Network Effect

A network effect is a property of a technical or financial system in which the utility of the system is proportional to the number of participants using it.

A currency's efficacy as money is in-part generated by its network effect giving rise to its widespread acceptance. It's efficacy as money is also linked to its price stability.

A payment network arises out of network effects of collection of interconnected banks which operate in conjunction a central bank to do clearing and issue a currency. This is an example of a centralized hub-and-spoke model which forms the basis of all modern financial systems.

See also decentralization and recentralization.

References

  1. Katz, Michael L., and Carl Shapiro. "Systems competition and network effects." Journal of economic perspectives 8, no. 2 (1994): 93-115.
  2. Metcalfe, Bob. "Metcalfe's law after 40 years of ethernet." Computer 46, no. 12 (2013): 26-31.
  3. Newman, Mark EJ. "The mathematics of networks." The new palgrave encyclopedia of economics 2, no. 2008 (2008): 1-12.