The Democratization of the Platform Economy (1/6)
Transaction platforms such as Uber, Airbnb and Facebook offer enormous benefits. But Blockchain has the potential to democratize those. What opportunities arise from this and how do we deal with decentralization?
The age of the Internet marked the emergence of transaction platforms and the corresponding platform economy. Today, transaction platforms constitute an indispensable part of our lives and business processes. One reason for the success of platforms, such as Uber, Amazon or Airbnb, is that they allow for transparency of supply and demand — and thus reduce transaction costs significantly. A significant driver of the reduction in transaction costs is the establishment of network effects: as the number of users, usually representing supply and demand, on a specific transaction platform increases, the value delivered to the individual user increases too, since there will be more suppliers and buyers attracted to the platform. This phenomenon is generally referred to the network effect, often resulting in a dominant platform.
However, especially from a user’s point of view, there are several disadvantages of dominant (centralized) transaction platforms. In the case of a centralized transaction platform, the platform is fully controlled by a single entity (the so-called platform leader). He alone controls the platform’s access and its transaction data. The platform leader can then use the information asymmetry to gain a competitive advantage by turning the data into exclusive offers and superior products and services (e.g. Amazon Basic: Amazon gains information about particularly popular products and potential sales via the data sovereignty of the Amazon Marketplace. Amazon subsequently offers these at significantly lower prices, thus displacing the original provider). On the one hand, information asymmetry subsequently allows for the offering of superior products and services at significantly lower prices for the platform leader. On the other hand, increasing network effects and platform dominance also allow for disproportionately high transaction fees, without having to fear to lose the predominant market position. For instance, due to a lack of competition, Uber nearly charges 30% of the users’ fare in Berlin as a transaction fee. Although an imminent market entry by Lyft might put pressure on Uber’s fees, it will most likely still not lead to a drop of Uber’s margin to a proportionate level, as network effects ensure that the amount of simultaneously operating transaction platforms is limited. Network effects thus also create high barriers of entry for potential competitors.
The main activities of central platform authorities are record keeping, transaction validation and platform curation. This includes account management — that is, the regulation of platform access — and the monitoring of transactions on the platform. With distributed ledger technologies (DLTs), such as Blockchain, the validating and record keeping activities of the central platform leader is decentralized and automated by essentially outsourcing it to the platform’s network. This eliminates the need for a central entity. By losing the validating function, the platform leader hence loses its most important unique selling point and ultimately raison d’être. On decentralized platforms, data storage is decentralized as well, and the current state of the ledger is determined by a consensus mechanism. A further activity, which is usually conducted by the platform leader (or potentially a third party), is the platform curation. Platform curation refers to all activities and processes devoted to the continuous development and optimization of the platform’s performance. The main tool for the platform curation process is the development of the front and back end of the platform. In terms of decentralized platforms, the platform curation process is now taken over by the platform’s entire network or parts of it.
Decentralized platforms combine the two main advantages of centralized platforms with advantageous properties of decentralization. More precisely, the combination of transparency and the reduction in transaction costs with decentralized validation. Decentralization guarantees that the data is held by the data originator or owner and can be sold to multiple third parties, which in turn use the acquired data to generate new services. Hence, decentralized platforms eventually lead to innovation power. Moreover, the removal of the platform leader as an intermediary means that customers and marketplace complementors are directly linked with one another — ensuring a closer relationship between the two and a decrease in information asymmetry. In conclusion, decentralized platforms prevent central authorities, lock-ins through network effects and thus disproportionately high transaction fees.
However, in order for a decentralized platform to properly function, a valid governance model needs to be established. Network collaboration must be regulated from the very beginning and all necessary activities to maintain the platform and its marketplace must be performed without any conflict between the parties involved. The Institute of Technology Management at the University of St. Gallen (ITEM-HSG) conducts extensive research on governance models and therefore designed a framework for decentralized platforms, including all necessary roles and associated activities as well as their definition to successfully establish and implement decentralized platforms. These roles include the Platform Initiator, the Marketplace User and the Marketplace Complementor, the Platform Curator, the Marketplace Modulator and the Ecosystem Complementor. The Platform Initiator (1) launches the platform through the ICO. Subsequently, the Marketplace (Marketplace User (2) and Marketplace Complementor (3) is built on top of the decentralized platform’s infrastructure. The Platform Curator (4) ensures the ongoing development and optimization of the platform. The Marketplace Modulator (5) supports the Marketplace with complementary and essential activities (e.g. logistic services for a decentralized retail platform). Through decentralized data storages (e.g. IPFS or MongoDB), third parties can develop and offer complementary services (Ecosystem Complementor (6)). All stakeholders are intentionally defined as roles, and not entities. This means that a role can be taken over by several entities and is selected via the market principle by the network.
In the following articles, we will introduce ITEM’s Decentralized Platform Framework by applying it to the case partner Share&Charge’s decentralized platform for EV charging stations. Each week, we will offer an in-depth description of one particular role and its activities in the Decentralized Platform Framework.
This is a multi-part post. Links to the other parts can be found below:
