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?

Subscribe to our Blog via Email