Remember when Bluesky was going to take out Twitter (X)?
This was something that happened after the 2024 US Presidential election. The media went nuts with its anti-Elon narrative, believing that a social media platform that was occupied by nothing more than left leaning individuals would overtake X.
For a short time, the numbers increased for Bluesky. It did see added users who left X. However, after a few months, many returned to the previous platform. Leaving aside some of what took place on Bluesky, we will focus upon something that is impossible to overlook.
Network effects are near impossible to overcome.
We have seen this repeatedly throughout the history of the digital era. There are a few winners and the rest lag behind. It is a winner take most game.
In this article we will look at what this means and how it could apply to Web 3.0.
The Power of Network Effects
Social media platforms exemplify network effects. They do, however, apply to anything in the digital world. It is one reason why I think the US dollar will not be surpassed. The network effects it commands are simply too powerful.
The problem with Bluesky is that the network effects it was establishing, while impressive for a startup, were nothing compared to X. It is a situation that is even starker when we compare to YouTube or the Facebook family of applications.
A number of studies were done on this matter. The result was a number of "laws" that people use to describe the situation.
Here is a chart of some of the main ones.
When it comes to network effects, the breakthrough idea was Metcalfe's Law. This was originally developed looking at facsimile networks. Once the digital era was born, research was conducted trying to apply this to the different platforms.
The first to be studied was Facebook.
It was concluded that network effects, i.e. the law, applied to social media applications also. We also witnessed the evolution of Reed's Law, which went one step further than Metcalfe.
Here is why social media companies are so valuable. Looking at the chart above, it is easy to see the difference when looking at the number of connections.
Network Effects and Web 3.0
One of the important takeaways is the fact that we can apply this to money. Since the overwhelming majority of transactions are done via digital payment systems, the same "laws" apply. Of course, we move this to another level when we look at cryptocurrency.
Blockchains are networks. Hence, they operate under the same principles as the traditional client-server architecture.
Riding on top is monetary value that can be transferred. This is crucial when looking at Web 3.0. Unlike Web 2.0 where there is a separation, that is not the case with Web 3.0. Under the former, money was integrated into platforms such as social media. The latter simply has it built in.
The major networks have their own currency. This is compounded by the fact that stablecoins are becoming the norm. Here we see where the evolution of the payment system is going.
Harkening back to the US dollar, it is one of the key drivers as that currency maintaining the bulk of the effects. As more people adopt stablecoin usage, it is the dollar that benefits.
Incumbents have a huge advantage.
YouTube is really starting to upset content creators. The push towards shorts has caused many to see dips in their earnings. What is really challenging is we see no viable alternative.
Rumble got a lot of coverage for being a competitor to YouTube. The problem is that, while the platform did great for a startup, it only has 50 million users. YouTube is over 2 billion.
When it comes to the number of videos and amount of viewers, we are looking at apples and oranges. Nothing is remotely similar between the two applications.
This highlights how difficult it is to usurp the established players. Web 3.0, thus far, is a total failure. Will that always be the case?
There is one option that does offer hope: AI.
As networks start to incorporate AI, the ability to produce network effects via AI starts to emerge. A fair portion of the content on YouTube is already AI generated. It will likely continue to grow.
Turning to this application versus another might not be a given in the future. If we see a lot of AI video incorporated into other platforms, where does this leave YouTube? Of course, this is presuming that people will want that. When it comes to news, whether delivered by a human or computer might not be relevant.
It could also destroy the moat that X has at the moment. This is now the number 1 source for news. That might dip in the future if AI content takes over.
Either way, we cannot discount network effects. They will keep established players doing well. To break through, a massive shift in utility must occur. In the social media realm, this has yet to emerge.