Decentralization Will Disrupt the Sharing Economy and Centralized Marketplaces

The advent of online peer-to-peer marketplaces and the sharing economy has had a tremendous impact on our world. These developments have disrupted traditional businesses and business models. However, we have witnessed the quick establishment of monopolies and other adverse effects that may seem to be natural consequences of how these marketplaces are formed. Decentralization and blockchain technology will give us an opportunity to rewrite how these markets are structured.

First we should examine why these markets tend to be dominated by monopolies or a small handful of large companies. Two obvious and important factors are the first mover advantage and network effects. The first companies that created great home-sharing or ride-sharing marketplaces had massive advantages over competitors who released products later. The network effect of buyers (or consumers) and sellers (or providers) wanting to meet on the platform with the largest greatest number of participants, combined with the first mover advantage, leads to a positive feedback loop that quickly consolidates users and value onto a single platform, leaving competing platforms in the dust.

Bootstrapping new marketplaces is incredibly expensive, sometimes costing billions of dollars. Very few companies had the resources to do what Uber or Airbnb did. This allowed for monopolies to quickly expand across a given country and eventually globally. There are notable “failures” of this phenomenon, such as Uber failing in China, but in almost all of those cases, there is effectively a national monopoly that succeeded in the void such as Didi Chuxing in China.

We have also witnessed ambitious and successful horizontal expansion of these monopolies (UberEats, Airbnb Experiences), driven by their massive financial resources and infrastructure advantages. These companies sit on huge silos of valuable customer data to help them develop new products and can easily deploy these new products to a huge existing pool of potential customers.

I would argue that these outcomes are not inevitable and may have not even happened had there been open-source protocols for marketplace functions baked into the internet. Imagine if payments, transaction coordination, identity, reputation, instant messaging, and other essential services were natively available from the start of Web 1.0 — things might have turned out much differently.

Localized and niche marketplaces would have probably succeeded in many instances if they had access to the network effects and technology that the monopolies of today have. It doesn’t make a whole lot of sense that Airbnb is almost exactly the same in San Francisco, California as it is in Quito, Ecuador or Tokyo, Japan. From a user experience vantage, this may be convenient, but it makes little sense from an organizational perspective. A ride-sharing company dominating food delivery is only inevitable in a world where network effects and data are walled off and closely guarded. Local companies understand the needs of their locality better than companies based in a far away land. Specialized companies understand their area of expertise better than generalized companies.

Smaller companies are more nimble and able to innovate faster than larger companies in many cases. Monopolies quickly become rent-seeking and prioritize protecting their market share and revenue streams rather than improving product experience. The story of large companies angering their customer bases with befuddling and useless updates (or never updating at all, like Craigslist) and alienating the people who helped build their networks (such as early Uber drivers complaining about declining wages or Airbnb hosts being booted from the platform due to changing regulations) have become commonplace. Large companies can become culturally stale. Chris Dixon recently wrote about the life cycle of large centralized corporations:

Centralized platforms follow a predictable life cycle. When they start out, they do everything they can to recruit users and 3rd-party complements like developers, businesses, and media organizations. They do this to make their services more valuable, as platforms (by definition) are systems with multi-sided network effects. As platforms move up the adoption S-curve, their power over users and 3rd parties steadily grows.
When they hit the top of the S-curve, their relationships with network participants change from positive-sum to zero-sum.

There are additional dangers when large corporations control the protocols and platforms that economic activity is concentrated on. Centralizing innovation and development within a few corporations will rob us of viewpoints and ideas that we would have had with a global ecosystem of smaller teams.

Here at Origin Protocol, we are writing open source protocols for decentralized marketplaces on the blockchain. We hope to arm a diverse group of companies, entrepreneurs, and developers spread throughout the world to offer more localized, fair, open, and superior alternatives to the household names we know today. Companies building on our protocols will have a “shared network effect” by design. Users will be able to easily access all the different marketplaces using our protocols without having to sign up for yet another account. Identity and reputation will be open, portable, and based on the consensus of the blockchain. We are collaborating with many of the top groups taking on these challenges. Cryptocurrencies allow for an instantly global and permission-less payment system. Token economic models and tokenized incentives will give participants a stake in the network and greater motivation to spread the word about these new technologies.

Open protocols are fundamentally different than the closed models we see today in that they are censorship resistant and development is permissionless. Giving people free access to these protocols in regions where certain companies or technologies are banned would give freedom back to people to participate in the marketplace transactions that they decide is in their best interest. Blockchains, which are a form of distributed networks, are much harder to censor than centralized systems. All of Origin Protocol’s code is open source and will be available for the world to experiment with and improve upon. Infrastructure updates by individual developers unaffiliated with us or any corporate organization can be applied network wide with the consensus of network participants.

I am very excited to see the results, both expected and unexpected, that will come when we release these protocols into the wild. The list of projects that are committed to building on our protocols is impressive and will only get longer in the months to come. Marketplace participants will have the technology to freely organize and transact with each other. It’s high time that the disruptors get disrupted.

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