


The greater the number of users of a particular product, the more value it tends to attain. This takes a good understanding and application of the “Network Effect” concept.
Introduction to Crypto Networks
We live in a world where the use and adoption of cryptocurrencies are rising rapidly. With over 4000 cryptocurrencies available, there is always a fight for supremacy.
To make their projects the best and most sought-after, developers go the extra mile to incorporate innovative features/utility into them. That alone may not impact the sale or adoption of their cryptocurrencies as there is more to it.
It is the less developed cryptocurrencies that quickly gain traction. With unique characteristics, they take the market by storm. They win the hearts of cryptocurrency enthusiasts in the process, and subsequently, their value increases. How does this happen? One sensible answer to this question is the network effect. Let us explain how this phenomenon affects the entire market.
What is Network Effect?

A network effect refers to how the number of individuals using a particular product affects its value. As the number of users of a specific product increases, the value tends to increase as well. The network effect is also referred to as network externality.
Whenever a new user adopts a given product, such a product’s value or utility tends to increase. A user’s adoption will increase the product’s value for pre-existing users and draw other people’s attention. The process by which users’ addition to a product increases its value is referred to as the “total effect.” The addition of users that causes non-users to have an interest in having the product is known as the “marginal effect.”
One of the largest and best explanations of a network effect is the stock exchange. Network effects can be seen in the volatility of the stock market. Prices of stocks are heavily dependent on the demand of users. When users don’t show interest in a given stock, the price drops, attracting many investors in the process as it is traditional to buy the dip.
Upon investment, the number of users increases because the price steadily increases. However, a decline is seen when people begin to sell off because of the increased price. As such, prices eventually drop yet again. The network effect is observed when the activity of investors causes people to profit from the price increase.
Economic Importance of Network Effect

As the number of users of a given product increases, market sales are affected positively. If the price of goods and services are lower than the value they bring, the number of consumers will increase rapidly. A network effect is generally perfect for the economy.
There are several ways businesses can leverage network effects to attract several users. Common tactics are rebates or discounts, free trials, etc. The adoption of Airdrops is a common way of attracting users in the crypto market.
The Problem of Network Effects
The network effect may be problematic when the addition of new users causes the reduction of value. This is often seen in blockchain technology. It is expected that a good network should attract investors. However, when investors are attracted, instead of the network’s value increasing, it declines surprisingly.

Ethereum’s gas fees are a typical example. It was designed for users to bid on transaction throughput. This bid is used as payment to miners of Ethereum for verifying transactions. The addition of users into the Ethereum network led to an increase in gas fees. This is because users of the network tend to outbid themselves. As the gas fees increased due to bidders’ activities, many users are inclined to leaving the network due to the high cost of transactions.
This illustration is one big problem of the network effect: an increase in users of a given product could end up leading to a decline in its value.
Types of Network Effects

- Direct Network Effect: We see this type of network effect when an additional user affects pre-existing users. This means that existing users directly profit from the accumulation of new users.
- Indirect Network Effect: It is also called the cross-side effect. It is a type of network effect by which new users’ addition to a particular product is not influenced by the product’s innovations but by an external body. We mean that users do not use the product because of what they want to gain but because of a complementary product that brought about awareness. New users adopted the internet because of the availability of cheaper means of accessing the Internet.
- Bilateral Network Effect: This type of network effect is observed when the increase in a complementary product triggers an increase in the product. Again, the Internet is a good example - for instance, the number of Internet users increases due to an increase in the number of smartphones produced or purchased. The smartphone is a complementary product whose growth influences the actual development, which is the Internet.
- Local Network Effect: This occurs when new members’ addition is beneficial to some pre-existing users rather than the entire users.
Conclusion on Network Effects
Network effects are a beneficial concept that many organizations leverage for rapid growth. A network ensures that its products or services are sold effectively. Networks may have some side effects like congestion, as seen in the Ethereum network or even on the Internet. Many users can lead to a slower network. The network effect is generally a positive phenomenon. The impact of the network effect is readily seen in many sectors of technology and finance. Its impact is well established in crypto markets and can be a strong determinant in how well a cryptocurrency is adopted.
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Related News

Explore the comparative analysis between Bitcoin and Pi Network, two prominent networks shaping the future of decentralized finance. Uncover their differences in mining, scalability, market acceptance, and community dynamics.
TL;DR:
- Bitcoin and Pi Network are compared in terms of their foundational principles, mining methods, scalability, market acceptance, and community dynamics.
- Bitcoin operates as a decentralized digital currency, while Pi Network focuses on accessible mining through mobile devices.
- Bitcoin mining relies on computational power for security, while Pi Network utilizes a mobile mining approach with lower energy consumption.
- Bitcoin faces scalability challenges, while Pi Network needs to address scalability as it aims for widespread adoption. Market acceptance and value differ between the two networks.
Cryptocurrencies have opened new avenues for financial transactions, decentralized networks, and innovative technologies. Bitcoin, the first and most well-known digital asset, has paved the way for a digital revolution.
However, newer players like Pi Network are entering the market with unique propositions and aiming to challenge the status quo. This article will conduct a comparative analysis of Pi Network and the Bitcoin network to understand their similarities, differences, and potential implications for the future of Decentralized Finance (DeFi).
Foundational Principles
Bitcoin, introduced in 2009 by the pseudonymous Satoshi Nakamoto, was designed to be a decentralized digital currency that operates on a peer-to-peer network. Its foundational principles include security, transparency, and scarcity. Bitcoin's blockchain technology enables secure transactions without intermediaries or central authorities.
Pi Network, on the other hand, was founded by a team of Stanford graduates in 2019. It creates a digital currency, $PI, that can be mined using mobile devices, making it accessible to the masses.
Mining and Network Security
Both Pi Network and Bitcoin utilize mining as a fundamental process, but they employ different approaches. Bitcoin mining involves solving complex mathematical problems through computational power to validate transactions and add new blocks to the blockchain. This process ensures network security and prevents double-spending.
In contrast, Pi Network's mobile mining aims to provide an alternative approach that allows users to mine using their smartphones. It utilizes a consensus algorithm that doesn't require massive computational power or energy consumption. However, it's important to note that Pi Network is still in the enclosed mainnet phase, and the security and decentralization of its network are not as established as Bitcoin's.
Scalability and Transaction Speed
Scalability has been a significant challenge for Bitcoin. The network can handle a limited number of transactions per second, leading to congestion during peak periods and higher transaction fees. Various solutions, such as the Lightning Network, have been proposed to address these scalability issues and enhance transaction speed.
Pi Network, a relatively new project, has not yet faced the same scalability challenges as Bitcoin. However, as Pi Network aims to achieve widespread adoption, it must address scalability concerns to support a growing number of transactions and users when the open mainnet goes live.
Market Acceptance and Value
Bitcoin has gained widespread acceptance and recognition as a digital asset and a medium of exchange. It has attracted institutional investors, retail traders, and merchants worldwide. Bitcoin's value is determined by market demand, and its price has experienced significant volatility over the years.
In comparison, Pi Network’s enclosed mainnet phase means that its native currency has not yet been listed on major exchanges. Its value and market dynamics are not freely tradable or well-established. Pi Network's success in gaining market acceptance and establishing value will depend on user adoption, utility, and listing on reputable exchanges.
Community and Ecosystem
Bitcoin has a robust and active community of developers, enthusiasts, and supporters. Its open-source nature has allowed for the development of various applications, platforms, and services built on top of the Bitcoin network. The Bitcoin community has played a vital role in its growth and adoption.
Pi Network, as a newer project, is also building its community of users and supporters. It has attracted many early adopters enthusiastic about its vision of accessible mining. The Pi Network team actively engages with the community, providing updates and addressing concerns. Building a solid and engaged community will be crucial for Pi Network's success and future development.
Conclusion
The comparative analysis between Pi Network and the Bitcoin network highlights their differences in approach, mining methods, scarcity, scalability, market acceptance, and community dynamics. Bitcoin, as the pioneer in the cryptocurrency space, has established itself as a widely recognized and accepted digital asset. Its decentralized nature, security, and growing ecosystem contribute to its value and market dominance.
Pi Network, on the other hand, is a newer project that aims to bring mining to the masses through mobile devices. It introduces a unique consensus algorithm and focuses on accessibility and user-friendliness. However, Pi Network is still in its early stages, and its network security, scalability, and market acceptance are yet to be fully established.
Both Pi Network and the Bitcoin network contribute to the continuous innovation and evolution of decentralized finance. While Bitcoin remains the leader in market acceptance, value, and ecosystem development, Pi Network's vision of accessible mining and user-friendly approach could have implications for making cryptocurrencies more inclusive and widespread.
This is a paid press release, BSC.News does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. The project team has purchased this advertisement article for $1500. Readers should do their own research before taking any actions related to the company. BSC.News is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, or services mentioned in the press release.
This is a paid press release, BSC.News does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. The project team has purchased this advertisement article for $2500. Readers should do their own research before taking any actions related to the company. BSC.News is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, or services mentioned in the press release.
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