• by William Mougayar
    Venture advisor, 4x entrepreneur, marketer & strategist. I live in Toronto, curate a lot, blog a bit, and help startups.

The Crypto-Tech Platforms Landscape via a Network Effects Lens

I’m expanding on the Network Effects question that I introduced in my previous post, It’s Too Early to Judge Network Effects in Bitcoin and the Blockchain.

Some of my thoughts are in the below Tweetstorm, Is Bitcoin Really TCP/IP. But we need to realize (and accept) that the “One Currency-One Blockchain” paradigm is being challenged.

There are five variations on Crypto Technology Platforms that are emerging, as depicted in the following diagram:

Screen Shot 2015-01-13 at 5.52.12 PM

And to complicate things further, some of the platforms like Truthcoin have two currencies: a native currency and Bitcoin. Others like Ethereum allow you to create your own cryptocurrency.

I’m going to ask some questions, without totally answering them, but you will see my bias towards Blockchain Apps as the ultimate Network Effects leveler, and not Bitcoin users as we see them today.

Yes, currency effects bring liquidity, but Blockchain effects bring the Apps. Both have users. Will currency network effects drive blockchain network effects, or are blockchain network effects more related to the blockchain apps specifically?

Is Cryptocurrency Fuel or Toll?

Keep in mind that today, 99% of the revenues in the Bitcoin network are mining related. But going forward, that ratio is expected to shift towards transactions.

How about Developers?

Although a cryptocurrency needs users, I think the important thing for a blockchain will be developers. They will ultimately be the ones creating these Apps.

How about Interoperability?

Eventually, we will see a degree of interoperability between blockchains, and we will see more inter-liquidity between Cryptocurrencies. Of course if Apps are on the same blockchain, it will be easier for them to interoperate, and there is some gain in network effects, but that may not be the dominant factor if blockchains interoperate nicely. And as for cryptocurrency liquidity, that will be achieved fairly soon via exchanges, allowing you to easily convert from one currency to another.

So, back to the main question:

Which Network Effects are more Important: Cryptocurrency or Blockchain?

  • Which comes first: the applications or the platform with the right tools that enables their development? The blockchain is an incredible innovation but application developers need to learn how to “think decentralized.” This experiment is still in progress and we’ll need a lot more infrastructure built before blockchain-based apps will be as easy to build and deploy as something on the iTunes App Store.

    • We will definitely need to see some apps, and there is lots activity around the areas you mentioned.
      I think the robustness and comprehensiveness of the platforms will be needed, and the apps aren’t too far behind.

  • Fundamentally, though if you remove the “proof of work” and mining rewards from a blockchain, you’re no longer really talking about a blockchain in the Bitcoin sense. These two posts https://medium.com/@twobitidiot/bitcoin-minings-logical-conclusion-299c466352b4 and https://medium.com/@jony_levin/i-love-the-blockchain-just-not-bitcoin-354c511ad3e5 distil the issues well.

    Not sure anyone has fleshed this out but you “borrow” the Bitcoin network to secure your own disconnected blockchain by writing additional metadata into the transactions and paying the fees to get them mined in? Maybe using OP_RETURN txs?

    • Vitalik Buterin

      To me “blockchain” means “decentrally updated list of data packets referencing sequential state updates with each one containing a hash of the previous”. So, just about everything that is in the bitcoin/crypto space is blockchain based, but BitTorrent, BitMessage, etc are not. This seems like the most useful distinction to draw.

      • Makes sense – I didn’t really express what I’m struggling with well. Wouldn’t any blockchain still require some proof of work/proof of stake/etc. scheme to achieve consensus? And then if we remove the financial incentives how do you incentivize users to build a decentralized network to secure the chain?

        • This is my main question too, and I haven’t seen much discussion on the impact of the Bitcoin price on miners. I’m starting to see news on miners shutting down now as the reward does not cover the expenses any longer. If computing power is taken away, won’t it affect the blockchain infrastructure? Nodes need to have incentive to run – maybe they can start to charge transaction fees?

  • nederhoed

    A remark: NXT should be non-Bitcoin in both the blockchain and currency quadrant. It is a new implementation of a blockchain with its own currency. Completely independent of BTC.

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