Blockchain’s impact on marketplaces: what’s the future for decentralized marketplaces?

By boris, August 08, 2017

Nearly two years ago, we published our first ebook, A Guide to Marketplaces. Towards the end, we touched briefly on emerging marketplace types and included decentralized marketplaces in the mix. At the time, OpenBazaar was still in beta. Since then, we’ve been closely following the evolution of blockchain technology and looking at the potential impact that blockchain will have on the marketplace landscape.

In terms of decentralized marketplaces today, OpenBazaar is really the only game in town for buying/selling physical products and reminds one of a decentralized version of eBay. It’s an open source project to create a peer-to-peer commerce network using Bitcoin. With OpenBazaar, there’s no middle man: the platform connects buyers and sellers directly. And since there’s no one in the middle of a transaction, there are no fees and no restrictions on what goods can be listed and sold. OpenBazaar realizes blockchain’s promise to bring power back to the edge (aka the users).

A decentralized marketplace is an interesting proposition and we are eagerly watching how new marketplaces based on blockchain may disrupt existing (centralized) marketplaces. However, the big question of the day is if a decentralized platform will be able to create the same great customer experience that we’ve grown accustomed to on centralized marketplaces. Can a decentralized platform offer the same kind of UX, conflict resolution tools, and customer service? The other question is will decentralized marketplaces be pushed to the fringe and just attract buyers and sellers for illicit goods? If so, just how scalable are these kinds of use cases?

These are important questions and we’re still not certain in what ways a decentralized marketplace can disrupt a well-functioning centralized marketplace. Will a decentralized marketplace replace a centralized one, or will blockchain technology become a part of an existing marketplace?

While there may be challenges associated with replacing well-established marketplaces, tremendous opportunities exist to enable something new and create a brand new generation of marketplaces. Prime candidates are marketplaces for digital assets that allow anyone in the world to conduct a transaction with any other participant without having a central instance manage the transaction (e.g. payment settlement, etc.). Examples include:

  • Prediction markets like Augur or Gnosis that enable completely new financial products (buying and selling options; insurances/betting on potentially any “event” in the world)
  • Decentralized storage (Filecoin, Sia) and computing markets (Golem) that can leverage underused computing power and replicate the AirBnB model for digital assets
  • Decentralized exchanges that allow for trading the ever rising amount of tokens and currencies supporting the buying and selling of this new asset class
  • Data marketplaces: there is potential to create decentralized marketplaces around the collection and distribution of data – there are no specific projects yet but it’s certainly an area we are watching.

The business model for these decentralized marketplaces will likely be built around tokens where buyers will have to pay fees (with the marketplace token) and sellers earn tokens by contributing to the marketplace.

As the marketplace’s usage grows, those tokens will hopefully further appreciate, making participation from the supply side even more attractive. This will solve the chicken and egg dynamic that can pose such a problem for young marketplaces. It will also create strong network effects as the platform grows, resulting in a winner-takes-all where the biggest player is way bigger than its competitors.

  • Most of the current blockchain applications have no use for the average citizen, especially those from developing countries. I believe that the applications targeting the un-banked and over-restricted will create new wealth that will then create opportunities for practical blockchain products to be built to serve the masses. New money will increase the demand for products and services, and those ready with centralized blockchain applications can further empower these people by providing the next steps for them to improve the lives for their families. The supply side will be incentivized as the demand will ensure there’s no downward pressure on the pricing. The applications can vet and curate the products and services to ensure quality control and keep the ship on course. (I’m heavily biased as I’m currently working on one of these applications.)

  • P2P is a pretty important part of these marketplaces.
    For data, check out https://santiment.net and datafund.net

  • bwertz

    Thanks for sharing those two links. What your take on how successful these data marketplaces can be? In a centralized environment they never really took of, what’s different in the decentralized environment?

  • Good question. I have no idea yet as it is early, and when theory precedes reality.
    Which unsuccessful central ones come to your mind?

  • bwertz

    Definitely a bunch of marketplaces for ad data that were aiming to create data assets that could compete with Google or FB

  • Armen Gulesserian

    There is great potential in using blockchain technology with marketplaces through smart contracts and cryptocurrencies, making international trade more efficient. Smart contracts have the potential enforce the terms of the trade contract, making the administration of these cheaper and safer. No need for complex legal arbitrage in case of fraud or failure to fulfill the contract. An international B2B marketplace with its own cryptocurrency can also be an interesting idea. Not having to change between different fiat nationalities coupled with the speed and reliability of blockchain can reduce the friction of international commerce and finance.

  • bwertz

    agreed – great use case!

  • Johnny

    Blockchain based platforms will out rival P2P marketplaces in my opinion, p2p has its list disadvantages. Luckily August will mark a chapter in history when the first consumer ready market Blockmarket will release on desktop and web. Developed by Syscoin team from Block Foundry.

  • Great post Boris.

    There is something that keeps bugging me though about these conversations. Almost all the time I read something along these lines: “as the marketplace’s usage grows, those tokens will hopefully further appreciate”. I’d like to really hear and understand why that should be the case.

    Especially when it comes to the trading of goods (but storage applies as well) the value of what is traded cannot fluctuate just because the network is bigger. The price of a product on ebay doesn’t increase because more people use ebay. So, if we exclude speculation (which exists, and I don’t want to deny it as a meaningful appreciation factor) what is really the mechanic that would push e.g. the price of filecoin up just because more people use filecoin as a storage service?

    Also, we should consider that if participating in a network becomes too expensive (think again in the case of storage) then the ultimate reason why people use it starts going away. I will not store my files on filecoin service if it is not competitive. I don’t know it is just me but i have never obtained a convincing answer to this question. Maybe you can help.

  • bwertz

    Stefano, a few really good questions & comments – here is my take:
    – I think that appreciation of tokens will happen as a result of an increased demand for tokens for liquidity purposes (the more you participate / trade on a network, the more liquidity you will need). Very similar to the way that Paypal users were holding more and more funds in their PayPal accounts as the network grew in importance.
    – Investor interest (what you call speculation) will be the second pillar of token appreciation but would be very much linked to the first driver.
    – The cost of participating in the network is flexible and will be adjusted by market dynamics all the time, e.g. in the Filecoin case storage providers bid for storage jobs and prices will be driven by the competition within the network but also by prices outside of the network (e.g. if AWS is consistently cheaper nobody would use Filecoin all things being equal). So if a service becomes too expensive to participate, market dynamics would create price pressure.

    Does this make sense?

  • Thanks. These are definitely some dynamics we can expect, and yet so many questions remain unanswered (which is what makes it interesting, and fun!). I just get quite sceptic when I read references to Metcalfe law as an argument for why a token should appreciate. For utility tokens in particular, I don’t see how Metcalfe plays a role. I don’t get more utility when it comes to storage if more people participate in the market. Yes, the market itself might be more valuable but that value – e.g. in Airbnb – is due to the fact that the market extracts a rent on market players. So, if the token was indeed a proxy for an equity instrument (and a claim on future cash flow – if that is still a thing) it would make total sense for it to appreciate. If it is instead a mean to participate in the utility, I would expect it to reach an equilibrium driven by supply/demand dynamics and stop there. To be seen.

  • bwertz

    In the Filecon case there are actually very strong network effects as delivery of stored documents is quicker the closer the storage provider is to you (and Filecoin actually incentivizes storage providers for being closely located to their customers). So if proximity really matters (and I am not 100% sure to what extent / for what use cases it actually does), then Metcalfe Law plays a big role.

  • thx. makes sense for this specific case. I guess the main question, as you also comment on, is how much it is going to matter for the user. In general, estimating the “actual” value potential of a protocol is really difficult given how this intersects with the speculative dynamics of tokens.

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