The Redistribution of Network Effects in Cryptocurrencies

By boris, October 17, 2017

Cryptocurrencies have strong network effects, built around the concept of mining. The more miners participate, the cheaper mining gets and the more quickly transactions are validated. (On a side note, this has actually not be true as of late for Bitcoin as it ran into scaling issues which is driving up mining costs). In fact, network effects were initially deemed so strong that most people thought that Bitcoin would be the winner in a winner-takes-all market.

But then, along came Ethereum and other cryptocurrencies. And, we began to see that crypto may not necessarily be winner-takes-all. Instead, we’ll probably end up with a number of cryptocurrency platforms, each built around distinctive characteristics or niches.

While it’s not yet clear who the exact players will be, I predict that there will be a continuous redistribution of network effects through two mechanisms: forking and vertical integration.

Just recently we have seen how forking can redistribute network effects when Bitcoin Cash split off from the main Bitcoin platform. Considering that mining has become pretty consolidated, it is actually easier than ever before to split off from the main platform if enough of the major mining players will come along for the ride.

The second redistribution of network effects will happen when large utility tokens that got built on top of Ethereum will integrate backwards and create their own currency. The new platform will need to have enough scale to do this (and Filecoin even started with their own token right away).

I am curious to see how any redistribution of network effects will impact the future rise and fall of currencies and tokens. And, if redistribution is actually happening, does it mean that the fat protocols we’ve been envisioning might not be that fat after all?

  • Erik Seiz

    I am suspicious of alt coins. Currency is a form of communication where the message has a single degree of freedom: value.

    If not for borders, the US dollar would likely be the only paper money used globally. (…In fact, it kind of is, but with a friction filled forex support system.)

    We don’t have separate languages for art, engineering?, science, etc. The start of every bubble has niche players that eventually succumb to the gravity of major players. Tucker and Duesenberg, Lycos and Ask, heck, where’s Abe books these days?

    Other than divisibility and speed, what more do we expect from a currency? If I want to purchase 1TB of space for 5 years, why can’t I just buy it directly with BTC? Why do I need to first buy filecoin, or introduce a shapeshift intermediary? Admittedly, the execution of a smart contact is slightly different, but do the tokens used by the system’s internal accounting need to be exposed? Will I need to buy “threadcoin” or “thread-time-slice-coin” or “weighted-thread-time-slice-coin” if I just want to purchase some compute cycles?

    With time, won’t all the (useful) unique properties of smaller alt coins be assimilated by the bigger ones? Segwit moved from litecoin to Bitcoin. (Even though the idea started with Bitcoin) After all, it’s just software.

    At the end of the day, will it not just be the coin which best stores value that is left standing? The 21M BTC cap gives confidence in value preservation. Since the big coin bang, we’ve already seen BTC market share advance from 37% to 54%.

    It may be the only caveat for not having a winner takes all coin will be borders. Bank borders and government borders. But didn’t that also happen with the early Internet?

  • bwertz

    Very good comment, Erik! First of all, I agree w/ you that too many coins w/ too little utility value have been introduced which is creating additional friction ( I also agree w/ you that every tech cycle has seen a strong consolidation over time, strongest in this last cycle. But my 2 points in the post above (especially forking) give me reason to think that the dynamics in this decentralized environment might be slightly different. But to be seen, will be fun to watch play out…P.S.: Abebooks is doing well – still alive and kicking!

  • Erik Seiz

    We are very lucky to have front row seats to the greatest show on earth.

    It was surprising to see the Bitcoin? cash fork hold value. I wonder if forks (before the 21M cap) are the long term answer to divisibility / supply? At a minimum, they would keep the mining ecosystem alive, even after matured coins enter a fee only cycle. …like doing a (parallel) up shift on a car that has a 21M red line. Maybe timed forks should be added to the base protocol?

    It’s? possible the coin tub will drain after the first broad market killer app shows up. It’s? fascinating to instead see so much attention going into building the killer coin. The digital dime has been invented. Maybe it’s? time to start making pay phones, vending machines, and those really cool mechanical riding horses!

  • bwertz

    I will look for that “cool mechanical riding horse” of the crypto age!

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