Blockchain & The Network Effect

By Sandeep Kasalkar

A peer-to-peer network is the foundation of the ground-breaking technology architecture known as blockchain, which allows for total decentralisation. Peers are encouraged to cooperate democratically and can act collectively as a centralised server or another sort of authority to supply the processing power required to run services on the blockchain. The network effect can flourish in these circumstances, and it does so with particular strength when blockchain is involved.

The network effect's sluggish onset is one of its main drawbacks. This sluggishness is partially brought on by the lack of any immediate financial gain for either new or existing users. Social media sites are a good illustration. New users might want to join and avoid missing out on a great platform, and their participation adds to their friends' experiences by adding relevant material. The opportunity to engage, however, is not a very strong motivator by itself. Furthermore, a network like Facebook benefits from new users more than its own users do.

Due to the decentralised nature of blockchain, it cannot be manipulated by a single party. As a result, all financial gains from a rising user base are distributed directly to users. Due to bitcoin, which is a strong incentive for each blockchain network peer or user, it has been able to successfully maintain its decentralised nature. The majority of blockchain networks use cryptocurrencies or tokens because they need to compensate peers whose computers process and verify data flows.

The Network Effect at Work

Blockchain is assisting companies to profit from the network effect while also achieving better results because it offers concrete incentives in the form of bitcoin and equal benefit distribution to users rather than centralised authorities. Referral schemes, for instance, which frequently offer some sort of incentive to those parties which bring in new members, are an example of a relatively simple implementation of the network effect.

Companies that seek to encourage user-generated growth frequently use referral systems that don't make use of particularly complex technologies. The fairly limited software choices that are currently available are significantly limited in their ability to track complex multi-step referral chains involving more than two parties. In addition, it is quite simple to commit referral fraud by purposefully giving minimal value in order to manipulate simple referral systems.

Users are rewarded by the company's referral programme for successfully matching others, which has a positive ecosystem network impact.

The Engine of the Network

Blockchain-based solutions that aim to replace established alternatives rather than enhance them also exhibit the network effect.

IOTA, a blockchain platform that aims to harness the network effect to better the Internet of Things, offers a similar idea (IoT). The Internet of Things (IoT) is an older idea, but it has a lot to gain from more openness and quick communication. IoT devices can respond to changing environmental stimuli and one another more precisely when they are seamlessly connected via IOTA's ledger. If an IoT swarm is a metaphor for the brain, then before IOTA, it could only perform rudimentary logic. Yet, using the blockchain network effect enhances its neural connections and increases its capacity for critical thought.

Without the network effect, blockchain would not exist and is a product of the network effect. Although some have compared cryptocurrencies to pyramid schemes, they neglect to take into account the fact that a blockchain-based system cannot have a top or a bottom. Blockchains that employ the network effect to grow spread out at once in all directions, and as they mature, each user experiences benefits proportional to their level of contribution. The private sector is only just beginning to recognise this new reality, but it is already necessarily resulting in a wide range of more equitable services.

6 days ago