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In this article, you will understand:

• Network effect: what is it?
• Network effects come in many forms.
• Network effects and cryptocurrencies
• Network consequences that are harmful

Network effects are crucial in the world of cryptocurrencies. For instance, if a lot of new people sign up for a blockchain network, the underlying service is probably going to be more beneficial.

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So let's learn more about network impact.

Network effect: what is it?

An economic phenomenon known as a network effect occurs when the value of a network rises as a result of an increase in the number of users of a good or service. New consumers are encouraged to join the network when a network effect first appears, raising the value of the underlying good or service. A network's value increases together with the expansion of its user base. A classic example of a network effect is the telephone network, where higher usage led to decreased costs, increasing the network's total value. A number of variables decide which cryptocurrency projects are dominating the market in a certain industry.

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A promising or innovative technology's relevance or success cannot be assessed only by its consumers. There are many instances of businesses that used inferior technology yet nevertheless managed to capture a sizable portion of the market. Users place higher value on a project's availability at a certain moment!
In essence, this is where network effects are relevant.

Network effects can take many different forms.

There are two sorts of network effects.:

1. Direct network effects
2. Indirect network effects

In the case of the telephone network, for instance, increasing utilization benefits all other consumers directly.

Increased utilization by one group of users benefits another group of users indirectly through the network.

Numerous cryptocurrency projects are open-source because of the significant network influence they have, and developers like to check the code's source code.

This rising use is the result of a well-established network effect, which chooses which cryptocurrency projects become industry leaders in a certain niche.

Network effects and cryptocurrencies

A crucial aspect of blockchain and cryptocurrencies is network effects. For instance, Bitcoin offers characteristics that are appealing to the majority of users and a demonstrable influence on the network.

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Think about how Bitcoin miners maintain network security while disregarding the liquidity issue. Even if an innovative project with a comparable use case to Bitcoin appears out of nowhere, switching to it isn't necessarily the smartest course of action. Although incentives for miners will be slightly larger, they won't have as much liquidity as BTC. Particularly, the distinguishing qualities and traits of Bitcoin make it hard to imitate, which motivates consumers to continue with it over time.

Although network effects may be significant in the Decentralized Finance (DeFi) area, no smart contract initiatives have, to far, undoubtedly attained a substantial network impact that would position them as the market leader.

Network consequences that are harmful

The value of the network is diminished as new users join because they have a negative network effect. Ethereum gas costs serve as an example of a detrimental network effect. Ethereum gas fees increase as more users place bids on the amount of gas fees that should be levied to Ethereum miners.

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Closing words

Because new users add value to the network, network effects, which affect the value of cryptocurrencies similarly to how they affect the value of various economic segments, have an impact on their value. By taking network effects into account when creating blockchain networks, developers can hasten scalability.