Written By: Isaiah Payton 3/18/21
This blog is written based on the opinion of the current protocols of Chainlink in relation to the network value laws of Sarnoff, Metcalfe, and Reed.
The Exponential Network Value of Decentralized Oracle Protocol
An in-depth look at the Network Effect of Chainlink and it's relation to Metcalfe's & Reed's Law
Before getting into the article, I always like to start off with simple definitions to help the reader understand the concepts discussed in this blog. A true understanding of a word or phrase and where it originates from not only helps one's vocabulary but also allows persons to build off the definition to create new ones. The keywords of this post will be Network and Network Protocol which are at the center of Metcalfe's Law, Reed's Law, and the Decentralized Oracle Network of Chainlink. I have provided links for the definitions of "Network" and "Network Protocol" to help save time and space on this post so we can get right into the meat of this topic.
Prior to Metcalfe's and Reed's laws on networks and their value, David Sarnoff created a law that stated "The value of a broadcast network is directly proportional to the number of viewers", or Sarnoff's Law which was applied to broadcasting but is just as applicable to the digital age we are in today.
If you didn't know, David Sarnoff throughout his career led The Radio Corporation of America (RCA) as well as NBC from 1919 to around 1970 and is the person responsible for the description of "Network Value" and how to measure it. His calculation was a simple one, the network value was directly proportional to the size of the network, as stated above. As you can see in the example above, the network value or "V=n" would be the number of people or connections to the network. Let's say that each black dot (n) is a node valued at 1 million, extending from the centralized black dot or Network (V). This would mean the network value would be 8 million based on the amount connections or nodes connected to the central network. However, as the world population grows, naturally more and more networks become available therefore increasing the value of these networks. But is it that simple?
This leads me to the "second law" of Network Value which is Metcalfe's Law.
Metcalfe's Law states that "The value of a communications network grows in proportion to the square of the number of users on the network (V=n2) where 'n' is the total number of users on the network". This concept was formed around (1980), nearly a decade after Sarnoff's reign in the telecommunications industry for nearly a century. The term was coined by Robert Metcalfe who was one of the inventors of the Ethernet we still use today. When this law was formulated, it mainly applied to networks like Ethernet, fax, or phone networks but naturally included the internet, social media, and online marketplaces as they came into existence. This was a significant development because the value of the network was not in the nodes themselves but the links between the nodes which multiplied the value by 2. This law is more applicable today than Sarnoff's law, especially with developing tech, but doesn't consider the formation of Group Forming Networks or GFN's.
This finally leads me to Reed's Law, which takes GFN's into consideration because of the growth of these various networks at different speeds and paces based on what these network entail. (i.e. cell phone companies and their network value & growth)
As you can see in the example above, instead of Metcalfe's "V=n2" the formula instead uses "2n" which represents the number of possible groups within a network that supports "easy group communication". This number is much higher than the value of "1", so instead its a function of the total number of nodes plus the total number of possible sub-groups or clusters which scales at a much faster rate with the addition of more users to the network. This applies most accurately to the online environment we are all apart of today which can be seen by the adoption of the internet worldwide along with cellular phone services as well. I draw the correlation to the free market we are in today where multiple networks can be made for the same utility and people have freedom of choice to choose what network suits them best. Based on the network's performance and adoption from Nodes or consumers, the networks grow exponentially due to the groups that have been formed within the networks.
What does all this have to do with Chainlink and Sergey Nazarov? Decentralization
If you notice in all three examples above there is a central network that all these nodes derive from, which is important to understand why Chainlink's Oracle Solution is the next step for the law of the network. One thing that none of these laws considers is trust and transparency when considering the network and its effects on the entire ecosystem. There was essentially no questioning the integrity of that centralized or primary network which the entire network grew from. This led to Sergey Nazarov's solution which I will call DeOr's Law (Decentralized Oracle Law). Now excuse my example and description of this law, I'm not great at math but I will try to illustrate what this means to my best ability.
The formula would be V=2n+t(NfX). The value of a network is based on the number of possible groups within a network that supports "easy and trustworthy (t) communication" multiplied by the Network Effects caused by these vetted relationships between networks. This new formula includes the most important part of these networks, the human emotional connection. What use is a network if there is no trust in it? Bigger doesn't always mean better and in this case, the network is growing exponentially and we cannot stop it. As more and more people are included in the network we have to consider the players that are making these connections. To bring this full circle, what the Chainlink Oracle Network aims to do is to not only bridge the gap between on chain and off chain data for consumption or distribution, but it also addresses the need of truly valuable data that is trustworthy, correct, and easy to get. It aims to achieve this through incentives through providing and distributing trustworthy data from trustworthy services. This is represented by the decentralized oracle network in the middle (blue hexagon) connecting different color nodes who give data to other networks which can be seen by other nodes with the same color. These networks are no longer only for the communication between people but are now responsible for the transfer of value through various means. These nodes act as checkpoints for these values and if a node doesn't perform up to standard, it can be excluded and the information gained from elsewhere. This in turn incentivizes organic growth from these nodes through accurate and trustworthy data and performance. Otherwise nothing will be gained and deters certain parties looking to cause harm to the network and also essentially shuts them out. Moving forward this is the type of transparency we need in order to start making the world a better place and help even the playing field for smaller entities to grow alongside major entities. This will take some time, but the time spent will be worth it in my opinion.