The Internet has greatly promoted the spread of ideas and culture. Companies that are familiar with network effects are more likely to gain competitive advantages, consolidate their competitive position in the market, and break out of the tight encirclement and become industry leaders. Network effect is also an essential element for Internet entrepreneurs to succeed. The network effect in the software industry is ubiquitous, covering operating systems, search engines, social networks, instant messaging systems, online trading platforms, taxi Hailing software and other products and services. In addition to software technology, the spread of religion, culture and language can also be partly attributed to the network effect. Network effect affects the competition pattern of Web3 industry to a great extent. It can build a moat for projects that enter the market earlier and resist the attacks launched by new entrants with more advanced technology. This paper defines the concept of network effect, discusses some classic cases of network effect, and expounds how network effect will help Web3 project build a strong economic moat. What is network effect? Network effect refers to the increase in the number of participants in the system leading to the improvement of the value and utilization of the underlying network and its services. As more people join the network, users will get more value from services, and form a virtuous circle to further promote the improvement of service demand. In short, network effect can attract more people to join the network, thus enhancing the value of products. The popularity of the landline is a typical network effect: a landline is worthless, but every time a new landline is added to the network, the utilization rate of the entire network will rise. A landline is equivalent to a node. With the continuous improvement of node connectivity, the utilization rate of the network will also rise. Similarly, the greater the number of users in social networks, the higher the value of services it provides to users. Another example of network effect is payment platforms such as visa or taxi platforms such as Uber. The more users, the higher the network value.

The more users the landline network covers, the greater its value.

Direct, indirect and negative network effects Network effects can be divided into direct and indirect types. Direct network effect refers to that the increase in the number of users directly promotes the utilization of the network, such as the example of the landline computer mentioned above. In addition, the network effect can also have an indirect impact. For example, if a new cryptocurrency wants to compete directly with bitcoin, it not only needs to surpass bitcoin in terms of underlying community beliefs and security, but also needs to build a stronger ecosystem. Bitcoin has done very well in these dimensions, and its network effect can continuously attract more developers, tools, advocates and users. Indirect network effects usually occur between two different groups of participants, and the network effects created by one group of participants often affect another group of participants. For example, third-party game developers can develop high-quality games for game consoles, which can improve the value of game consoles themselves. Negative network effect means that new users will only extract value from the network, but will not contribute value to the network. For example, most modern cities have traffic congestion problems. In some cities, urban planning is centered on cars, so people can only choose to drive. As more and more people drive, the throughput of the expressway will decrease, which will reduce the utilization rate of the expressway. Usually, the solution is to build more highways, which is often adopted by urban planners. However, doing so will lead to more cars on the road, which will further aggravate the road traffic problems and eventually produce more serious negative network effects. What phenomena look like network effects but are not? Network effect should not be equated with "network externality". Network externality means that users' demand for products depends on other buyers' demand for the same product. For example, a restaurant with a long line at the door may attract more customers than an empty restaurant. Because customers are willing to sacrifice some time for a better dining experience, their decision is influenced by other customers in line. In addition, many people will confuse the network effect with "economies of scale". Scale economy means that the production cost of goods decreases with the increase of total output. In manufacturing and other industries, economies of scale are indeed equivalent to network effects. However, in fact, the network effect only involves the demand side in the scale economy, that is, the network effect can improve the participation willingness of users, but it does not necessarily improve the productivity of the supply side (or the underlying network). How to establish network effect? To establish the network effect, we must reach the critical point of explosion. Every time a new participant is added to the network, its value will also rise. Therefore, users who have joined the network will take the initiative to find new participants and promote the growth of the network. Many times, no one can figure out how the network effect is produced, but once it is produced, it will not disappear easily. However, as the network continues to expand, the growth rate will gradually slow down. Open and neutral networks are more likely to establish long-term and lasting network effects. If the underlying architecture is not neutral, the network effect will also be difficult to achieve. The Internet is based on open standards and treats all users equally. We can imagine that in another parallel world, the Internet is only open to some people. In this world, I am afraid it is very difficult for the Internet to have such a subversive impact on society. Nevertheless, many large enterprises still want to build an Internet that requires permission to access, and they can control the information in the network. This makes decentralized Web3 particularly important, because it can continue to maintain the open spirit of the Internet. Network effects also affect economic diversity, especially for software and communication technologies. Although the scale of the World Wide Web continues to expand and new products and services are being developed, the number of users on the Internet platform seems to be shrinking. These large platforms have established a strong network effect and increased the conversion cost of users, which means that web2 is gradually moving towards a dead end of monopoly. The network effect may also fade. There are many reasons, for example, the penetration rate in the target market is close to 100%; Unable to adapt to environmental changes; And the unsustainable economic model. Classic case of network effect Facebook vs MySpace Facebook intentionally or unintentionally adopted a very effective way to establish its initial network effect. Facebook started as a real name social platform for college students. In the early days of the Internet, such social platforms were not common. Facebook has set up a two-tier mechanism to establish a long-term and lasting network effect for itself. First, when users first join the platform, they can directly establish contact with other users. Building connections between users helps improve service utilization, so Facebook can build a social map faster than other anonymous social platforms. If new users can't find a contact object, they may not log in to the platform again, so the platform will never reach the explosion point. In addition, users are more likely to establish contacts through friends they know. Another advantage of Facebook's business model is that it creates a psychological effect similar to fomo (Note: fomo is the abbreviation of fear of missing out, which refers to people's fear of missing out). If a student's circle of friends are using Facebook, he may be worried that he will miss some important social activities, and it is more difficult to maintain relations with friends. Therefore, he may also want to join Facebook. Facebook has established a social network based on the real world, which can achieve a strong network effect, and expand from the initial group of college students to any community. At that time, the mainstream social network MySpace was unable to keep up with the rapid growth of Facebook for various reasons, and finally failed. The main reason is that Facebook has established a strong network effect, focusing on user growth. This made MySpace lose out in the competition, and Facebook eventually became one of the most disruptive platforms in the field of social networking.

The Internet has greatly promoted the spread of ideas and culture. Companies that are familiar with network effects are more likely to gain competitive advantages, consolidate their competitive position in the market, and break out of the tight encirclement and become industry leaders. Network effect is also an essential element for Internet entrepreneurs to succeed. The network effect in the software industry is ubiquitous, covering operating systems, search engines, social networks, instant messaging systems, online trading platforms, taxi Hailing software and other products and services. In addition to software technology, the spread of religion, culture and language can also be partly attributed to the network effect. Network effect affects the competition pattern of Web3 industry to a great extent. It can build a moat for projects that enter the market earlier and resist the attacks launched by new entrants with more advanced technology. This paper defines the concept of network effect, discusses some classic cases of network effect, and expounds how network effect will help Web3 project build a strong economic moat. What is network effect? Network effect refers to the increase in the number of participants in the system leading to the improvement of the value and utilization of the underlying network and its services. As more people join the network, users will get more value from services, and form a virtuous circle to further promote the improvement of service demand. In short, network effect can attract more people to join the network, thus enhancing the value of products. The popularity of the landline is a typical network effect: a landline is worthless, but every time a new landline is added to the network, the utilization rate of the entire network will rise. A landline is equivalent to a node. With the continuous improvement of node connectivity, the utilization rate of the network will also rise. Similarly, the greater the number of users in social networks, the higher the value of services it provides to users. Another example of network effect is payment platforms such as visa or taxi platforms such as Uber. The more users, the higher the network value.

The more users the landline network covers, the greater its value.

Direct, indirect and negative network effects Network effects can be divided into direct and indirect types. Direct network effect refers to that the increase in the number of users directly promotes the utilization of the network, such as the example of the landline computer mentioned above. In addition, the network effect can also have an indirect impact. For example, if a new cryptocurrency wants to compete directly with bitcoin, it not only needs to surpass bitcoin in terms of underlying community beliefs and security, but also needs to build a stronger ecosystem. Bitcoin has done very well in these dimensions, and its network effect can continuously attract more developers, tools, advocates and users. Indirect network effects usually occur between two different groups of participants, and the network effects created by one group of participants often affect another group of participants. For example, third-party game developers can develop high-quality games for game consoles, which can improve the value of game consoles themselves. Negative network effect means that new users will only extract value from the network, but will not contribute value to the network. For example, most modern cities have traffic congestion problems. In some cities, urban planning is centered on cars, so people can only choose to drive. As more and more people drive, the throughput of the expressway will decrease, which will reduce the utilization rate of the expressway. Usually, the solution is to build more highways, which is often adopted by urban planners. However, doing so will lead to more cars on the road, which will further aggravate the road traffic problems and eventually produce more serious negative network effects. What phenomena look like network effects but are not? Network effect should not be equated with "network externality". Network externality means that users' demand for products depends on other buyers' demand for the same product. For example, a restaurant with a long line at the door may attract more customers than an empty restaurant. Because customers are willing to sacrifice some time for a better dining experience, their decision is influenced by other customers in line. In addition, many people will confuse the network effect with "economies of scale". Scale economy means that the production cost of goods decreases with the increase of total output. In manufacturing and other industries, economies of scale are indeed equivalent to network effects. However, in fact, the network effect only involves the demand side in the scale economy, that is, the network effect can improve the participation willingness of users, but it does not necessarily improve the productivity of the supply side (or the underlying network). How to establish network effect? To establish the network effect, we must reach the critical point of explosion. Every time a new participant is added to the network, its value will also rise. Therefore, users who have joined the network will take the initiative to find new participants and promote the growth of the network. Many times, no one can figure out how the network effect is produced, but once it is produced, it will not disappear easily. However, as the network continues to expand, the growth rate will gradually slow down. Open and neutral networks are more likely to establish long-term and lasting network effects. If the underlying architecture is not neutral, the network effect will also be difficult to achieve. The Internet is based on open standards and treats all users equally. We can imagine that in another parallel world, the Internet is only open to some people. In this world, I am afraid it is very difficult for the Internet to have such a subversive impact on society. Nevertheless, many large enterprises still want to build an Internet that requires permission to access, and they can control the information in the network. This makes decentralized Web3 particularly important, because it can continue to maintain the open spirit of the Internet. Network effects also affect economic diversity, especially for software and communication technologies. Although the scale of the World Wide Web continues to expand and new products and services are being developed, the number of users on the Internet platform seems to be shrinking. These large platforms have established a strong network effect and increased the conversion cost of users, which means that web2 is gradually moving towards a dead end of monopoly. The network effect may also fade. There are many reasons, for example, the penetration rate in the target market is close to 100%; Unable to adapt to environmental changes; And the unsustainable economic model. Classic case of network effect Facebook vs MySpace Facebook intentionally or unintentionally adopted a very effective way to establish its initial network effect. Facebook started as a real name social platform for college students. In the early days of the Internet, such social platforms were not common. Facebook has set up a two-tier mechanism to establish a long-term and lasting network effect for itself. First, when users first join the platform, they can directly establish contact with other users. Building connections between users helps improve service utilization, so Facebook can build a social map faster than other anonymous social platforms. If new users can't find a contact object, they may not log in to the platform again, so the platform will never reach the explosion point. In addition, users are more likely to establish contacts through friends they know. Another advantage of Facebook's business model is that it creates a psychological effect similar to fomo (Note: fomo is the abbreviation of fear of missing out, which refers to people's fear of missing out). If a student's circle of friends are using Facebook, he may be worried that he will miss some important social activities, and it is more difficult to maintain relations with friends. Therefore, he may also want to join Facebook. Facebook has established a social network based on the real world, which can achieve a strong network effect, and expand from the initial group of college students to any community. At that time, the mainstream social network MySpace was unable to keep up with the rapid growth of Facebook for various reasons, and finally failed. The main reason is that Facebook has established a strong network effect, focusing on user growth. This made MySpace lose out in the competition, and Facebook eventually became one of the most disruptive platforms in the field of social networking.