Crypto & NFTs: Exploring Network Effects in Web3 and the Rise of Paid Newsletters

Crypto & NFTs: Exploring Network Effects in Web3 and the Rise of Paid Newsletters

Introduction:
In the ever-evolving landscape of technology and the internet, network effects play a crucial role in determining the success and sustainability of various platforms and projects. This article delves into the concept of network effects in the context of web3, specifically focusing on cryptocurrencies, NFTs, and the rise of paid newsletters. By examining the commonalities and unique aspects of these domains, we can gain insights into the potential of web3 projects and their network effects.

Network Effects in Web3:
Web3 projects, such as cryptocurrencies like Ether and NFT platforms like Axie Infinity, exhibit natively layered network effects. Unlike their web 2.0 counterparts, these network effects are weaker and less defensible. However, the addition of more nodes in the network increases its capacity and value for token buyers. Token buyers, who can also be validators, contribute to cross-side network effects on a 2-sided interaction network. Nevertheless, this network structure presents challenges, including negative network effects and commoditization risk.

Competition and the Rise of New Layer 1 Blockchain Protocols:
Unlike web 2.0 platforms with matching or app store components, web3 lacks an underlying product other than the native token (e.g., Ether). Consequently, numerous Layer 1 blockchain protocols have emerged, aiming to establish their own network effects by expanding the smart contract ecosystem. However, the cross-chain composability of these protocols may dilute their impact on defensibility, posing further challenges in establishing strong network effects.

Uncertainty and Experimentation in Web3:
As web3 continues to evolve, the value and utility of its network effects remain unclear. This is a common occurrence in the early stages of technological cycles, where experimentation and evangelism precede utility. Various web3 projects, such as Axie Infinity, combine multiple network effects, including marketplace network effects and decentralized autonomous organizations (DAOs), which rely on user identity and scale.

Challenges and Possibilities for Sustainable Defensibility:
Two possibilities emerge regarding the future of network effects in web3. First, network effects may no longer serve as a significant source of structural defensibility. Instead, defensibility may depend on the tribal and psychological switching costs of each project's community. Second, it is possible that we are still too early in the web3 cycle for sustainable defensibility to emerge. Stronger and more defensible network effects may only arise after the experimentation phase.

Key Questions for Evaluating Web3 Projects:
When evaluating the potential of web3 projects, several crucial questions must be considered. These questions revolve around how users interact with each other, the impact of adding new users on the value of the network, scalability limitations, and changes in defensibility as adoption grows. Projects that successfully combine web3 capabilities with stronger network effect layers may emerge as the winners of this era.

Actionable Advice:

1. Embrace Experimentation: As the web3 ecosystem continues to evolve, it is essential for projects to embrace experimentation and explore the capabilities of this new technology. By being at the forefront of innovation, projects can potentially establish stronger and more defensible network effects.

2. Foster Community Engagement: Building a strong community around a web3 project can contribute to its defensibility. By fostering engagement, encouraging collaboration, and creating switching costs through a sense of belonging, projects can increase the tribal and psychological factors that contribute to sustainable network effects.

3. Prioritize Scalability and Composability: To overcome the challenges posed by commoditization risk and cross-chain composability, web3 projects should prioritize scalability and the ability to interoperate with other protocols. By focusing on these aspects, projects can enhance their defensibility and stand out in the competitive landscape.

Conclusion:
Network effects in web3, whether in the realm of cryptocurrencies, NFTs, or paid newsletters, present both challenges and opportunities. While the current network effects in web3 may be weaker and less defensible, the ongoing experimentation and evolution of the technology hold potential for stronger and more sustainable network effects in the future. By understanding the dynamics of network effects and incorporating the actionable advice mentioned, web3 projects can navigate the complexities of this era and position themselves for success.