Self-reinforcing popularity and congestion issues.
The issue of transaction fees on the Bitcoin network increasing exponentially has occurred because the Bitcoin network is based on the principles of free market. Transaction participants on the Bitcoin network can initiate a transaction at any time of day or night from anywhere in the world because of the total freedom that the Bitcoin network offers due to its decentralized nature. There is no government agency anybody needs to get permission from, no bank that needs to be open during certain hours and no center that processes transaction only during certain times. The Bitcoin network is truly free and independent.
When participating in transactions, users do not have to pay any fees to send or receive money on the network. Even when they don’t pay anything, Bitcoin miners still have an incentive to include their transactions into the blocks of Bitcoin blockchain because the network rewards the miners with block creation awards regardless of what users on the network have paid in transaction fees.
At the same time, just like the users don’t have to pay a fee, the miners do not have to include a transaction into a block that they mine. The decision about whether to include a transaction into a block of the blockchain is completely up to miners. This approach has worked really well up until 2017. Before this year, transaction fees on the Bitcoin network were minimal and were typically less than $1. You can see the average daily transaction fees on the Bitcoin network since its launch in 2009 by visiting this chart: https://bitinfocharts.com/comparison/bitcoin-transactionfees.html
However, in 2017, the number of transactions has increased quickly and miners were now able to choose which transactions to include into the Bitcoin blockchain blocks. It goes without saying that they were choosing the transactions with the highest fees as miners on the Bitcoin network get to keep 100% of the fees.
The second factor that contributes to the network effect is that popularity is self-reinforcing. In practical terms, this means that to be interested in going to a restaurant, people need to see a line of other people line up in front of the restaurant. For people to send funds in cryptocurrencies or to get a digital identity on a blockchain network, they would need to hear about others doing the same.
Getting rid of the line completely does not work. If a restaurant didn’t have a line, people that are driving by would not get interested in going to it. For this reason, it is much safer, more profitable and less risky for a restaurant to have a line of people outside all the time than try to push the prices.
The same is true of all digital networks: they need to have enough users that they can serve, but they can’t have more than they can handle because it would lead to all kinds of problems, such as problems with skyrocketing transaction fees on the Bitcoin network in the last quarter of 2017.
While a network effect can have many positive consequences for a business, entity, or a blockchain network, it can also have negative effects. Typically, negative effects occur when too many people start using something. An example from real life would be a highway. The more people use the highway that connects two points, the more other people would be interested in getting faster between the two points. However, at a certain point, the amount of traffic will be more than the highway can handle, which would lead to congestion. The same can occur with a telephone service provider, an Internet provider or even a blockchain network where if a user doesn’t include a large enough fee, the transaction will be stuck for hours as “pending” because no miner wants to pick it up and include onto the blockchain. This is also an issue where suddenly a paper government-issue identification document gets a lot of advantages over a blockchain-based self-sovereign identity because while verification of a traditional identification document is not always instant (unless done by government authorities running it through an online database), the document is still a document. With blockchain, if a network gets congested, you may not be able to get a confirmation at all.