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IBC and the Power of Network Effects
The usefulness of IBC exponentially increases with the number of blockchains adopting it
Hey DEFI TIMES community,
Cosmos is at the very beginning of its adoption cycle.
For those of you who are new to Cosmos: IBC got released only in 2021 and it’s a communication standard between blockchains.
Right now, there are 25 blockchains connected with IBC - you can view that on mapofzones.com.
One thing that I’ve noticed (especially in the last few weeks) is that the number of blockchains joining the network per month increases exponentially.
The more time goes by, the more blockchains seem to implement IBC.
This is because the attractiveness and utility of IBC exponentially rise with the number of blockchains, which are in the network.
It’s a simple network effect - and it’s playing out really well in the Cosmos ecosystem.
Today, we go through some of the reasons why Cosmos heavily depends on more blockchains joining the network.
It turns out that Cosmos really only has a bright future if the vision of “millions of blockchains” turns out to be correct.
Cosmos is a leveraged bet on a multi-chain future.
...and IBC is the tool to make it happen!
Watch our latest YouTube episode where we talk about the Builders Program by the Interchain Foundation!
The Importance of Network Effects
The phenomenon of a network effect describes the fact that the increased number of participants improves the value of a specific product. Take Facebook as a simple example:
When Facebook started back in 2004, it was a social network specifically designed for Harvard students. Even though it exploded in popularity, it didn’t serve much value to the broader society.
But the network grew and grew, and suddenly, people kept referring their friends. As more friends of yours join Facebook, you start adopting the technology. In simple words: The more friends you have on Facebook, the more valuable the network is to you.
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IBC and the Power of Network Effects
The same applies to a network of blockchains. Why? Let’s first talk about why it might be valuable for a blockchain to communicate with other blockchains.
Access to applications: Cosmos’ bet is that application-specific blockchains will be needed in the future. Thus, each blockchain will have a unique use case (in contrast to Ethereum’s vision, which is a general-purpose blockchain). In order for application-specific blockchains to be useful, they will need to communicate with other blockchains to access other applications. Take Osmosis as an example: Osmosis is a DEX in the Cosmos ecosystem and heavily relies on IBC. Why? Without IBC, there would be few tokens to trade on the exchange. Osmosis can only grow because IBC allows users to send tokens from other blockchains to Osmosis - providing liquidity and trade.
More liquidity: That also brings us to another (probably most important) point, which is liquidity. Most liquidity is currently located on Ethereum because it was the first smart-contract blockchain. That’s why it’s crucial for L1s to connect to Ethereum to capture part of its network effect. Especially very young and immature ecosystems rely on bigger and more established blockchains to grow. The reason: Liquidity. Getting liquidity is hard at the beginning and IBC allows you to easily get access to fast liquidity.
These are the two reasons why it makes sense to connect to a network of blockchains. Whenever you try to build a blockchain from scratch, it makes sense to connect to as many blockchains as possible in order to grow fast and develop your own network effect (that other blockchains can leverage in the future).
The more blockchains join a particular network, the more valuable it is for future blockchains to join as well.
We can see this with a simple example: Imagine a network where each node is connected to all other nodes.
In the beginning, when only two nodes are connected, there is only one connection. However, when a third node joins, it makes two connections. When 5 nodes are in the network, each node has to connect to four different nodes.
What we see here is exponential growth - a simple network effect. The same applies to IBC and its usefulness.
The number of connections grows exponentially as more participants join the network. In other words: 100 IBC-connected chains bring more than 10x value than if only 10 chains are connected.
That’s why IBC heavily relies on more blockchains joining the network.
The Vision of Millions of Blockchains
Now you also understand the vision of millions of blockchains being connected with IBC. IBC will only make sense if that vision turns out to be correct.
It’s a standardized communication protocol for blockchains. It’s basically about many blockchains speaking the same language.
Just as the English language turned out to become the language of the world, we need a standardized way of blockchain communication.
No doubt, we won’t be building new token bridges in 10 years from now. That process needs to be simplified. And as IBC’s network effect grows, it might make sense for most blockchains to join and profit from universal interoperability.
Cosmos is a leveraged bet to make a multi-chain future happen. That’s why the whole Cosmos ecosystem depends on IBC to reach escape velocity.
Ethereum, Polkadot, Solana, and co. all need to implement IBC at some point in their life-cyle.
Only then Cosmos will win!
Will it happen? Probably…
That’s the bet we are taking… and in my opinion, it’s one of the best bets to take in crypto right now!
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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.