In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of a good or service has on the value of that product to other people. When a network effect is present, the value of a product or service is dependent on the number of others using it. -Wikipedia
By now, most people are familiar with the cryptocurrency, Bitcoin, but few people know that this token currently only constitutes about 70% of the $20+ billion current market cap of all digital currencies. In addition to Bitcoin, there are probably hundreds of other currencies in circulation that offer incremental improvements over Bitcoin, but also exist to serve certain niche markets, such as use cases for purchasing video games online, sharing unused network processing power, and ways of compensating content publishers.
Most of these currencies exist in their own ecosystem where value and opportunities for trade exist only for other holders of a given currency, and decentralized applications (dapps) that run on each platform, which accept and transfer a given currency. In order to trade, let’s say, Ethereum and Bitcoin, or PIVX and Steem, it would require a person to open an account with an exchange where they’d have to go through the process of buying and selling a currency pair, having a transaction fee exacted, and having to absorb added risk of yet another trading account. They’d have to do this in addition to, and after, transferring real world fiat currency into something like Bitcoin or Ethereum. The process is slow, cumbersome, and not terribly user or consumer friendly.
The value of a currency is based upon the network effect, in addition to supply and demand dynamics. The network effect is a consequence of an economic relationship that thrives not on scarcity, but on abundance. For example, the value of a PC is firstly derived from scarcity. They do not spontaneously exist in nature. Someone has to mine minerals, which have to be processed into circuit boards and microprocessors, and the object must be shipped, etc. But the full value of a PC is not completely realized without the presence of and ability to interact with other computers via cheap and ubiquitous telecommunication links. To learn this, all one must do is unplug their desktop computer from the internet for a week and then observe what it is good for. It won’t be completely useless. You’d still be able to use a word processing program and print documents, but you wouldn’t be able to share those documents with colleagues or family. Thus the full value would not be attained.
The value of a cryptocurrency is also influenced by both scarcity and abundance, like a PC. Its value is certainly influenced by demand and supply, as any cryptocurrency trader could tell you that. But its full value can’t be realized unless there are opportunities and other people in the market willing to accept it as a measure of value. The abundance of users, and the network effect, provides the full and complete value.
The world of cryptocurrencies, in many ways, is a network of networks where the value of these somewhat isolated and constricted crypto ecosystems will probably never be fully realized until each isolated segment can seamlessly, cheaply, and securely interact without the manual intervention and cost associated with exchanges — and take full advantage of the network effect.
A new crypto offering, Ark, promises such a thing with their SmartBridge technology, slated to be released in Q4 2017. The Ark roadmap includes many interesting milestones, which they promise will help speed consumer adoption of crypto and blockchain technology. That alone is a potential differentiator in the market. But one particularly interesting feature is Ark’s promise to break down trade barriers between various competing networks within the larger crypto network of networks.
With their coming SmartBridge offering, I can imagine being able to rent a movie for some specific period of time and not having to worry about purchasing tokens or credits from a media provider, and then converting from one currency to another on an exchange, but simply being able to make my purchase with any digital currency. Ark strives to provide the platform and, as of now, unique technology to transfer value between blockchains, and to provide the necessary information for the execution of smart contracts to provision my access to the media, and provide additional services, such as proof of payment to all relevant parties. The whitepaper states the potential number of use cases is “limitless”. And, you know what? I agree.
It should be clear, this product has not yet been completed or released. But excitement is building, particularly after the successful completion of previous phases of their roadmap, which includes the recent release of their trade-able currency. There’s a lot of potential value here. The team behind this offering is solid. And the community is growing by leaps and bounds. I’m going to be keeping an eye on this project, and so should you.