- Reed’s Law states that the value of networks grows exponentially as more people join.
- Open, decentralized networks that can grow freely are key, according to Reed’s Law.
- Vibrant cryptocurrency communities also create exponential value.
In the early 2000s, computer scientist David Reed realized social networks like Facebook gain value exponentially as they grow. Each new member increases the overall utility dramatically. He formulated this idea as Reed’s Law. While created before cryptocurrencies, Reed’s Law has critical implications for how cryptocurrencies are designed and grown.
Cryptocurrencies rely on large, decentralized networks, similar to social networks. So Reed’s Law indicates cryptocurrency networks will also increase exponentially in utility and value as more people join. This creates incentives to build open, decentralized networks and vibrant communities around cryptocurrencies.
Implications for Blockchain Architecture
According to Reed’s Law, cryptocurrency founders should focus on open, decentralized blockchain architectures. Don’t restrict or centralize the network artificially. Let it scale freely through voluntary participation. Then, as the network expands, the benefits to all participants grow exponentially. There is a snowball effect: larger networks with more users improve security and usefulness, attracting still more participants. Blockchain architects should harness this by making sure networks can grow smoothly over time. Decentralization and permissionless participation are crucial.
They allow the network to benefit from Reed’s Law’s exponential value creation through scaling up. Larger cryptocurrency networks also become more secure and resistant to attack. With no central point of failure, decentralized networks are extremely resilient. The integrity of transactions is assured, even as the user base expands dramatically.
Nurturing Cryptocurrency Communities
Reed’s Law highlights why active cryptocurrency communities are so important. The value grows exponentially when more people use and develop cryptocurrencies. Metcalfe’s Law also indicates that the fundamental value is tied to the square of the user base. So cryptocurrency founders should ensure they attract vibrant communities of users, businesses, developers, and ecosystem partners. Make it easy for people to join, contribute, and build services on top of the cryptocurrency. Think of the snowball effect: more developers will attract more users, which will bring even more developers on board. Creating network effects through a lively ecosystem drives the exponential value growth predicted by Reed’s Law.
Vibrant communities can also create positive feedback loops that reinforce the cryptocurrency’s position. Mainstream adoption leads to more development and usefulness. More users and their activities drive further ecosystem growth. Facilitating collaboration and communication within the community nurtures these virtuous cycles. Cryptocurrency founders should invest resources into community building, incentivize members to contribute, and make it easy to build on top of the cryptocurrency. The result will be exponential value creation.
Wrap-Up (Summary)
In summary, Reed’s Law highlights the importance of communities for cryptocurrencies. Letting networks scale freely creates exponential value. Vibrant user and developer communities drive exponential growth through network effects. Cryptocurrency founders should focus on permissionless, decentralized architectures that support organic growth. They should also invest in building lively ecosystems and empowered user communities around their cryptocurrency. Do those two things well, and the cryptocurrency will gain value at an exponential rate over time.