You've probably heard of the network effect and how it has scaled top social media and e-commerce brands to become giants in the digital marketplace. Network effects occur when the value of a platform increases as it attracts more users.
While network effects are good for brands, the traditional structures of the web make it difficult for emerging brands to compete or strike a positive-sum relationship with established brands. As a result, this article aims to explore new standards of recreating network effects - through web3 structures - that benefit both emerging and established brands.
Limitations of Traditional Network Effects in Scaling Emerging Brands
Traditionally, brands have explored content marketing and ecosystem partnerships as the most reliable means of scaling products and services. The process involves brands spending more energy, doubling their efforts and making all the moves themselves.
For example, the normal content marketing process involves generating a ton of written, visual and audio content coupled with several SEO strategies to rank on Google and YouTube. In addition, brands have to employ paid research tools, link-building tactics and guest blogging opportunities.
The process is time-consuming and requires lots of resources for brands to achieve any tangible result. Traditional content marketing ultimately accrues more value for the underlying search engine company than the end brand. Most often, the underlying search engine company harvests the personal data and online behavioural patterns of a brand's customers to generate more revenue, leaving brands earning less for their efforts. As a result, the network effect makes the search engine company more valuable in the long run instead of the end brand.
Alternatively, brands explore the ecosystem partnership strategy. The good side of ecosystem partnerships is that both brands can significantly scale from the process. However, the barrier of entry is usually high for beginner or small brands. For example, if brand A intends to partner with brand B, they would have to organise several meetings, establish legal agreements and sign several documents. The process is often tedious for a small brand, limiting the possibility of establishing any beneficial partnership.
The Web3 Standards For Building Network Effects
One of the perks of web3 protocols is the basic frameworks that enable them to have ripple network effects. The structures of web3 systems can change the game for brands through innovative features that can help them scale and create network effects in a far cheaper and simpler way than traditional methods.
Below are some of the top features of web3 that brings to life a new network scaling system for brands:
Open-source software is software in which the source code is freely available for anyone to inspect, enhance, modify or redistribute. Most web3 brands operate open-source protocols by default due to the crypto ethos of transparency. As a result, anyone can easily copy the source codes of an existing protocol and make a few modifications to release an entirely new protocol. This partly explains why thousands of crypto solutions are entering the market rapidly. The foundation was laid by the Bitcoin protocol, which gave birth to other top cryptocurrency networks like Litecoin, which in turn birthed Dogecoin - the popular memecoin.
The open-source nature of web3 protocols forsters accelerated innovation, helping brands to scale quickly. For example, Dogecoin was created in under three hours - even though initially as a joke - because the founders copied the existing Litecoin open codes. It's important to note that "meme" here doesn't discredit Dogecoin's general features of immutability, transparency and decentralisation.
Another prime example is SushiSwap, which is a fork of Uniswap. The founders copied the codes of Uniswap and added a few tweaks to include extra yield generation features that attracted many liquidity providers into SushiSwap's ecosystem. Web3's open-source approach means developers don't have to build from scratch, as they can leverage the codes of existing protocols to scale quickly. Like SushiSwap and Dogecoin, brands can copy and innovate on existing protocols with similar value propositions to their purpose instead of spending resources and wasting time building from scratch.
Hard forks are backward-incompatible updates to a cryptocurrency protocol, splitting its network into two factions - one with the old rules and the other with the new rules. Since web3 blockchain protocols are mostly open-source, anyone can carry out a hard fork easily. On the surface, hard forks seem the same as copying and tweaking an open-source code to launch a new solution, like in point one above.
However, beyond copying and tweaking codes, hard forks automatically make users of the forked protocol also potential users/customers of the new protocol. When projects conduct hard forks, token holders of the forked protocol receive their equivalent holdings in the new protocol. This serves as an incentive to interact with the newly created protocol. As a result, brands can easily access the user base of existing large cryptocurrency networks by innovatively creating hard forks out of them.
For example, Bitcoin Cash (BCH) is a hard fork of Bitcoin which began by increasing the block size of the Bitcoin network. All wallets holding bitcoin at the time also received the equivalent amount of their holdings in BCH. This gave Bitcoin Cash a kind of head start as it went on to stand among the elites of the top 50 cryptocurrencies in the world.
Permissionless generally means users don't need permission or authorisation before they can use or participate in securing a platform. But more importantly, permissionless also refers to the ability to integrate, partner or launch on existing protocols without necessarily going through any gatekeeper or centralised authority. This introduces a new kind of ecosystem partnership where brands don't need meetings, agreements or signed documents before they can partner or launch on top of each other's platforms.
Brand A can permissionlessly partner with Brand B to enjoy the benefits of B's ecosystem - without seeking authorisation from anyone. For example, The Sandbox allows developers to leverage its infrastructures to build decentralised virtual environments and games without seeking their approval or consent. Same as Decentraland, which enables users to customise whatever structures they intend to create in their virtual environment. The prime example of permissionless is seen in the freedom for anyone to launch dapps and tokens freely on Ethereum at no cost or charge. This is largely seen in how the emergence of Ethereum gave rise to the ICO boom and also birthed several top DeFi and NFT projects of today. Hundreds of thousands of applications and tokens on the Ethereum network run freely without any monthly subscription fee. As a result of web3's permissionless nature, brands can scale in no time and create multiple network effects by freely leveraging the infrastructures and user base of other established brands.
For the most part of this piece, the focus has been on how the effect of these web3 structures helps the emerging brand. However, these features essentially cause ripple network effects for the established brand. Protocols with several forks have proven to increase strength whenever new projects launch by forking their codes. The logic here is that a project must possess some kind of unique value for others to fork or copy its codebase constantly.
On the surface level, it may seem as though open-source and hard forks can make established brands obsolete. But the Bitcoin effect tells the opposite story. As the number of Bitcoin forks or cloned versions increases, the original Bitcoin protocols accrue more value. Another example is how Uniswap leveraged SushiSwap and other forks of its codebase to grow in popularity and expand its ecosystem. When defining SushiSwap today, you must always reference Uniswap as its mother chain. The same goes for other Bitcoin forks, which always use Bitcoin as their first name - Bitcoin Cash, Bitcoin Gold, Bitcoin XT, Bitcoin SV, etc.
A similar network effect is visible in the permissionless partnerships approach of the Ethereum blockchain. By reducing the need for traditional forms of gatekeeping - subscriptions, legal rights, closed APIs - Ethereum has blossomed in strength. As dapps and projects launch freely on its network, their efforts to attract users to their products ultimately lead those users to Ethereum.
For example, you must have an Ethereum wallet and own some Ether (ETH) to interact with projects or dapps on the Ethereum network. Hence, the Ethereum network has seen a consistent surge in users since the enablement of dapps and third-party tokens on its network.
Another example is the incredible growth of the web after Sir Tims Berners Lee and CERN made its license open-source. The several applications and websites available today are a testimony of the success of its approach. Today, it's almost impossible to interact online without encountering the web. As a result, making the web open-source caused a ripple network effect which enabled it to scale in far lesser time than a closed system would have taken.
The web3 standards above are changing how brands approach building products as they lay the foundation for new ways of scaling quickly through network effects.
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