How Does Web3 Network Effects | Top Factors

 

Over the last decade, network effects have fueled the emergence and domination of Web2 platforms, capturing the imagination of builders and investors. Some believe that in Web3, network effects will be even more potent, while others say that in Web3, network effects will be eliminated.

 

The answer to this lies in modifying our mental models regarding network effects, in the midst of all the hoopla and term soup that currently plagues Web3 conversation. What we've learned in the Web2 era may not be as applicable in the Web3 era. It's helpful to consider network effects from fundamental principles in order to comprehend what changes when we move from Web2 to Web3 in order to understand network effects in a Web3 world.

 

Web 2 vs. Web 3 network effects: four key differences

To comprehend network effects in Web3 ecosystems, we must first define the distinctions between Web2 and Web3 ecosystems, as well as how these distinctions affect the generation of network effects.

 

First, the platform provider creates market infrastructure in Web2 ecosystems. Market infrastructure in Web3 ecosystems, on the other hand, is not provided by the platform provider and must be built out by the ecosystem, both through resource commitment (e.g., storage capacity commitment) and infrastructure creation. As a result, Web3 ecosystems face a unique difficulty in developing and scaling network effects, as they must orchestrate not only market activity (as web2 platforms do), but also market infrastructure development.

 

Second, token value adds a new value lever to help network effects get started and scale. Tokens are used to control market activity. Producers may be rewarded for bringing early supply to the platform in the form of tokens whose value rises as market activity rises. Similarly, developers in charge of constructing market infrastructure may be rewarded with tokens if they provide fundamental infrastructure components. Tokens introduce a unique incentive mechanism that has been missing from Web2 ecosystems.

 

Third, Web3 makes network effects considerably less defensible due to data and reputation mobility mixed with technology compatibility. Even if Web3 ecosystems quickly develop network effects, they will not be able to lock in their users (or the supply from providers) or extract surplus value from user data in the same way that their Web2 counterparts have done so successfully (and currently).

 

Web2 ecosystems are mostly made up of market participants. Participants in Web3 ecosystems must be considered not only at the market layer, but also at the infrastructure, financial, and governance layers. A Web 2 marketplace, such as Etsy, is open to third-party vendors, but it mostly builds the fundamental marketplace infrastructure internally and centrally oversees finance and administration. In contrast, a Web3 commerce protocol (such as the Boson Protocol) must be able to communicate with other Web3 commerce protocols.

 

At the infrastructure layer, organize market infrastructure creation around the protocol, at the funding layer, manage token liquidity to drive funding and token value appreciation (which incentivizes all participants), and at the governance layer, scale-out governance to ecosystem participants beyond the initial team.

 

VALUE NATURE MENTAL MODEL

Standalone/product value and network value were the primary sources of value for Web2 networks. Token value is an additional value lever provided by Web3. When considering web3 network impacts, this is a critical lever to consider.

 

STANDALONE/PRODUCT VALUE

Standalone/product value refers to the value that exists on a platform when no one is using it and is derived purely from the underlying product. This is the value that a user receives from the platform, regardless of how other users interact with it. This value is available to the first user that signs up for the platform. As more users join, the platform's standalone worth remains unaltered. The worth of a stand-alone item is usually the most important.

 

NETWORK VALUE

Network value is the value that exists on the platform as a result of the platform's utilization by other users. This is the value that is created on the platform as a result of other users' activities and usage. When a platform has no users, it has little value in the network. The network value does not accrue to the initial user who joins the platform. However, as the platform's utilization by other users expands, the platform's network value grows.

 

The community on Web2 platforms is mostly made up of platform users (producers and consumers). Because practically all value creation in Web3 ecosystems is enabled by the community of users, network value is boosted even more on Web3 platforms.

 

There are numerous examples that demonstrate the distinction mentioned above. Before turning on network value with a full-fledged social network, Instagram began off as a standalone app with gorgeous filters. Square began as a dongle that turned your phone into a credit card terminal before expanding its network with the Square Cash app and other Square ecosystem components.

 

TOKEN VALUE: On Web3 systems, token value refers to the value accrues in a native token connected with the protocol.

 

Conclusion

The network impacts of Web3 are distinct. They bring new coordination issues, incentive mechanisms, and classic rules of defensibility and extraction, reshaping the platform-versus-ecosystem power balance. Web3 network effects will necessitate an altogether new playbook, as illustrated by the five mental models above new bootstrapping and scaling models, new governance mechanisms, new sources of competitive advantage, and new forms of value capture.

 

We'll break down the Web3 bootstrapping playbook in a series of posts over the next few weeks, culminating with the debut of the Web3 bootstrapping playbook later this summer. If you'd like to be kept up to date on the launch, sign up at the link below and you'll be among the first to get your hands on a copy of the Web3 bootstrapping playbook.

You can get your Real-Time and Historical Cryptocurrency Data with Finage free Crypto Data API key.

Build with us today!

Start Free Trial