In its simplest definition, a network is a collection of participants who are using a given system and the connections between them. They choose to use the network because it gives them benefits, and the collective sum of all these benefits to everyone on the network are what we refer to as “network value.” It goes up as more people belong to the network.
When network value changes as more participants join the network or more connections between participants are formed, we call that network effects.
Network effects are a main driver of value generation where new technologies are concerned, because while network costs generally go up linearly as networks grow, network value tends to go up exponentially.
But even within the Internet era, there have been changes in network-based business models. In the earliest era of the web, business models were centered on brands distributing proprietary content to end users.
Newer platforms increasingly shifted their focus toward aggregating content or connecting users to one another. These peer-to-peer platforms had vastly reduced costs for maintaining engagement. At the same time, this “users as product” focus made continued network growth an even greater priority.
Alongside this came the emergence of a class of Internet companies focused on providing their platforms as mechanisms for the exchange of access to crowdsourced goods and services — the “sharing economy.” These businesses (think of Uber, Airbnb, Taskrabbit, and others) generally sat in the middle of two different and distinct networks — providers and customers — generating revenues by efficiently connecting one with the other.
All of these prior iterations of network-based enterprise have something in common. They reserved for themselves unique and centralized power within their networks, unilaterally making decisions on how value is distributed to network participants and capturing data about network relationships and transactions for themselves, with little or no transparency to users.
The next evolution of the web promises to fundamentally alter this power imbalance between businesses and their users, with a “decentralized Internet” that distributes control more evenly across the network. Built on peer-to-peer technologies like blockchain, this new paradigm democratizes network information, distributing it across user nodes rather than locking it in a central vault. It also embeds the concept of value into the network itself. By integrating value into its core protocols, this next Internet acknowledges that users contribute to the system, and should be incentivized to keep doing so in order to sustain and grow networks.
In short: A decentralized Internet is optimized for positive network effects.
Want to learn more about the evolution of networks over the past few decades? Read our in-depth article here.