Reed’s Law was developed by David P. Reed from Harvard University in the year 1999 and was first cited in “The Law of Pack”, Harvard Business Review, 2001. This law is based on the concept that the utility of large networks, specifically social networks can grow exponentially with the growth in the size of the network. It is an advancement to the formula given by Metcalfe Law on the growth of networks and Sarnoff Law.
The number of possible subgroups is calculated as 2N-N-1, where N is the number of participants. And it grows faster as N is in the exponential. The number of possible pairs is calculated as [N(N-1)]/2.
In Meltcalfe’s law (1980) the value is calculated N2 so the growth of many possible subgroups is much faster as in Reed’s Law, N is in exponential. Sarnoff Law states that the value of a broadcast network is directly proportional to the number of viewers denoted by n. It was based on a one-to-many broadcast application in opposition to a peer-to-peer application.
Reed’s Law is based on the proposition that various kinds of value grow proportionally to network size while some grow in proportion to the square of the size of the network (Metcalfe’s Law). Reed believed that group-forming networks value even faster than other networks which allows the formation of clusters.
The reason that supports Reed’s formula of 2N rather than N2 is that the number of possible groups within a network that supports communication between groups in an easier way is much greater than 1. In reality, the total number of connections in a network is not a function of the total number of nodes (N2) but additionally, it has the total number of possible sub-groups or clusters with a total number of nodes. Online networks allow the formation of clusters as suggested by Reed rather than the rate that is suggested in Metcalfe’s law.
Application of Reed’s Law in Crypto Space
With the involvement of crypto, almost all modern social networks have given importance to these clustered networks. The advancement of Web 3.0 and the increasing exchange of digital goods is bringing layers of monetary transactions into each platform. The scarce digital goods are being exchanged with crypto layers to be transacted in the World of Metaverse. Increasing ownership of these digital assets will boost the size of the network as suggested by Reed’s Law. The adoption of cryptocurrencies by more users will support the exponential value creation in the network more traceable. This will increase the value of cryptocurrencies as experienced by Bitcoin and Ethereum.
The larger increase in the size of the network will make the growth of the crypto world more faster and the need for more dApps and exchanges will also rise. It can grow niche and use case-specific cryptocurrencies which will be eligible for specific kinds of cryptocurrencies.
As the number of members or value increases it will make the Law of Pack (Pack Law) more important because users can come together form groups (packs) and demand changes. It can be powered by crypto and social tokens and these packs can even take their followers with them. This can facilitate a new digital world creation where large networks can lose and gain both as given by Reed’s Law.
Implication in the Tokenomics
Reed’s Law plays an important role in the planning and execution of blockchain initiatives and the development of tokenomics. Before deep diving into the concept, let us first understand what is tokenomics. Tokenomics is the combination of two words ‘token’ and ‘economics’ and it refers to the study of the supply, demand, distribution, and valuation of cryptocurrencies. As pointed out by Reed’s Law the exponential increase in the project’s value with the inclusion of more communities and subgroups, tokenomics can get the advantage of attracting more users, and programmers, and advancement in the development of applications while increasing the value of tokens.
Tokenomics promotes the interoperability of various sub-groups. The interconnectedness between different sub-groups creates relationships and they rise together leading to rise in the overall value of the project. The groups that are created as per Reed’s Law participate in governance processes, create applications that benefit the ecosystem, and offer support. Long-term benefits are achievable with an increase in the project’s resilience and sustainability.
Drawbacks of Reed’s Law for Networks of Cryptocurrencies
- Increase in complexity: With more subgroups, it is required to maintain connections and avoid divisions and conflicts and a faster and effortless experience becomes difficult.
- Exponential Growth is hard to maintain: As suggested by Reed’s Law, it is difficult to maintain the same exponential growth after reaching a certain degree of growth. The initial potential shown by a group can be misleading as expansion can differ with the creation of each sub-group.
- Sustainability of sub-groups: Not all the sub-groups will be equally sustainable and beneficial. Knowing which groups are more sustainable and beneficial in influencing the values of the project requires a lot of trial and error which leads to a waste of resources.
- Privacy and security: With the greater number of sub-groups it might become difficult to maintain the utmost privacy and security which is desired world of cryptocurrencies.
Future of Crypto space in relation to Reed’s Law
As suggested by Reed’s Law, the exponential growth of different and specialized communities will give rise development of creative dApps and networks. This will promote user-centered specific solutions across various industries such as banking, healthcare, government, and banking. With the advancements in blockchain interoperability it will enhance the adoption and utility of cryptocurrencies and an environment for connected groups will be created.
The law will enhance the development of a governance model with a more decentralized and inclusive approach and this will lead to the advancement of Decentralized Finance (DeFi), Decentralized Autonomous Organizations (DAOs), and Non-Fungible Tokens (NFTs).
