Network Effect

A network effect is a property of a technical or financial system in which the utility of the system is proportional to the number of participants using it.

A currency's efficacy as money is in-part generated by its network effect giving rise to its widespread acceptance. It's efficacy as money is also linked to its price stability.

A payment network arises out of network effects of collection of interconnected banks which operate in conjunction a central bank to do clearing and issue a currency. This is an example of a centralized hub-and-spoke model which forms the basis of all modern financial systems.

See also decentralization and recentralization.


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