Crypto glossary
Network effect (Metcalfe’s law)
A network effect is when a product becomes more valuable as more people use it; Metcalfe's law models a network's value as the square of its users.
Telephones, social networks and payment systems are classic examples: each new user makes the service more useful for everyone else. Robert Metcalfe's rule of thumb holds that a network's value grows roughly with the square of the number of connected users, because the number of possible connections grows that fast.
Crypto relies heavily on the idea. Bitcoin's liquidity, brand and number of holders make it the default store-of-value asset, and Ethereum's developers, tools and DeFi liquidity attract new projects, which attract more users. Analysts have fitted Metcalfe-style models to bitcoin's price using active addresses or users, and some valuation ratios compare market value with on-chain activity.
Network effects are powerful but not guaranteed. Active addresses can be inflated by bots, exchanges or airdrop farmers, and one person may use many addresses. Users can migrate if fees rise or a better alternative appears, as several early social networks and blockchains learned. Metcalfe's law is a rough heuristic, not a law of nature, and fits often break down outside the period they were drawn on.
Example
A new stablecoin offers better yields, but merchants and exchanges already support USDT and USDC widely, so users keep the incumbents because that is where the liquidity and counterparties are.