Placeholder: Institutionalization = Network Success
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Placeholder: Institutionalization = Network Success
Excellent technology is merely a necessary condition for success, not a sufficient one.
Navigating Web3 tides with focused insightsAuthor: Mario Laul
Translation: Kate, Mars Finance
"Better technology doesn't always win" is an old adage in the startup world, with many well-documented examples throughout business history: standard gauge versus wider, higher-performance railway tracks; internal combustion engines versus electric motors for urban car transport; QWERTY versus Dvorak keyboard layouts; VHS versus Betamax video formats, and so on. Similarly, while solving technical issues related to scalability, privacy, cost, and user experience is crucial for driving adoption of blockchain networks, the long-term success of any individual network is not solely—and in some cases, not even primarily—a function of its relative technical advantages. It is also a function of its relative institutionalization.
There are many reasons why a particular product may gain and maintain market dominance even when technically superior alternatives are available: favorable timing, sticky consumer habits, regulatory or distribution advantages, vendor lock-in, technological path dependence, high switching costs, compatibility with existing standards or other popular products, better marketing, or even random chance events that ultimately foster ecosystems or network effects. Competing products are never simultaneously presented to all equally informed and identically predisposed target customers, nor are they introduced into the market without being shaped by their surrounding environments. Instead, knowledge about products is unevenly distributed, individual consumer preferences may differ even when starting from the same information base, and producers are embedded within pre-existing social and market structures that can independently influence their competitiveness regardless of product quality.
In the context of public blockchain networks, one particularly important non-technical factor for success is the degree of institutionalization of the network. Here, I do not refer to the codification of software protocols as rules governing information and transactions associated with that information—which itself constitutes a form of institutionalization (see here and here). Rather, I mean the extent to which a specific network is embedded within the mental models and social practices of its developer and user communities, as well as external technological and institutional structures. Typical sources of this kind of network institutionalization include:
First-mover advantage. For example, being the first to associate a particular use case with a specific network—if this association becomes strong enough that the network and use case become almost synonymous (e.g., Bitcoin as digital gold)—makes it difficult for other networks, including technically superior ones, to compete. Likewise, being the first to successfully reach a particular group of developers or users can generate loyalty, especially if these groups invest significant resources or make public commitments linking their identity, social standing, or economic well-being to the network’s success. As a result, they develop a strong tendency to continue participating in and defending the network, even when confronted with criticism based on unfavorable technical comparisons.
Internalization of narratives leading to the development of shared ideologies regarding the network’s role in society and its position relative to competitors. Blockchains are not merely software protocols and technical infrastructures—they are communities of people connected through values, ideas, and goals. As such, they are filled with collective myths—regardless of whether these myths are factually accurate—that help sustain a sense of common purpose and continuously mobilize the necessary resources to grow and maintain the network. The more compelling and widely internalized a network’s narrative myths are, the greater its level of institutionalization, making it more resilient against competing networks and internal crises.
Specialization between network operators and infrastructure service providers, particularly when tied to substantial investment capital and the ability to run profitable businesses within the network. This creates an ecosystem of mutually reinforcing economic interests that, once sufficiently large and diverse, contributes to the ongoing evolution and reproduction of the network as a social and economic system. In some cases, if a network’s user base and commercial ecosystem grow large enough, the economic incentives to keep operating and building on the network can outweigh concerns over its strict technical shortcomings.
Network effects around open-source libraries, programming languages, tools, etc., attracting entrepreneurs and builders to the network and continuously improving the developer experience. Developer network effects are linked to the emergence of best practices, which lead to increasingly habitual ways of thinking and acting. Over time, these habits become second nature, resulting in choices that are instinctive rather than based on deliberate objective analysis. At the individual developer level, as familiarity with a particular network, programming language, or toolset grows, so too does the personal career risk and cost associated with switching to a different network or ecosystem. While entirely new languages or open-source tech stacks can certainly emerge and gain popularity, for an aspiring blockchain network, this represents a significantly more challenging path to success compared to leveraging an already thriving ecosystem by ensuring maximum technical compatibility.
Consumer habits and brand awareness. Through regular exposure to a specific network, user interfaces, and associated branding, consumers build trust and behavioral patterns that eventually attain an almost rule-like status in how they interact with blockchains. The more deeply entrenched these habits are, the higher the learning and switching costs associated with exploring alternative networks. This can even lead to situations where replicating a poor user experience that consumers are already familiar with—or basing a product on a technically inferior but highly trusted network with a massive user base—proves to be a more successful user acquisition strategy than offering an objectively better but unfamiliar product or experience. Brand trust and habitual consumption further reinforce the ecosystem and network effects described above through positive feedback loops between end-users and application developers. For aspiring networks, the best way to begin benefiting from this dynamic is to successfully onboard entirely new user groups who have not yet formed habits around existing blockchains.
De facto standardization. Establishing technical standards carries high coordination costs—not just in the blockchain industry, but in any technological field. This is especially challenging in dynamic and competitive environments where multiple concurrent but technically incompatible attempts address the same problem. As a result, standards are often not established through industry-wide agreements or dedicated standards organizations, but rather through achieving dominant market position. Such de facto standards are not always technically optimal, and over time they may or may not evolve into formal, official standards. Either way, they play a key role in determining the long-term success of specific networks and technology stacks.
Adoption and legitimization by external institutions. When existing organizations utilize the record-keeping and other services provided by a network—especially if those organizations possess prestige and power—the network gains legitimacy and becomes more likely to attract further institutional users. Like individuals, institutions develop habitual forms of behavior, and once these behaviors are integrated into organizational culture and core functions, or generate significant financial profits or other benefits, they become extremely difficult to change. Large institutions in particular tend to exhibit high inertia, making institutional adoption a major driver of sustainable network usage.
None of the above suggests that technological innovation is unimportant. On the contrary, it is critically important, and in certain use cases involving blockchain and smart contract applications, technical differentiation will be the most decisive factor in a competing network's success. However, in most cases, excellent technology is merely a necessary condition for success, not a sufficient one. Incremental innovations embedded within highly institutionalized ecosystems benefit from powerful network effects that can easily outcompete more radical technological innovations within less-institutionalized ecosystems. If blockchain networks are to fulfill their potential, it will be the most institutionalized networks that become the most globally influential over the coming decades.
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