Will Blockchain(s) Eat the Marketplace Stack?

Louis Coppey
Jan 20, 2017 · 13 min read
  • Second, some new products based on blockchain technology could become an integral part of existing marketplace stacks and drive incremental business efficiency.
  • Lastly, they could provide a solution to tamper marketplaces’ network effects and prevent marketplaces’ operators from extracting too much value from their users.

Platform thinking in the marketplace world

We thought a good way to start was the simple and very good framework created by Sangeet Paul Choudary in his book Platform Thinking. This framework provides a way to analyze any online platform, in this case a marketplace. Choudary views a marketplace as a combination of three main components:

A network of users

Buyers and sellers active in the marketplace. The role of any marketplace’s operator is to reduce friction in order to facilitate transactions within this network. There many actionable ways to reduce frictions, but 3 stand out as important pieces when we try to measure the impact of blockchain technology in the marketplace world:

  1. Improving the matching between buyers and sellers
  2. Improving marketplace’s UX and UI.

An infrastructure layer

The technical pieces that marketplace operators need to build to enable these transactions. These are not always visible to users, but it always includes:

  1. A protocol to exchange data (eg. TCP)
  2. A hosting platform (most of the time AWS, Azure or another cloud service provider).

A data layer:

Any data stored on:

  1. Past transactions
  2. Goods or services sold on the marketplaces.
  • AirBnB in its early days was a case in point of a successful vertical marketplace. They leveraged a smaller community of people (hence a smaller network) interested in only one service: accommodation. The members of this community were matched more efficiently thanks to an improved technology infrastructure and a more granular understanding of their users based on data.
  • Since then, they have done such a great job in reducing friction that they can now rely on a network that is probably as large as Craigslist’s and have stored an incredible amount of data on their users and their past transactions.

The social problem of marketplaces’ network effects

One of the reasons why investors like marketplace is network effects. From an investor perspective, investing in companies with network effects is great. Network effects create winner takes-all dynamic, and very often the biggest player in the market is way bigger than its competitors. So, as an investor, if you pick the winner, then there is a very high chance that you’ll meet high returns.

The intrinsic properties of blockchains and their impact on marketplaces’ stack

It’s now the right time to introduce blockchains, because one of the underlying promises of this technology is to bring the power back to the edges. In other words, give power back to users.

A P2P network of payment

Self-enforceable (“smart”) contracts

Many vertical marketplaces have started growing once they’ve been able to act as a third-party guarantee, either holding the funds before the transaction is completed (escrow) and/or guaranteeing the quality of the goods/service sold through their marketplace. If you want to know more check Fabrice Grinda’s post: “The Evolution of Marketplaces”. This can be a cumbersome process for marketplaces operators, or at least drive significant costs.

A protocol with built-in data

A protocol is a “specification of how entities should communicate”. TCP / IP is the decentralized protocol over which any internet application is built today. Bitcoin itself is a protocol to exchange value and data. Interestingly, the blockchain lets developers create new protocols on top of the bitcoin blockchain, or a based on a new blockchain, and customize it for a specific purpose. Colu’s coloured coin is a protocol built on top of the Bitcoin blockchain to issue and represent any assets digitally. LaZooZ is inventing a new protocol based on a new blockchain dedicated to real-time car sharing. Drivers are rewarded with appcoins (LaZooZ tokens) when they drive passengers in their cars. OpenBazaar is re-inventing peer-to-peer marketplaces with another protocol based on Ricardian contracts built on top of the bitcoin blockchain.

Individual ownership of data on identity and reputation

  1. Increase trust on each of the platform individually and
  2. Prevent marketplaces’ ownership of our ability to transact.

Trusted and authenticated reviews and reputation

User reviews have a dramatic impact on the level of trust on marketplaces. Academic research proves for example that one initial negative feedback from a buyer (justified or not) correlates with an average decrease of the growth of a specific seller’ weekly sales from +5% to — 8%. This partly explains why sellers could be tempted to manipulate reviews, post fake ones or delete others. The problem of reciprocal reviews is another of the challenges of marketplaces as they scale (never heard of the infamous “5 for 5” with a Uber driver at the end of the drive?). Using blockchain technology, any review could be authenticated, and solely users who had actually been through a prior transaction would be able to post reviews (for example by signing reviews with their own private key before posting them).

Decentralized hosting

Finally, it’s not only users’ individual data that could be hosted in a decentralized fashion but the whole application. When using OpenBazaar, users download a client and run the application on their private computer’s CPU. The whole network is maintained by users or nodes contributing their own computing power to the network. This means no down times, and a constant availability of the marketplace!

Full stack vs. technological enabler?

It’s clear that we are today at too early a stage to know which approach has the brightest future between being:

  • What we could pompously call a “full-stack” blockchain-enabled marketplace (another new term after the SaaS-enabled Marketplace :) ).

1. Blockchain and AirBnB?

In a recent report published in May 2016, Goldman Sachs’ research department shows that the use of blockchain could drive improvements for sharing economy marketplaces, and especially AirBnB, in three areas:

  • Payment: funds could be released per fulfillment of a smart contract written by AirBnB, and the payment credentials tied to an ID stored on the blockchain. Seeing even further, the state of a lock connected to the Internet could be one of the smart contract’s triggers in order for the funds to be released. Slock.it is currently developing a smart-lock, which could help in this case.
  • Reviews: reviews would not be accepted unless they are digitally signed by a reviewer, who has been habilitated because he has in a transaction with the person about which he’s writing a review (“you can’t write a review if you haven’t paid for the service”). These reviews could also not disappear as blockchains are tamper proofs.

2. Is Storj.io the new Dropbox?

Challenges for VCs

One of the recent tweets published by one of the founders of Slock.it
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Point Nine Land

Stories from the P9 team & portfolio companies

Louis Coppey

Written by

VC @pointninecap, @MIT grad, writing about #VC, #SaaS, and #Automation.

Point Nine Land

Stories from the P9 team & portfolio companies