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Network Effects in Crypto

This article from details how the rise in price and usage of cryptocurrency can be modeled by network effects similar to those we studied in class. Primarily, the article focuses on the effects of usage on a network’s value. The article explains how Metcalfe’s law, which states that the value of a telecommunication network is proportional to the square of the number of connected users, can be used to model the values of Bitcoin and Ethereum as the number of transactions on each platform has increased over time. Specifically, Ethereum started the year at 20,000 transactions per day, and at the time of the article’s writing was around 300,000 transactions a day. This has come with about a 10x increase in price – closely following Metcalfe’s law.

Beyond what is explained in the article, we can see what looks like a tipping point in a graph provided within the article. Once the number of transactions reached the tipping point early this year, the value of Ethereum has experienced exponential growth that we expect to round/flatten out in the near future. This can be explained by a combination of Metcalfe’s Law and the idea of tipping points. Since the number of transactions on Ethereum has moved past a tipping point, the value will continue to increase until a stable state is reached, after which a more normal growth pattern should be experienced. This along with the idea that the value of the coin is directly related to the size of the network or the number of transactions leads to the price of Ethereum tracking its increase in usage and therefore the enormous growth experienced due to surpassing a tipping point.

Bitcoin and Ethereum Follow Metcalfe’s Law of Network Effects New Study Says


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