Network Effects in Blockchains and Decentralized Services
As we learned in class, network effects are the beneficial effects that people both add and gain by behaving similarly to other people. A common example of network effects is joining social media – users add their own value by joining the network because they give other users one more person to access on that platform, and that user also gains value by having a network of others they can now access. Over the years there has been mounting excitement over blockchains and decentralized technology because of their security, versatility, and speed. However, because blockchains and decentralized networks are peer-to-peer networks, perhaps their most impressive aspect is how much potential they have via network effects. To understand where network effects would apply in a blockchain, it’s important to first understand where each peer (user) comes into play.
A blockchain is essentially a peer-to-peer network where users add pieces of data (blocks) such as transactions to a massive chain of already existing transactions. Each peer on this network also stores the current version of blockchain data, so any transaction added to the blockchain can be automatically validated by comparing the new transaction with each peers’ blockchain data. If a manipulated or invalid transaction tries to get added to the blockchain, it wouldn’t match the data held by other peers and therefore wouldn’t get validated and added to the chain. So, if I tried to add a block containing a false transaction that didn’t occur, then other peers’ blockchains would not match my data and reject the transaction from being added. Furthermore, each block has a specific hash (an extremely long password number) based on the block before it – this is a safeguard to make it computationally unworthwhile for people to try to reverse-engineer a blockchain and maliciously alter its transaction data. These are the main principles of a blockchain, which are used as the backbones of many different decentralized services.
However, before diving into a specific example, we can already see how network effects come into play given the critical role that peers have in the security of networks. As mentioned above, in order to add a new block, the majority of peers on the network need to have matching data. However, this also means that if someone set up enough computers to become 51% of the userbase, then would have a majority control of the network and could therefore manipulate the blockchain. Therefore, one of the benefits with more peers in a blockchain network is that it becomes more secure; the odds of someone gaining 51% control over a network decrease as a more and more peers make it unworthwhile for someone to destabilize the network. Furthermore, as more peers use the network, a higher volume of transactions will occur and therefore blocks will be added to the chain more frequently. This also adds security to the network because with each additional block, the required computational power for someone to reverse-engineer and manipulate the blockchain becomes much larger and unworthwhile. These are some of the network effects that would apply to any blockchain, and different decentralized services can use these network effects to their benefit.
To examine this, I decided to look into a specific decentralized service called Storj. It is a service that allows users to store data on their cloud. However, unlike Amazon or other cloud storage companies, Storj does not own any storage space themselves – they pay other users to act as their storage space, creating cloud storage spread across thousands upon thousands of privately owed hard-drives. The service describes itself as “ride-sharing for the cloud,” which distributes small pieces of users’ data as blocks in a blockchain and spreads it across its massive, decentralized cloud network. Network effects can work massively in favor of this service; additional users joining the service will result in more storage space and therefore lower storage costs.
Sources:
https://dataconomy.com/2018/06/how-blockchain-can-supercharge-the-network-effect/