What Are “Network Effects” in Crypto and How Do They Complicate Comparative Valuation?

Network effects occur when the value of a protocol increases exponentially as more users or developers join. For example, a decentralized exchange becomes more valuable as its liquidity and user base grow.

These non-linear growth dynamics are difficult to capture with linear, comparative metrics. Two protocols with similar current metrics (e.g.

TVL) may have vastly different intrinsic values if one has stronger network effects. This necessitates a qualitative assessment alongside quantitative comparisons.