Generally speaking, tokens are representations of the network effects within a given network, platform or ecosystem. Tokens make it possible, the first time, to grant their holders ownership of a piece of a network. This is different from traditional equity instruments. Because tokens are multifaceted and have a mostly permissionless nature that is open to composability, they encourage experimentation and creation and thus can generate network effects faster and of a greater magnitude than the closed networks of Web2.

 

Fundamentally, participation in Web3 based on true ownership of tokens means owning pieces of network effects, something that was impossible in the previous world wide web iterations. Network effects are akin to social relations and the relative strength of those connections. The principle of the ownership of network effects also applies to NFTs.

 

Not All Networks Are Created Equal 

Neither Metcalfe’s nor Reed’s Law model networks well for infrastructure projects or large social networks because both assume that users and devices in a network have more or less equal value and contribute equally to the overall value of their networks and network effects. This is not the case. Just because a network has more users doesn’t necessarily mean it is of greater value or has a more valuable network effect than a smaller network. The value of the users in a network is an important factor. 

 

Consider an example based on economies, which are large networks. The population of an economy can be seen as its network size, and its GDP can indicate the value of the network.

 

Hong Kong has a population of about 7.5 million people and a GDP of approximately US$407 billion. North Korea has a population of 27.5 million and a GDP of $48.3 billion. The difference in the value (GDP) of these networks is primarily due to the value of the nodes  in the network (meaning the populations and businesses of the economy). Even though North Korea’s network is more than 3.5 times larger than that of Hong Kong, North Korea's economy is isolated, its network effects are closed off and therefore less valuable, rendering the entire network far less valuable than the much smaller Hong Kong. 

 

In Web3, as in the real world, networks with low potential tend to attract less investment, fewer builders, and lower activity. It therefore makes sense for anyone building in Web3 to aim for a more valuable network with a more valuable network effect.

 

Growing and Measuring Network Effects

There isn't a single “one way” to grow network effects; multiple appropriate methods must coalesce to create a lasting impact for each network. These include emphasizing broad user access and utility (for example, TON), attracting high numbers of builders and investors (for example, Ethereum and other L1 and L2 ecosystems), high  total transactions, and so on. 

 

One popular measure beyond focusing on growing the number of users in a network is to maximize the investment the network receives. Many chains focus on building high total value locked (TVL), a measurement of the total value of assets that are locked or staked in a network. TVL serves as a financial network effect that attracts investment and entrepreneurial activity. 

 

Perhaps the most crucial factor in a Web3 network is stickiness, because Web3 networks are by design broadly open and permissionless, meaning that users can come and go instead of being trapped inside a “walled garden" environment. This is, of course, starkly different from the Web2 paradigm, in which network effects are not ownable by the end-user and are powerfully monopolized by the network itself (for example, it is no easy matter to transfer your data and network effect from Facebook to TikTok).