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Decentralized versus centralized marketplaces

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blockchain and small businesses
blockchain and small businesses

 will decentralized marketplaces replace centralized ones?

Since the early 1990s, the growth of internet has been synonymous with growth of another thing that is central to day to day living: online marketplaces. eBay is like the poster child for web marketplaces and others forms have come along: oDesk, Etsy, Kickstarter, Airbnb and so on. Another angle is now coming up: decentralized marketplaces.

Whether centralized, decentralized or any other form, one thing is central for any marketplace to work; LIQUIDITY; ability for someone selling something to find a buyer and buyer finding something they want to buy. It may sound simple, but finding is one thing and ability to convert is another. I.e both sellers and buyers are satisfied. What centralized platforms do is that they invest in user experience, the caveat being costs involved. In a decentralized platform, user does the work, with hope for reduced costs. There are various examples that you can read more about here

 

why centralized platforms are still important

  • Play an important role in verifying the quality of suppliers and consumers
  • Providing the all-important customer services/conflict resolution
  • Improving the product by better matching buyers and sellers
  • Investing in marketing in order to build liquidity. They take a commission in order to build liquidity and in most cases liquidity is more important than the cost. The ability of buyers to find sellers and vice-versa is very important for a marketplace to work.

Decentralized platform also have several advantages:

  • Immutable public ledger that facilitates transactions between seller and buyer
  • Use of tokens in order to incentivize early use-to create liquidity
  • Smart contracts make it possible for two parties to enter into an agreement and making administration of trade agreements between two parties easier, cheaper and safer.
  • Also where incumbents charge far too much commission, decentralized marketplaces could replace them

Examples:

Decentralized marketplace: Openbazaar that allows peer-to-peer buying and selling. With no middle man, the premise is that there is virtually no transaction costs and no restrictions as to what you might sell. I am not sure how they enforce KYC and AML (Know your customer and Anti-money laundering) regulations, which is the premise of a centralized exchange-facilitating a sustainable buyer-seller exchange.

Decentralized storage: Filecoin, Sia as well Golem, in terms of computing. The main idea behind these is that they can leverage underused computing power and give it to someone else at a cost, for example the way Airbnb does for houses, renting free space.

Prediction markets: for example Augur, Gnosis. Enable building of completely new financial products; from betting on almost everything happening in the world, selling insurances, options.

Decentralized exchanges: to allow trading of new tokens that are coming up every day to counter the centralized exchanges.

Use case: OpenBazaar

OpenBazaar is one of the first example of a decentralized marketplace. Simply a decentralized ebay, Jumia, masoko etc. this means its peer to peer application, data is distributed across the network not in centralized servers. Each user contributes to the network and payments methods are through cryptocurrencies such as Bitcoin, Ethereum and others. The need for all this is of course is reduced costs and transaction fees that would have been used to facilitate buyer-seller engagement in a centralized marketplace. For buyer/seller safety, there are two aspects: rating and reviews so that users can judge. Secondly escrow for transactions help protect payments, with an option or raising disputes.

Business model:

For the decentralized marketplaces, the business model is mainly built around tokens. Buyers buy marketplace tokens while sellers earn the tokens by contributing to the marketplace. As more buyers and sellers use the marketplace it is expected that the value of tokens appreciate in value and therefore participating from the supply side becomes even more valuable. The appreciation will not happen merely due to large number of users but because of increased demand for tokens for liquidity purposes. The users who participate/trade within a network require more liquidity. Also investor interest will contribute to appreciation. However, the jury is still out as to whether there will be infinite in increase in value.

However, the cost of participating in the network will not necessarily increase but could be adjusted by market mechanisms. For example, Filecoin whitepaper argues that the closer the buyer and seller are, the faster the delivery and therefore Filecoin incentivizes storage providers who are closest to their customers. This will eventually dictate price mechanisms.

Since the concept is still in the early stages, there is definitely more room to see how it evolves. My opinion is that a decentralized platform with its own cryptocurrency is promising but could take time to replace existing centralized ones as long as they are more efficient and provide value for the user. What we are seeing is that existing centralized platforms are allowing for diverse methods of payments such as Ethereum and Bitcoin. More is defiantly to come.

Naval tweeted that ‘blockchains will replace networks with markets’ the idea that in future, strangers will trust each other without need for intermediaries. Please go through this tweetstorm You will love it.

We will definitely be here to see how this pans out.

Any ideas/comments about this?

 

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