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Reference Information
What Is a Network Effect?
Reddit reminisces defunct ‘Bitcoin faucet’ website that gave away 19,700 BTC for free
Excerpted from a Japanese article translated by DeepL translator.
ビットコインの価値はその周りの「ネットワーク効果」で考えるとよくわかる
The value of Bitcoin can be better understood by considering the “network effect” around it.
"Why is the network effect so important?
So what is so important about the network effect?
Frankenberg says, “If the network effect of an existing product is strong, a new entrant may not find a place in the market. That’s what’s important,” he says.
Here’s an example Frankenberg gave. Let’s say you have a product here. There’s only so much this product can do technically, but as time goes on, this new product will increase its network utility. Later, a new entrant comes to the market with a better technology. However, the new entrant has less network utility than the previous product. Then, when comparing the “original technology + network utility”, the earlier product will have a greater advantage in the market. Therefore, even though the new entrant has a better technology, it will be at a disadvantage in the market competition because of the weak network effect.
Network Effects in Bitcoin
So what are some of the network effects in Bitcoin? There are many," emphasizes Frankenberg.
According to him, in terms of direct network effects, if more users use Bitcoin, the number of users sending Bitcoin to each other increases, which increases utility. In terms of the Indirect Network Effect, if the on-ramp increases, the number of users will increase, which will continue to increase the network effect. Furthermore, if many applications such as payments and messaging are built on top of the Bitcoin network, the value of Bitcoin will also increase.
Using the diagram above, Frankenberg explains the flow of bitcoin’s network effect as follows.
First, widespread use of Bitcoin in businesses will affect the price of Bitcoin. If the hash rate increases, security will increase. This will create a positive feedback loop.
The more regulation, the more transparency, and the more companies will use bitcoin. The more user-friendly the system becomes, the more companies will use bitcoin.
The accumulation of use cases will make it easier to use bitcoin for payments, which will in turn increase the use of bitcoin by businesses.
The more bitcoin is used in retail, the more bitcoin will be used in business, the more bitcoin transaction volume will increase, and the value of bitcoin and fintech-related conferences will rise.
Eventually, if central banks come to use bitcoin, we can expect a very large network effect."