Network Effects And The Flywheel

Many wonder why Hive is not taking off. The mantra seems to be "we just need more users". Unfortunately, over the last 6 years, we saw a lot of people come and go. This leads to the questioning of retention. What can we do to retain the users who do arrive here?

The fact this question is being asked shows what is lacking. In short, it is the network effect. We can also see how this effects the value of the ecosystem. Platforms are not being designed in a way that properly utilizes the advantages offered by the digital world. Hence, they do not realize the flywheel effect, which would increase their value.

So what does this all mean?

Fortunately, what is being stated here applies to all of Web 3.0. This is why we still are living in a Web 2.0 world. The transition is not happening because there is nothing to transition to. The industry as a whole has failed to capture what the true transformation power. It is a problem since the incumbents are well aware of how this operates.

In this article we will dive into the basics of platforms and how this can set off the flywheel effect. Anyone who can design this for their applications will realize enormous success.

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Flywheel Effect

What is the flywheel effect?

Basically, this is a concept where we see a digital platform simply become a self feeding proposition. For the most part, it deals with the monetary component of things. Traditionally, this meant revenues (or profits). The poster child for this, in my mind, is Amazon.

The basic process is one aspect of the platform feeds into the other. For example, the selling of ebooks was enhanced by the introduction of Kindle. The company started to sell these hardware devices, using a protocol it designed, thus earning a profit. Of course, this allowed it to sell more ebooks.

Essentially, the small wins that are started early on expand over time. As they add up, we see a compounding effect. For example, Amazon, at one time, had thousands of titles. They kept expanding the offerings, with each addition adding to the network. This allowed for the introduction of physical books, then other products, and finally logistics.

With Amazon, what was the "breakthrough" moment. There is not one. It was a long succession of activities that resulted in a massive difference when viewed in totality. The key is that, over time, the "flywheel" spins faster as the victories add up.

The idea was coined by Jim Collins in his book "Good To Great". In the digital realm, it really becomes evident since platforms are able to expand in many areas, expanding the tentacles.

Ultimately, this is resulted in some of the most valuable companies in the world.

Digital Platforms And Network Effects

We covered this in a previous article, so we will not dive too deep.

The challenge with network effects, or Metcalfe's Law, is the idea that every node on a system is equal. This is not the case. We know there are "hubs" in all networks, one that have a greater impact than others. On a social network, this could be a superuser or a celebrity. On the Internet, this is a server network that is heavily used as infrastructure. In biology, this is the heart versus the appendix.

Another issue is people usually think of social media and users for the network effect. What gets overlooked is how Amazon, Spotify, and others do not fall into this category.

Under the usual premise, we have a situation where there is direct interdependency. People use a social network because their friends and family are there. Getting them to move away is very difficult. Content creators go to where the audience is.

This is a simple concept. Yet it is only the tip of the iceberg and, actually, the result. Amazon, Uber, and Netflix have network effects yet the users have no dependency upon each other. Do you care if Aunt Sally has Netflix uses Uber or shops on Amazon? Will that prohibit (or entice) you from doing it?

Of course not.

Therefore, we have something else in play.

Web 3.0

What is Web 3.0 missing?

Just looking at Hive, the problem becomes clear. We do not have much that is seeking to kick off the flywheel. Most are looking for the massive strike. Platforms are not leveraging the opportunities in the digital world to their advantage. This goes right down to the user base.

We can see this through the conversation. The focus tends to be on mass adoption. When will it happen? How do we retain users? What will it take to get them to convert?

These are all the wrong questions. The answer is very simple: give people a reason to switch.

Facebook did not become a success because it targeted traditional media and looked to convert their customers. Instead, it created it owns market by offering something people could not get elsewhere.

Of course, this is social media which is in contrast to Amazon.

Let us look at this another way. We will presume Web 3.0 truly kicked off with the introduction of smart contracts in 2015. This might be an arbitrary date but it works for our example. Twenty years earlier, in 1994, Amazon was started by Jeff Bezos.

We are now roughly 9 years into the smart contract age. When Amazon was 9 years old, it had revenues total over $5 billion. This is a drop in the bucket compared to what it would become but it illustrates the point. How many companies/platforms in Web 3.0 are generating $5 billion? In fact, how many even have a token value that high (projects not networks)?

My guess is we have not see it yet.

So what is the deal? How can this be the case? Looking at Hive, we see the answer. While we are still awaiting infrastructure to be completed, there is little discussion about the concepts mentioned in this article. It is becoming evident that most are not aware of the realities of the digital realm.

When we look at the largest companies, by market capitalization, we see 4 of the top 5 being platforms. What does this tell us?

The answer is clear.

Web 3.0 Communities

If Web 3.0 communities are going to be successful, they best start working on these concepts. There is a lot more to this game than simply getting more users. That is going to fail, as we have seen for 6 years. To date, the largest aspect of this entire industry is trading. That is nothing new. People will trade seashells if they can profit from it. In that instance, cryptocurrency is nothing more than another asset to speculate upon.

Everyone is looking for the answer outside. It is to the point that it is an epidemic. Of course, this shows up in the results.

How did Amazon, Spotify, Meta , Google (search), and Uber become so successful? If one simply because they got more users, it is missing the entire premise.

Platforms allow for the capturing of small scale network effects and spreading them through the entire community. This is what sets off the flywheel.

It will not happen if people are living on the Web 2.0 platforms.

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