Metcalfe's Law

2 min read

Metcalfe’s law states that the value of a network is proportional to the square of the number of nodes, or members, in the network. A network is a set of nodes who form connections with one another and follow a protocol, a set of rules. As more nodes join a given network, the value of that network increases parabolically, because each additional node can contribute value to all existing nodes.

Metcalfe’s law can be applied to many different types of networks, including centralized and decentralized ones. For example, in the case of social media networks, where users are nodes, each new user can add content to the platform, making it more interesting and appealing to others.

Metcalfe’s law also applies to monetary networks. A money which is accepted by more people will have a higher value, because there is a stronger guarantee that an individual can buy the goods they want using that money. Knowing it will purchase the goods they want in the future, individuals can feel more secure in holding that money.

Metcalfe’s law applies in reverse as well. As nodes leave a network, the value of the network falls rapidly. For every node that leaves a network, every remaining node has one fewer possible connection. This is exemplified by the devaluation of collapsing fiat currencies. When a government loses the faith of its citizens or foreign investors, those participants leave the currency network, and demand for the currency falls. The remaining members of the network are left with a less valuable currency, incentivizing them to leave as well.

Learn more about Bitcoin’s Network Effects.