It’s hard to ignore the recent growth in the crypto market, perhaps better defined as the digital asset ecosystem, which today includes cryptocurrencies, non-fungible tokens (NFTs) and products and services secured by blockchain technology. What’s driving such growth? What are some of the ripple effects?

Looking at growth first, speculation, in an environment of ample liquidity, is part of the story. However, a large part of this growth can be attributed to network effects, sometimes referred to as Metcalfe’s Law, which states: The value of the network is proportional to the square of the number of users¹. In other words, increasing numbers of users leads not to linear, but rather exponential growth in value. Think about how the value of a telephone network, on which Metcalfe’s Law was originally based, grows as the number of users increases. The same theme applies to the growing digital asset ecosystem.

In recent editions of Perspective, we’ve covered two important components of the digital asset ecosystem, blockchain technology and NFTs. A quick recap. Blockchains are digital ledgers of transactions distributed across a network of computers that facilitate peer-to-peer transactions. They are the foundation upon which the digital asset ecosystem exists.

Building on the blockchain base, tokens—both fungible and non-fungible—store data and represent ownership of a digital asset. NFTs have become an increasingly important and popular store of value within the digital ecosystem.

Consider that over the past 25 years, the Internet has arguably revolutionized the distribution of digital information. Likewise, blockchain technology and tokens are revolutionizing the idea of ownership, ranging from assets such as art, music, and online gaming collectibles to owning, sometimes in fractionalized form, non-digitized property such as real estate, vintage cars, collectible wines and spirits.

Building Value
One of the most interesting ripple effects of digital tokens is the development of social communities around a particular artist, musician, sports team, clothing designer, etc. Here’s where the network effect, discussed earlier, is critical to creating value. Creators are building networks by issuing digital tokens:

• Free, simply to grow their community.
• As earned rewards for work within the community.
• For sale, offering special access to and/or an investment opportunity in the community.

It’s early days, but social communities have the potential to up-end and enhance traditional business models. In the former case, by building a new social community with a shared purpose through a blockchain-based business model referred to as a decentralized autonomous organization (DAO). In the latter, by offering rewards or investment stakes alongside their existing products or services to enhance customer loyalty. By building social communities, creators such as artists and musicians or even large publicly traded companies can turn their supporters into investors and investors into marketers.

As Marshall McLuhan observed, “Art at its most significant is a Distant Early Warning System that can always be relied on to tell the old culture what is beginning to happen to it.” ² In the digital asset ecosystem, artists and musicians have been the first to recognize the opportunity to monetize their creative talents through token issuance to build their social communities. Traditional businesses such as Nike, Yum Brands (owners of Pizza Hut, KFC and Taco Bell), the NBA and Coca-Cola are already experimenting with digital tokens and other companies are taking note.

NOTES:

1.“Metcalfe’s Law explains how the value of networks grows exponentially … exploring the “network effects” of businesses like Apple, Facebook, Trulia and Uber,” February 17, 2020, https://peterfisk.com/2020/02/metcalfes-law-explains-how-the-value-of-networks-grow-exponentially-there-are-5-types-of-network-effects.

2.“Marshall McLuhanQuotes,” BrainyQuote, https://www.brainyquote.com/quotes/marshall_mcluhan_102232.