This was a way to value telecommunication networks. It was put forth by Robert Metcalfe.
Basically, the theory states that the value of a telecommunication system is proportional to the square of the number of users. This was basically a concept on exponential valuation.
When formulated, it was breakthrough. Since that time, we learned of this nature by looking at the market capitalization of social media and technology companies. In fact, Metcalfe's Law was tested against platforms such as Facebook and it was found to be viable.
In 1980s, Metcalfe looking at systems, not in terms of users but as communicable devices. He was looking at the Ethernet technology but framed it against a telecommunications background. George Gilder was the one who flipped this into users.
Network Effects
This is a term that is rather common today. However, in the early days of the Internet, we did not understand how network effects could impact things.
It is believed that network effects describes the true working of the Internet along with communication and other networks.
As we advance towards Web 3.0, networks effects are going to be vital. Here is where Metcalfe's Law could enter. Since it is a valuation tool, based upon users, it could provide a frame of reference for market caps relating to cryptocurrencies.
The key will be to see how many users move away from the traditional Internet services, especially social media applications, and embrace the newer developments within the blockchain space.
Businesses
Metcalfe's Law seeks to quantify the impact that additional nodes can have on companies. When looking at starting a digital business, this is an important variable to keep in mind.
It the traditional world, each additional customer impacts revenues and earnings. However, in the digital realm, especially on system that have two-way engagement, we can see how the effect is much greater. If we simply look at the connections that can be made, the concept of exponential growth is easily recognized.
We also have to keep in mind the reserve is true. For those corporations that enjoy the present market share, each node that exits its ecosystem has an outsized impact. This is how many project the mega-technology companies can lose out if they do not keep innovating.
Criticism
One criticism that is often levied against Metcalfe's Law is that each node is treated equal. This is not the case.
In the traditional analysis where Metcalfe started, a fax machine with 60 users is not the same as one connect with 10 users. Within the social media realm, the idea of super users calls into question the validity of Metcalfe's Law. If someone is 10 times more active, certainly that "node" is worth more than the one who is engaging with the network less.