We are often asked the question: what is the exact purpose of a token and why would a project want one?
Tokens are usually described as more efficient fundraising tools that are potentially non-dilutive to equity holders; alternatively, they are seen as utility constructs that can be used in games and other virtual environments in a similar way to virtual currencies.
Tokens are none of these things exclusively and can be all of them simultaneously. In our view, tokens represent a completely new way of owning an asset class that previously lacked an ownership construct. In general we view them as a novel way to own a piece of the network effect.
Understanding Network Effects
You are probably already familiar with the network effect: as the number of users of a product, service, or platform increases, so does the network’s overall value to those users. Network effects contribute significantly to the value of the world’s largest companies, from luxury brands to tech giants. Investors often try to establish a value for businesses by measuring their network effects or the growth and impact of these effects.
Metcalfe’s Law states that the value of a telecommunications network is proportional to the square of the number of connected users or compatible devices within it. In simpler terms, the more people or devices participate in a network, the more valuable that network becomes. We can attempt to gauge the value of the owners of a network (such as Facebook, Google, or LinkedIn) based on how many users the network has: the more users, the more valuable a network is or could become.
This same approach is also used to estimate the potential of a network in Web3, based on its number of wallets, transactions, or developers. Some apply Metcalfe’s Law to try to estimate the potential of Web3 networks, although we think that Reed’s Law might be slightly more applicable (i.e, the utility of large networks can scale exponentially through the sub-groups of network participants).
Generally speaking, tokens are representations of the network effects within a given network, platform or ecosystem. Tokens make it possible, the first time, to grant their holders ownership of a piece of a network. This is different from traditional equity instruments. Because tokens are multifaceted and have a mostly permissionless nature that is open to composability, they encourage experimentation and creation and thus can generate network effects faster and of a greater magnitude than the closed networks of Web2.
Fundamentally, participation in Web3 based on true ownership of tokens means owning pieces of network effects, something that was impossible in the previous world wide web iterations. Network effects are akin to social relations and the relative strength of those connections. The principle of the ownership of network effects also applies to NFTs.
Not All Networks Are Created Equal
Neither Metcalfe’s nor Reed’s Law model networks well for infrastructure projects or large social networks because both assume that users and devices in a network have more or less equal value and contribute equally to the overall value of their networks and network effects. This is not the case. Just because a network has more users doesn’t necessarily mean it is of greater value or has a more valuable network effect than a smaller network. The value of the users in a network is an important factor.
Consider an example based on economies, which are large networks. The population of an economy can be seen as its network size, and its GDP can indicate the value of the network.
Hong Kong has a population of about 7.5 million people and a GDP of approximately US$407 billion. North Korea has a population of 27.5 million and a GDP of $48.3 billion. The difference in the value (GDP) of these networks is primarily due to the value of the nodes in the network (meaning the populations and businesses of the economy). Even though North Korea’s network is more than 3.5 times larger than that of Hong Kong, North Korea’s economy is isolated, its network effects are closed off and therefore less valuable, rendering the entire network far less valuable than the much smaller Hong Kong.
In Web3, as in the real world, networks with low potential tend to attract less investment, fewer builders, and lower activity. It therefore makes sense for anyone building in Web3 to aim for a more valuable network with a more valuable network effect.
Growing and Measuring Network Effects
There isn’t a single “one way” to grow network effects; multiple appropriate methods must coalesce to create a lasting impact for each network. These include emphasizing broad user access and utility (for example, TON), attracting high numbers of builders and investors (for example, Ethereum and other L1 and L2 ecosystems), high total transactions, and so on.
One popular measure beyond focusing on growing the number of users in a network is to maximize the investment the network receives. Many chains focus on building high total value locked (TVL), a measurement of the total value of assets that are locked or staked in a network. TVL serves as a financial network effect that attracts investment and entrepreneurial activity.
Perhaps the most crucial factor in a Web3 network is stickiness, because Web3 networks are by design broadly open and permissionless, meaning that users can come and go instead of being trapped inside a “walled garden” environment. This is, of course, starkly different from the Web2 paradigm, in which network effects are not ownable by the end-user and are powerfully monopolized by the network itself (for example, it is no easy matter to transfer your data and network effect from Facebook to TikTok).
Image: Web 2 Networks are typically walled gardens with isolated network effects that require permissioned access
Image: Web3 network effects are permissionless and open and therefore interoperable, allowing for accelerated growth of network effects
Web3 offers much greater flexibility to users than Web2, and it therefore becomes critical to focus on retention when building in the decentralized Internet. A key mechanism to create more stickiness for a network is investment in cultural capital.
Cultural Capital and NFTs
According to Pierre Bourdieu’s theory of capital and class distinction, cultural capital comprises intangible resources like knowledge, skills, and experiences that significantly impact social mobility and opportunities. Economic and cultural capital can reinforce each other — for example, membership in exclusive clubs, attendance at elite colleges, or residing in certain districts can present persons with significantly greater and more numerous opportunities to improve economic status and social standing.
Non-fungible tokens, due to their unique nature and ability to reflect personal identity and cultural capital, have created network effects that are deeper and more complex than fungible tokens, and that bear resemblance to Bourdieu’s theory. These NFT-driven network effects might grow more slowly than fungible tokens but will create deeper and more loyal networks depending on the cultural capital they attain, leading to stronger moats and even more powerful network effects. This phenomenon is already evident in the culture of the physical world, where we easily observe brand loyalty to companies such as Hermès, Nike, or Apple.
In the virtual world, we have begun to see similar cultural emergence in projects such as Pudgy Penguins and Bored Ape Yacht Club, as well as Animoca Brands’ own Mocaverse.
Image: welcome to the Mocaverse
Investments and the Mocaverse
One of the most critical measures to value any network’s potential is the level of investment it has received, which indicates or even determines the potential of the network. This is similar to investment in infrastructure development in a nation: the more investment, the greater the potential.
Animoca Brands is one of the Web3 industry’s biggest investors, with over 450 portfolio companies and a balance sheet measured in billions of dollars. We will continue to invest to grow our network and its related network effects, both economic and cultural, which in turn will provide the framework to expand the Moca Network, the interoperable economy of partner “subnets” and users connected to Mocaverse. At the same time, we will use the omni-chain token MOCA Coin, the utility and governance token that powers the Moca Network, to expand Animoca Brands’ network and boost our growth.
So what exactly is Mocaverse? It is an interoperable infrastructure stack created to enhance network effects and bring together various cultural economies for maximum mutual benefit. It integrates diverse sectors including gaming, music, sports, anime, NFTs, digital identifiers (DID), and many more into a cohesive ecosystem where the success of one segment translates into benefits for the broader ecosystem.
Mocaverse is building Moca ID, an omnichain identity reputation layer that will bridge network effects across ecosystems and — since Animoca Brands is already one of the biggest investors in Web3 — help to drive the growth of the entire Web3 industry. Mocaverse and MOCA Coin represent cultural capital that today may appear objectified (like most NFTs) but will become more social and symbolic in meaning and purpose as Mocaverse’s reputation layer grows and increasingly rewards and incentivizes the creation of cultural capital. This begins through a proof-of-loyalty mechanism and assessing how much value users contribute to the network.
Building in the Mocaverse will lay the foundation for anyone to benefit from the Animoca Brands ecosystem, emphasizing engagement and loyalty to the network. Through Moca ID and the attached reputation system, we aim to usher the most engaged and loyal users, builders, developers, dreamers, and entrepreneurs into our growing investment portfolio.
Our goal is to create a truly symbiotic set of relationships that will deliver value to our portfolio’s networks and reward the time, loyalty, and attention of Mocaverse users. It’s a scenario in which all participants benefit from the shared network effects, in full accordance with the central ethos and promise of Web3.
