Author: Catrina, Crypto KOL

Compiled by: Felix, PANews

Revisiting the most popular Growth Hacking in Web2 (PANews Note: Growth Hacking refers to strategies and tactics that help companies grow rapidly): Why network effects are no longer a durable moat for Web3.

First, let's understand the definition of network effects and why they are important in Web2. The following results come from ChatGPT:

Definition: Network effects occur when a product or service gains additional value as more people use it. This means that each new user increases the overall value of the product or service to existing users.

Benefits of Network Effects (NE):

• Strengthens competitive moats—more users make the product more valuable, thereby blocking competitors.
• Reduces user acquisition costs—existing users attract new users through word-of-mouth, integration, or ecosystem effects.
• Creates higher switching costs and retention rates—as the network grows, users become more integrated into the ecosystem (e.g., social connections, data, integrations). This makes the cost of leaving high or inconvenient, thereby increasing retention and pricing power.

Some may raise objections here, but this article emphasizes that network effects are not a durable moat in the crypto space. Due to the following characteristics of cryptocurrencies, they cannot provide crypto companies with the same durability and sustainable competitive advantages as Web2 companies.

Characteristic 1: Crypto users tend to be more profit-driven

As users, developers: Developers are users/buyers of blockchains (L1, L2, other "layers"). Blockchains provide developers with similar products: block space in an on-chain immutable database that records transaction history. When choosing where to build, developers typically have common criteria:

• Lowest transaction fees
• Fastest transaction processing
• Highest liquidity
• Most ecosystem/community support, including grants

As shown in the developer report from Electric Capital, Ethereum initially benefited from network effects, attracting most developers to build specifically on Ethereum ("single-chain developers"). However, faced with competitors like Solana and Base, network effects failed to save Ethereum from poor performance and fragmented liquidity. This led to a significant decline in the ratio of "single-chain developers" / "monthly active developers" starting in 2022. This shift indicates the profit-driven nature of developers, who will move to where their needs are met rather than stay out of loyalty.

As users, retail investors: As long as DeFi remains the primary use case for cryptocurrencies, liquidity providers and DeFi users will continue to seek:

• Highest liquidity yields
• Lowest slippage in trades
• Most token varieties
• Most attractive mining rewards

This behavior is often unrelated to user experience or platform preference.

Moreover, the emergence of wallets has made switching between platforms like Uniswap and Hyperliquid smooth and easy.

As users, validators: Validators naturally seek the highest nominal value block rewards—whether from their stake (in PoS networks) or from the services they provide (as DePIN providers).

The choice to continue using or supporting a clone L1, L2, application chain, or DePIN project depends on simple cost-benefit calculations. When making this choice, validators assess the economic value and sustainability of block rewards.

Characteristic 2: Cryptocurrencies are inherently open-source, significantly lowering the entry barrier for imitators

"Vampire attacks": SushiSwap copied Uniswap's code, provided the exact same user experience, and then designed a more profitable token incentive to siphon off Uniswap's liquidity providers and users.

Implementing similar attacks in Web2 is much more difficult. Someone would have to steal Facebook's entire codebase, launch the same or better product, and then fund all of Facebook's users to attract them to the new platform.

Characteristic 3: Cryptocurrencies are inherently interoperable, minimizing switching costs for developers and retail investors

Take USDC as an example, which arguably has the highest network effects in the crypto space, comparing it to one of its Web2 counterparts, the Visa network. If USDC is not accepted, exchanging it for USDT, USDe, or PYUSD on a DEX or CEX does not take much time.

However, switching a card from the Visa network to Mastercard is much more cumbersome.

Now returning to the main point of this article, why network effects cannot provide crypto companies with the same advantages as their Web2 counterparts:

Network effects do not increase competitive moats: Due to the forkability and open-source nature of cryptocurrencies, combined with the Bertrand competition among indistinguishable products (returns, block space, liquidity), network effects do not necessarily make early adopters with more users more "competitive."

Network effects cannot lower the cost of acquiring crypto users: The nature of crypto users (whether retail or developers) is more profit-driven than Web2 users. Retail investors tend to seek optimal trading returns and yields. Developers tend to seek the best performance and deepest liquidity. Regardless of whether network effects exist, as long as returns are profitable for LPs, liquidity will remain in the ecosystem.

Some even argue that cryptocurrencies have the opposite effect of network effects: the more LPs in a pool, the lower the returns; the more users on a chain, the higher the fees and congestion.

Network effects do not create higher switching costs and retention rates in the crypto space: Due to the inherent composability and interoperability of blockchains, switching costs in the crypto space are extremely low.

There is also no data moat in the crypto space. Any data on-chain cannot be considered "proprietary data," which is key for large tech companies to retain users.

Finally, let's look at a case study on Ethereum, which is widely regarded as a microcosm of network effects in the crypto space. Since Ethereum has been seen as the "world computer," it has combined blockchain innovation with programmable money, benefiting from early network effects:

• Developer adoption: Ethereum attracted the largest blockchain developer community early on, primarily because its EVM became the industry standard for initial blockchain development.
• Liquidity and DeFi dominance: Ethereum hosted most of the liquidity of cryptocurrencies through DeFi platforms—until recently surpassed by Solana. More liquidity attracts more users → easier, cheaper trading/borrowing → more liquidity.
• Security: Increased usage of Ethereum enhances its security, attracting more projects and users.

However, this trend was broken this year. Ethereum squandered a good hand: delaying product improvements and overly decentralizing its ecosystem by supporting L2s that erode its own liquidity. This led to:

• Massive developer outflow: The number of monthly active developers decreased by 17% in 2024, while the number of new developers on Solana grew by about 83%.
• Liquidity outflow: According to DeFiLlama data, DeFi's dominance dropped from 100% to 50%.

And Ethereum's so-called network effects could not reverse this trend.

In contrast, while Web2 giants (i.e., Meta and Twitter) have also been lax in innovation and delivery, they continue to easily dominate their respective markets. Why? Because the network effects in the Web2 version are indeed effective and durable:

• Competitors cannot fork their code and offer similar products.
• The data of Twitter and Facebook is truly proprietary and irreplaceable.
• They cannot interoperate with any projects outside their own ecosystems.

Given these factors, the traditional network effects that provide long-term moats for Web2 companies do not apply in the crypto space.

Related reading: Ethereum's Growing Pains: From ETF "Bleeding" to On-Chain Weakness, Can ETF Staking Boost the Market?

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