Online marketplaces have revolutionized the way commerce is conducted. Since the 1990s, the rise of companies such as eBay and Amazon completely changed the way people shop. The growth in online marketplaces has been phenomenal ever since. For example, Amazon grew by 55.8% annually between 2014 and 2016 while Alibaba grew by 50% in the same period. Estimates show that by 2020, the global ecommerce retail sector will be worth $4 trillion.
There are also other online marketplaces that have grown considerably. These are online freelance and gig marketplaces. Sites such as Upwork, Fiverr and Freelancer have grown considerably with estimates showing that about 68 million workers have online jobs which constitute about 34% of USA workforce. There has also been growth of other online marketplaces such as Uber, Lyft and other gig-related activities. All these online marketplaces have been propelled by building a centralized platform that links buyers and sellers. It is based on algorithms proprietary methods and other algorithms.
Increased demand for online marketplaces has led to increased research on where the online marketplaces go from here. One of the major aspects that make it possible for these online marketplaces is trust which is achieved through having centralized software linking buyers and sellers. When making a sale, even in the traditional marketplace, trust is the major enabler. However, one of the main challenges that have arisen is that matching buyer and sellers through centralized software is another way of replacing traditional middle man to a new middle man-software. There is transaction costs involved in this case and network effects have created multi-billion businesses for aggregators.
However, blockchain technology is looking to once more change the industry. Blockchain has seen the most year-on-year growth in the last 5 years. Billions of money has been invested in blockchain based projects in the last 2-3 years especially with Initial Coin Offering (ICOs). Private investments in bitcoin have reached $4.5 billion so far and in 2017, there have massive investments in blockchain. Blockchain was mainly introduced to the masses through Bitcoin, a decentralized currency that is mined and maintained through blockchain without need for centralized servers. Now it is emerging that the blockchain has more applications away from Bitcoin. Researchers and technologists are seeking to use the cryptographic knowledge to make online systems distributed, secure and transparent. The next stop is online marketplaces. This is the next obvious areas because online marketplaces involve currency exchanges and with that there is a need for a decentralized platform that is more open, flexible and better aligned to user needs.
It is against this backdrop that blockchain based companies are being taunted to revolutionize many industries and online marketplaces seem to be next. With blockchain, it is possible to create decentralized platforms through peer-to-peer interactions rather than centralized ones. Let’s see how this would work.
How blockchain online marketplaces work
There has been ongoing decentralization of communication and business exchanges that have contributed to growth of decentralized systems. People are engaging more in a peer-to-peer manner fuelled by a distributed communication system instead of a central gatekeeper. Online blockchain marketplace has emanated from this believe. Furthermore, although the services offered by these online marketplaces are made possible through some of decentralization, the companies that are behind the businesses are highly centralized: Amazon, eBay and Alibaba among others.
This shift is being seen in terms of nature of exchanges and underpins aspects of social media, crowdfunding, Wikipedia, ride-sharing and other areas related to internet of things. These aspects are sustained by decentralizing information exchange and that is why they are successful. The internet functions as a distributed system. The packet-switching technology enabled data to travel to its destination without necessarily going through a congested system. The internet enabled human beings to communicate with each other through a new system without even being next to each other. This also changed commerce because now people could exchange goods and services through the internet. This is what led to growth of online marketplaces such as eBay. However, the problem that remained is that there was no decentralized trust system that would support the new distributed communication system over the internet.
The Blockchain Technology of Trust
Now with the blockchain ledger, we have a distributed network. Trust is no longer needed to be executed a third party intermediary but through a distributed community of incentivised users who protect the blockchain for public good. Therefore through the block, an age-old problem of Tragedy of commons is solved. People can trust a distributed system that is constantly updated and records kept for the public to see. It is a public ledger with multiple copied versions and stored in different and independent computers. There are different nodes that run on open source software. The open source software dictates the manner in which it is updated and how to arrive at consensus on whether the transactions being made are valid. Furthermore, it is now emerging that another aspect of blockchain can be used to make online marketplaces even more effective, and it is the use of smart contracts. With smart contracts, individuals are able to enter into a sale agreement to execute certain tasks and duties based on specifications of smart contracts.
The Blockchain Technology of Exchange
With blockchain technology, service providers have a platform of seamless exchange. Unlike the current online marketplaces, blockchain marketplaces offer buyers ability to choose their price levels based on needs and wants. With blockchain marketplace, sellers can offer one-time services and they are not linked to one-time limitations that exist in the current centralized system. On the other hand, buyers are not limited by what third party hosts put in front of them. With blockchain, there is an opportunity for peer-to-peer interaction between sellers and buyers in a social setting while not maintaining high level of security and transparency. Ultimately, there is real possibility that a decentralized public ledger is able to create a superior and more efficient way of conducting transactions online in a secure way. Areas that need to be sorted include the governance and regulatory systems as well as incentive structures that are robust.