Steemit’s Network Effect

Steemit and the technology behind it is a contender with Facebook. We could see a meteoric rise that one day replaces the social media giant.

ECONOMICS IN 30 SECONDS

I think of economics like a grade-schooler. That is, I think in pictures. To me, it’s like an engine. The engine represents the stuff people want.

Everyone has a hidden list of desires floating in their heads all the time. The list is like the transmission. It starts at #1 (“what I want most”) and goes to #2, #3, and so on. The list is always changing as we “drive” through time.

We never really know what will be on the list tomorrow, or in an hour, or even a minute in the future. All we can say for sure is that what we are doing right now is always #1. Otherwise, we wouldn’t be doing it.

Every moment of our lives is spent sorting through our personal list.

But unless we can provide everything we want ourselves, we have a problem. Namely, if we don’t want to end up living like Robinson Crusoe we need help from others.

So there’s a give and take between what we want and what others want. In order to get others to help us get what we want, we have to strike a sort of bargain to help them, too. It’s an “I’ll scratch your back if you scratch mine” sort of arrangement.

Therefore, demand comes in two parts;

1) it is only possible to fulfill our own demands,

2) if you are willing to consider the demands of others.

But here is a very important point:

If no one demands anything, there is no economy.

YIN AND YANG

If demand is an engine, supply is the fuel.

Supply is the other half of the equation. It strikes a balance with demand. Neither have much purpose without the other.

The fulfillment of every demand on your personal list requires an equivalent amount of “fuel” provided by someone else. Another way of putting it is that every time we produce something (i.e. provide a little fuel) it lets the engine of demand run exactly that much longer.

Economists call this Say’s Law.

As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.

- Jean-Baptiste Say

NETWORK EFFECT

I divide investments into two categories, the first being a linear proposition like a lemonade stand.

To set up a lemonade stand you need a few things. A storefront - could be a few boxes and a chair. The lemonade (lemons, sugar and ice). You need utensils to cut, squeeze, and mix the ingredients and a pitcher and cups to pour the finished product. And finally you need a sign for marketing and cash on hand to make change.

(Of course in the U.S. you also need a business license, local permits, a tax consultant, OSHA permits, FDA approval, a legal contingency fund, etc…)

When it all comes together you have a functioning business that produces a product and sells to customers – supply and demand.

But this straight-forward model has a limitation.

If you want to grow your business, you need more lemonade.

The growth rate is linear. The only way to get more customers is to offer more product. No matter how many people show up, you can only fill the demand until your supply of lemonade runs dry.

In other words, the value to the customer is directly proportional to the input of supply.

Feedback Loop

There is a different business model that is not linear… diaspora*.

Wait... what?

It’s a social media network similar to Facebook but distributed instead of centralized.

Never heard of it.

Me either. I just googled “distributed social media site” while I was writing this and diaspora* popped up. Apparently it has around 10,000 active accounts across 50 or so implementations of the software. To compare, Facebook has 1,000,000,000+ active accounts.

Are you joining?

No.

Why?

Why would I? There’s nobody there.

But isn’t one social media site just as good as, or maybe even better than, the next?

Sure, if the only thing we care about is how awesome the technology is. Arguably, a distributed social network is better than Facebook because it’s censorship resistant. But then, if I’m basically there by myself then what’s the point?

This is an example of network effect. The awesome futuristic technology and the crack developer team doesn’t mean much if no one bothers to show up. But the more people that do show up, the more people there are to provide content, the more good content gets created, the more people want to show up… and so it goes in a never-ending positive feedback loop.

So in this case, the value to the customer grows exponentially with the input of more customers.

CRAWL BEFORE YOU WALK

Is Steemit better than Facebook? Well no, not yet.

Steemit is built on better technology and with a much better economic model. However, it’s user base is still laughably small compared to Facebook. This is one of the core reasons why many content creators are complaining that their work isn’t gaining any traction. There are simply not enough users available to match demand to supply.

But is this a problem? Maybe, maybe not. Right now we are seeing a disequilibrium in the market. There is a greater adoption rate of supply-side content creation and curation than the demand-side adoption rate of end-user consumers. To put it more simply, content creators have to work very hard for pennies. They are becoming frustrated and disappointed.

What will Happen?

One way or the other, the system will balance itself or die, just like a living organism. But that isn’t to say the system is sick… rather, it’s young.

Like adjusting the temperature in the shower, the water will alternate between too hot and too cold until we find the “Goldilocks Zone.”

Many content providers will give up and leave, while new ones will appear. What is important is that the adoption rate by providers rises in tandem with the adoption rate of users. And in true network effect fashion, once this goes on for long enough it will hit an inflection point.

I don’t have to elaborate on where that will go…