thus, as more is developed, people will have more options. Here we see a situation where, at some point, one person might be using 25 different applications, each with at least one cryptocurrency. That is an enormously powerful network effect.
Hopefully it becomes clear how even small networks can be worth billions of dollars. It is also why we need to monitor the development that is taking place. If a platform offers more opportunities (choices), it stands to reason that the value will grow at a greater rate as compared to others.
People make the mistake of looking at marketcap believing it tells the entire story. It does not. In fact, looking at that can be extremely misleading.
The key is growth. When more development takes place, the existing users have more options, further immersing themselves in the network. As we saw, this adds more value. Of course, more options can also attract new users, who also increase the value.
When it comes to cryptocurrency, if there are presently 100 million people involved, then we are going to see massive jumps in value if we double that to 200 million people. Regardless of what system one subscribes to, the non-linear aspect of this guarantees that the value will more than double.
Presently, we are sitting on the greatest opportunity in history to implement the network effect across the world. Ultimately, we will see 8 billion people involved in this industry to some degree. That is going to send the value of the totality to astronomical levels.
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