Network Effects and Friendly Developer Moats
Crypto assets are unique in the sense that they are either natively baked into a network or exist on top of a network. There are many crypto assets but one in particular deserves your attention. The network is known as Ethereum and it has a native asset called Ether. Ethereum has the most daily users, daily transaction volume, total number of assets built on top of the network and most importantly, number of developers.
While Bitcoin is #1 when it comes to total network market capitalization and general market awareness, Ethereum will continue to gain notoriety in the space as it can do what Bitcoin cannot do; smart contracts, programmable money and decentralized applications. Ethereum has developed an incredible network effect and developer moat during its past four years of existence. This will cause it to not only continue to grow rapidly, but with compounding effects as shown by Metcalfe’s Law.
Network effect is a phenomenon whereby increased numbers of people (developers, companies…etc) or participants (users, investors…etc) improve the value of a good or service. One way to judge a crypto asset’s network effect is to look at projects built on the network.
In the case of Ethereum, there are currently more than 2,600 decentralized applications. In comparison, its closest competitors are EOS.IO and BlockStack which have 297 and 250 applications respectively.
The problem for Ethereum competitors is that they are still building the primitive building blocks that are necessary to create more complex applications. Ethereum has been developing these building blocks over the past few years and include things like decentralized exchanges, oracles, and stable coins. These allow developers to build more complex applications through what is known as composability — the ability to leverage existing projects in order to build something completely new.
One great example of composability is Set Protocol. This utilizes Ethereum, a stable coin (Dai, built in 2017) and a decentralized exchange (KyberSwap, built in 2018) in order to create automated asset management strategies which are sometimes called “autonomous money robots.”
While there are already projects looking to compose Set Protocol into the next mind-blowing application, Set is just one example of many projects that were created through Ethereum composability.
The term network effect is not new and what we are seeing now is nearly identical to the growth of the internet.
“The internet was of relatively little value to anyone outside of the military and some research scientists at first, but as more users gained access to the Internet, they produced more content, information, and services.” — Wikipedia
This snowball effect that happened in the early days of the internet is happening now with Ethereum.
This network effect tends to create immense stickiness with builders which forms a developer moat. The majority of developers do not want to recreate an entire ecosystem just to deploy their new application successfully. This creates a chicken and egg problem for new networks as developers want access to the basic building blocks to create interesting and complex use cases, which sends them directly to the vibrant Ethereum ecosystem.
This post has only just scratched the surface of Ethereum, which is a constantly evolving organism and is nowhere near its final form. While it’s nearly a full time job keeping tabs on this lush ecosystem, I do my best.
About the Author
Anthony Bertolino is dedicated to educating the world about Ethereum and the future of finance. He studied Blockchain Technology at U.C. Berkeley and currently lives in Los Angeles, California. If you want to learn more or have any questions, reach out to him on Twitter.
