Ecoinometrics - Can you value Ethereum based on network effects?
How active addresses relate to market capitalization.
You have certainly heard of Metcalfe’s law. The core idea in this law is that the value of a network comes not from the individual nodes but from the number of connections they can form.
That's a key observation which makes all the difference in the world. Because if you have N nodes adding one more node gives you N+1 nodes. But that additional node has created N new potential connections.
That's the magic trick, in networks math +1 becomes +N.
But why does it matters when we are thinking about the value of the Ethereum network?
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Can you value Ethereum based on network effects?
Getting back to the basics one of the first question we can ask is why it makes sense to talk about network effects for Ethereum.
Now there are always two distinct networks when we talk about Ethereum (and decentralized cryptocurrencies in general):
The physical network of computing nodes.
The users of the physical network, i.e. those who transact in ETH.
While the physical network is obviously critical from a technical point of view, what really gives value to Ethereum is its users. And of course you can think of those users as forming a network.
Users control ETH addresses, you can also think of those as the nodes. Anyone with an ETH address can send and receive ETH, those are the connections between the nodes.
So it definitely makes sense to think about network effects in that context.
And from that perspective a network effect based valuation model for Ethereum at least makes sense.
A Network based valuation
Here is one way of thinking about a network based valuation for Ethereum.
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