Network Effects in Crypto Projects: Fueling Adoption and Value

Kajetan Olas

04 Mar 2024
Network Effects in Crypto Projects: Fueling Adoption and Value

The term "network effects" frequently surfaces as a factor underpinning the exponential growth of cryptocurrencies. But what exactly are network effects in crypto projects, and why are they so important? At its core, a network effect occurs when a product or service becomes more valuable as more people use it. This phenomenon is not exclusive to the digital age; it has influenced the adoption and success of technologies ranging from the telephone to the internet. However, in the context of cryptocurrency, network effects not only fuel adoption but are also directly correlated with market capitalization. This article delves into the mechanics of network effects in crypto and discusses just how much adoption influences projects’ value.

Measuring Network Effects in Crypto

One of the most widely recognized methods for measuring these effects is Metcalfe’s Law, which posits that the value of a network is proportional to the square of the number of its users. Studies have found that this law applies to blockchain networks particularly well. In practice, we measure user base (N) as the number of nodes or active addresses.

Case Studies: Bitcoin and Ethereum

To illustrate the practical application of Metcalfe’s Law in cryptocurrencies, let's examine Bitcoin and Ethereum, two of the most prominent blockchain networks.

  • Bitcoin: As the first cryptocurrency, Bitcoin has demonstrated a remarkable correlation between its network size and value. Historical data shows that periods of rapid growth in the number of active wallets are closely followed by increases in Bitcoin's market price. Pearson’s correlation coefficient between BTC price and a squared number of nodes is approximately 0.9. In the case of squared number of active addresses, it’s approximately 0.95. This pattern underscores just how important network effects are.
  • Ethereum: Ethereum's utility extends beyond mere financial transactions, encompassing smart contracts and decentralized applications (DApps). This added functionality attracts a diverse user base, further amplifying its network effects. Pearson’s correlation coefficient takes similar values as in BTC case. 

Network Effects and Cryptocurrency Adoption

The adoption of cryptocurrency is significantly influenced by network effects, which not only enhance the value of the digital currency but also contribute to its widespread acceptance and use. As the network of users grows, the cryptocurrency becomes more useful and desirable, creating a virtuous cycle that attracts even more users. This is particularly evident in the context of payments and remittances, where the value of a cryptocurrency network increases with the number of individuals and institutions willing to accept and transact in the currency.

Enhancing Security and Trust

One of the critical ways network effects contribute to cryptocurrency adoption is by enhancing the security and trustworthiness of the network. Blockchain technology, the foundation of most cryptocurrencies, becomes more secure as more participants join the network. The decentralized nature of blockchain makes it increasingly difficult for malicious actors to compromise the network's integrity, thereby bolstering user confidence in the system. This enhanced security is a direct consequence of the network effects, as a larger network provides greater resistance against attacks. 

Impact on Liquidity and Market Depth

A larger user base means more transactions and, consequently, greater liquidity, making it easier for users to buy and sell without causing significant price fluctuations. This increased market depth attracts investors and traders, further fueling cryptocurrency adoption. That’s especially important for Dapps which release native tokens traded on DEXs like Uniswap. It’s common for teams to provide initial liquidity that fosters trading, but it’s much better when that liquidity is provided by users.

Fostering network effects techniques

Very strong correlation between the value of blockchain projects and their user base makes it clear that adoption is very important. So, how should projects foster the growth of their user base?


Airdrops are a very common (and relatively cheap) way to grow user base of a network in its beginnings. The way they work is the following: projects allocate a certain number of tokens (e.g. 1% of total supply) to people who engage with the project. For example, a project may announce that people who retweet and like their posts on X a certain number of times will get some tokens. Another type of engagement might be participating in testnet and providing feedback to founders. Airdrops are effective because even if only 5% of these attracted users will stay for long-term then it’s still a great return on investment.

Subsidized incentives

When the project is just starting it may be a good idea to allocate some capital towards higher incentives for early users. An example might be providing higher APY for stakers (like 10%, instead of 5%) for the first 6 months. While such subsidized incentives are good in the beginning they must end at some point. That’s because they’re unsustainable in the long term. An example of what can happen if unsustainable incentives last for a little too long is the Anchor Protocol’s case. Anchor hoped to attract a lot of users by providing 15% APY. In that sense it achieved success, but because it didn’t end the program in time, the protocol became unsolvable and crashed. Though while it lasted the network’s growth was truly exponential.

Vision Oriented Project

Probably the most sustainable and organic way to grow your user base is by showing users an inspiring vision associated with your project. This is about creating a protocol that in some way promises to change the world for the better. An example may be Cardano which acquired an enormous fanbase oriented around its mission statement. That was despite poor user experience in their beginnings. 

Challenges and Limitations

Despite the positive impact of network effects on cryptocurrency adoption and value, some notable challenges and limitations must be acknowledged.

Scalability Concerns

A primary challenge posed by network effects is scalability. As the network grows, the underlying blockchain technology must be able to handle an increasing number of transactions quickly and efficiently. However, many cryptocurrencies, including Bitcoin and Ethereum, have encountered difficulties scaling their networks to meet demand without compromising security or decentralization. This is the most important factor hindering adoption, since many users prefer to use a centralized payment system, just because it’s more efficient. For example, VISA can process 24k TPS, while BTC can process 7 TPS.


While network effects are a powerful driver of cryptocurrency adoption and value, they also present significant scalability challenges that must be addressed. However, in the case of emerging projects, benefits coming from increased adoption outweigh the costs and it’s shown that the greatest factor influencing the value of these projects is their user base.

If you're looking for ways to foster the adoption of your DeFi project, please reach out to Our team is ready to help you create a strategy that will grow your user base and ensure long-term growth.


What are network effects?

  • Network effects is a term describing a situation when the value of a network grows more than proportionally relative to the number of users.

How do network effects influence projects' value?

  • There is a very strong correlation between a squared number of active addresses/nodes and the market capitalization of projects.

How to foster adoption and occurrence of network effects within my project?

  • By building a community. This can be achieved through orienting protocol around an inspiring vision, airdrops, and subsidized incentives for users.

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Token Engineering Process

Kajetan Olas

13 Apr 2024
Token Engineering Process

Token Engineering is an emerging field that addresses the systematic design and engineering of blockchain-based tokens. It applies rigorous mathematical methods from the Complex Systems Engineering discipline to tokenomics design.

In this article, we will walk through the Token Engineering Process and break it down into three key stages. Discovery Phase, Design Phase, and Deployment Phase.

Discovery Phase of Token Engineering Process

The first stage of the token engineering process is the Discovery Phase. It focuses on constructing high-level business plans, defining objectives, and identifying problems to be solved. That phase is also the time when token engineers first define key stakeholders in the project.

Defining the Problem

This may seem counterintuitive. Why would we start with the problem when designing tokenomics? Shouldn’t we start with more down-to-earth matters like token supply? The answer is No. Tokens are a medium for creating and exchanging value within a project’s ecosystem. Since crypto projects draw their value from solving problems that can’t be solved through TradFi mechanisms, their tokenomics should reflect that. 

The industry standard, developed by McKinsey & Co. and adapted to token engineering purposes by Outlier Ventures, is structuring the problem through a logic tree, following MECE.
MECE stands for Mutually Exclusive, Collectively Exhaustive. Mutually Exclusive means that problems in the tree should not overlap. Collectively Exhaustive means that the tree should cover all issues.

In practice, the “Problem” should be replaced by a whole problem statement worksheet. The same will hold for some of the boxes.
A commonly used tool for designing these kinds of diagrams is the Miro whiteboard.

Identifying Stakeholders and Value Flows in Token Engineering

This part is about identifying all relevant actors in the ecosystem and how value flows between them. To illustrate what we mean let’s consider an example of NFT marketplace. In its case, relevant actors might be sellers, buyers, NFT creators, and a marketplace owner. Possible value flow when conducting a transaction might be: buyer gets rid of his tokens, seller gets some of them, marketplace owner gets some of them as fees, and NFT creators get some of them as royalties.

Incentive Mechanisms Canvas

The last part of what we consider to be in the Discovery Phase is filling the Incentive Mechanisms Canvas. After successfully identifying value flows in the previous stage, token engineers search for frictions to desired behaviors and point out the undesired behaviors. For example, friction to activity on an NFT marketplace might be respecting royalty fees by marketplace owners since it reduces value flowing to the seller.


Design Phase of Token Engineering Process

The second stage of the Token Engineering Process is the Design Phase in which you make use of high-level descriptions from the previous step to come up with a specific design of the project. This will include everything that can be usually found in crypto whitepapers (e.g. governance mechanisms, incentive mechanisms, token supply, etc). After finishing the design, token engineers should represent the whole value flow and transactional logic on detailed visual diagrams. These diagrams will be a basis for creating mathematical models in the Deployment Phase. 

Token Engineering Artonomous Design Diagram
Artonomous design diagram, source: Artonomous GitHub

Objective Function

Every crypto project has some objective. The objective can consist of many goals, such as decentralization or token price. The objective function is a mathematical function assigning weights to different factors that influence the main objective in the order of their importance. This function will be a reference for machine learning algorithms in the next steps. They will try to find quantitative parameters (e.g. network fees) that maximize the output of this function.
Modified Metcalfe’s Law can serve as an inspiration during that step. It’s a framework for valuing crypto projects, but we believe that after adjustments it can also be used in this context.

Deployment Phase of Token Engineering Process

The Deployment Phase is final, but also the most demanding step in the process. It involves the implementation of machine learning algorithms that test our assumptions and optimize quantitative parameters. Token Engineering draws from Nassim Taleb’s concept of Antifragility and extensively uses feedback loops to make a system that gains from arising shocks.

Agent-based Modelling 

In agent-based modeling, we describe a set of behaviors and goals displayed by each agent participating in the system (this is why previous steps focused so much on describing stakeholders). Each agent is controlled by an autonomous AI and continuously optimizes his strategy. He learns from his experience and can mimic the behavior of other agents if he finds it effective (Reinforced Learning). This approach allows for mimicking real users, who adapt their strategies with time. An example adaptive agent would be a cryptocurrency trader, who changes his trading strategy in response to experiencing a loss of money.

Monte Carlo Simulations

Token Engineers use the Monte Carlo method to simulate the consequences of various possible interactions while taking into account the probability of their occurrence. By running a large number of simulations it’s possible to stress-test the project in multiple scenarios and identify emergent risks.

Testnet Deployment

If possible, it's highly beneficial for projects to extend the testing phase even further by letting real users use the network. Idea is the same as in agent-based testing - continuous optimization based on provided metrics. Furthermore, in case the project considers airdropping its tokens, giving them to early users is a great strategy. Even though part of the activity will be disingenuine and airdrop-oriented, such strategy still works better than most.

Time Duration

Token engineering process may take from as little as 2 weeks to as much as 5 months. It depends on the project category (Layer 1 protocol will require more time, than a simple DApp), and security requirements. For example, a bank issuing its digital token will have a very low risk tolerance.

Required Skills for Token Engineering

Token engineering is a multidisciplinary field and requires a great amount of specialized knowledge. Key knowledge areas are:

  • Systems Engineering
  • Machine Learning
  • Market Research
  • Capital Markets
  • Current trends in Web3
  • Blockchain Engineering
  • Statistics


The token engineering process consists of 3 steps: Discovery Phase, Design Phase, and Deployment Phase. It’s utilized mostly by established blockchain projects, and financial institutions like the International Monetary Fund. Even though it’s a very resource-consuming process, we believe it’s worth it. Projects that went through scrupulous design and testing before launch are much more likely to receive VC funding and be in the 10% of crypto projects that survive the bear market. Going through that process also has a symbolic meaning - it shows that the project is long-term oriented.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.


What does token engineering process look like?

  • Token engineering process is conducted in a 3-step methodical fashion. This includes Discovery Phase, Design Phase, and Deployment Phase. Each of these stages should be tailored to the specific needs of a project.

Is token engineering meant only for big projects?

  • We recommend that even small projects go through a simplified design and optimization process. This increases community's trust and makes sure that the tokenomics doesn't have any obvious flaws.

How long does the token engineering process take?

  • It depends on the project and may range from 2 weeks to 5 months.

What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained


18 Mar 2024
What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained

Enter Berachain: a high-performance, EVM-compatible blockchain that is set to redefine the landscape of decentralized applications (dApps) and blockchain services. Built on the innovative Proof-of-Liquidity consensus and leveraging the robust Polaris framework alongside the CometBFT consensus engine, Berachain is poised to offer an unprecedented blend of efficiency, security, and user-centric benefits. Let's dive into what makes it a groundbreaking development in the blockchain ecosystem.

What is Berachain?


Berachain is an EVM-compatible Layer 1 (L1) blockchain that stands out through its adoption of the Proof-of-Liquidity (PoL) consensus mechanism. Designed to address the critical challenges faced by decentralized networks. It introduces a cutting-edge approach to blockchain governance and operations.

Key Features

  • High-performance Capabilities. Berachain is engineered for speed and scalability, catering to the growing demand for efficient blockchain solutions.
  • EVM Compatibility. It supports all Ethereum tooling, operations, and smart contract languages, making it a seamless transition for developers and projects from the Ethereum ecosystem.
  • Proof-of-Liquidity.This novel consensus mechanism focuses on building liquidity, decentralizing stake, and aligning the interests of validators and protocol developers.


EVM-Compatible vs EVM-Equivalent


EVM compatibility means a blockchain can interact with Ethereum's ecosystem to some extent. It can interact supporting its smart contracts and tools but not replicating the entire EVM environment.


An EVM-equivalent blockchain, on the other hand, aims to fully replicate Ethereum's environment. It ensures complete compatibility and a smooth transition for developers and users alike.

Berachain's Position

Berachain can be considered an "EVM-equivalent-plus" blockchain. It supports all Ethereum operations, tooling, and additional functionalities that optimize for its unique Proof-of-Liquidity and abstracted use cases.

Berachain Modular First Approach

At the heart of Berachain's development philosophy is the Polaris EVM framework. It's a testament to the blockchain's commitment to modularity and flexibility. This approach allows for the easy separation of the EVM runtime layer, ensuring that Berachain can adapt and evolve without compromising on performance or security.

Proof Of Liquidity Overview

High-Level Model Objectives

  • Systemically Build Liquidity. By enhancing trading efficiency, price stability, and network growth, Berachain aims to foster a thriving ecosystem of decentralized applications.
  • Solve Stake Centralization. The PoL consensus works to distribute stake more evenly across the network, preventing monopolization and ensuring a decentralized, secure blockchain.
  • Align Protocols and Validators. Berachain encourages a symbiotic relationship between validators and the broader protocol ecosystem.

Proof-of-Liquidity vs Proof-of-Stake

Unlike traditional Proof of Stake (PoS), which often leads to stake centralization and reduced liquidity, Proof of Liquidity (PoL) introduces mechanisms to incentivize liquidity provision and ensure a fairer, more decentralized network. Berachain separates the governance token (BGT) from the chain's gas token (BERA) and incentives liquidity through BEX pools. Berachain's PoL aims to overcome the limitations of PoS, fostering a more secure and user-centric blockchain.

Berachain EVM and Modular Approach

Polaris EVM

Polaris EVM is the cornerstone of Berachain's EVM compatibility, offering developers an enhanced environment for smart contract execution that includes stateful precompiles and custom modules. This framework ensures that Berachain not only meets but exceeds the capabilities of the traditional Ethereum Virtual Machine.


The CometBFT consensus engine underpins Berachain's network, providing a secure and efficient mechanism for transaction verification and block production. By leveraging the principles of Byzantine fault tolerance (BFT), CometBFT ensures the integrity and resilience of the Berachain blockchain.


Berachain represents a significant leap forward in blockchain technology, combining the best of Ethereum's ecosystem with innovative consensus mechanisms and a modular development approach. As the blockchain landscape continues to evolve, Berachain stands out as a promising platform for developers, users, and validators alike, offering a scalable, efficient, and inclusive environment for decentralized applications and services.


For those interested in exploring further, a wealth of resources is available, including the Berachain documentation, GitHub repository, and community forums. It offers a compelling vision for the future of blockchain technology, marked by efficiency, security, and community-driven innovation.


How is Berachain different?

  • It integrates Proof-of-Liquidity to address stake centralization and enhance liquidity, setting it apart from other blockchains.

Is Berachain EVM-compatible?

  • Yes, it supports Ethereum's tooling and smart contract languages, facilitating easy migration of dApps.

Can it handle high transaction volumes?

  • Yes, thanks to the Polaris framework and CometBFT consensus engine, it's built for scalability and high throughput.