The Power of Network Effects in Web3: Building Stronger Communities

The Power of Network Effects in Web3: Building Stronger Communities

Introduction:
In the world of crypto and NFTs, network effects play a crucial role in shaping the success and growth of projects. Unlike the network effects in Web 2.0, those in Web3 are natively layered, combining multiple forms of network effects. However, they are weaker and less defensible compared to their Web 2.0 counterparts. This article explores the dynamics of network effects in Web3, their challenges, and potential strategies for building stronger and more sustainable communities.

Understanding Network Effects in Web3:
In Web3, the addition of more nodes increases the capacity and value for buyers of the Ether token. As more token buyers join the network, the value of the Ether token increases, making it more valuable for nodes to validate transactions. This creates cross-side network effects on a 2-sided interaction network, where token buyers can also be validators and vice versa. However, this network structure also poses challenges, such as negative network effects and commoditization risk.

Negative Network Effects and Commoditization Risk:
Beyond a certain point, the addition of a token buyer can decrease the value of the network for all other token buyers. This is because blockchains are identity agnostic, meaning the identity of each node does not matter to other nodes or token buyers. As the network scales, each new node adds less incremental value. Moreover, the absence of a "matching" or "app store" component in Web3 platforms and the reliance solely on the Ether token as the underlying product have led to a proliferation of competing blockchain protocols and tokens.

Layered Network Effects:
To overcome the challenges of weaker network effects, some Web3 projects have introduced layered network effects. For example, the presence of a marketplace component in Axie Infinity reinforces the interaction network effects of the game. The differentiated supply of Axie Infinity's marketplace makes it highly defensible, ensuring it remains the go-to destination for buying in-game items. Additionally, DAOs (Decentralized Autonomous Organizations) act as interaction networks where user identity influences defensibility. The scale of the network determines the importance of user identity.

The Path to Sustainable Defensibility:
The future of web3 projects and their defensibility is still evolving. Two possibilities exist: either true network effects are no longer a meaningful source of structural defensibility, and defensibility depends on the tribal and psychological switching costs of each project community, or we are still in the early stages of web3, where experimentation and evolution precede sustainable defensibility. The long-term winners with stronger and more defensible network effects will likely emerge after this phase of experimentation.

Actionable Advice:

1. Embrace Layered Network Effects: Explore ways to incorporate multiple forms of network effects in your Web3 project. By combining different interaction networks and marketplace components, you can strengthen the defensibility and value of your community.

2. Focus on User Interaction and Scalability: Pay attention to how users interact with each other and how the addition of new users affects the overall value. Ensure scalability to accommodate increasing user participation while maintaining the quality of the network.

3. Build Strong Community Identity: Foster a sense of belonging and community identity within your project. Encourage active participation, collaboration, and shared goals among members. A strong community identity can enhance defensibility and sustain the growth of your network.

Conclusion:
Network effects in Web3 are unique and present both opportunities and challenges for project creators. By understanding these dynamics and incorporating layered network effects, Web3 projects can build stronger and more sustainable communities. It is still early in the web3 cycle, and the winners with the most resilient network effects will emerge after experimentation and evolution. By evaluating the interaction, network effects, scalability, and defensibility of your project, you can position it for success in the era of web3.