Ecommerce is projected to be nearly $5 trillion by 2021 and the leader, Amazon, has a market cap around $1 trillion. Could all this be disrupted by zero fee Decentralized Marketplaces or is this a cypherpunk pipedream?
This is Part Two (Chapter 11) of The Blockchain Economy book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index/table of contents of The Blockchain Economy book please click here.
In this chapter we look at:
- The vision of free decentralised marketplaces.
- You need to be crazy or brilliant to compete with Jeff Bezos.
- The Dark Web and mainstream are very different markets.
- Decentralised exchanges for cryptocurrency trading aka DEX may point the way.
- Particl wins the decentralized purity award but will mainstream care?
- Could decentralised markets happen first in India?
- The real battle is in payments.
The vision of free decentralised marketplaces
A decentralized marketplace is a network of people who transact without the need for a central server or for arbitration provided by an institutional intermediary. The vision is of a pure free market without any intermediary in control. The system runs on a distributed network owned by its user base. The money is typically protected by multi-signature wallets. Individuals can buy and sell with nobody in control of that transaction. This appeals to people who distrust institutional authority (often labelled libertarian, anarchist or cypherpunk) and has 2 major selling propositions:
- No fees. This has potentially mainstream appeal. If you sell a product with a thin margin, the e-commerce fees matter a lot.
- No censorship. Nobody can say whether a product/service should be banned. This is a key selling point on the Dark Web.
You need to be crazy or brilliant to compete with Jeff Bezos.
The opening chapter of Part 2 of this book describes Blockchain’s Creative Destruction 7 Act Play. E-commerce is Act 7 of the last wave, which becomes Act 1 of the next wave:
Act 7.The new old guard dominates
Many entrepreneurs make the mistake of seeing how quickly the new guard arose and think that they can also be deposed quickly. The entrepreneurs who made it to this stage will be tenacious, paranoid and really hard to beat – until the next wave comes along. For example, in the Centralized Internet era we have GAFA (Google, Apple Facebook, Amazon) and BAT (Baidu Alibaba TenCent) who deposed their analog competitors and will dominate until the Decentralized Internet gets to prime time. Until that happens, don’t bet against GAFA and BAT.
Act 1. The Old Guard Dominate
This is when a few big companies dominate a market that has not fundamentally changed for decades (or hundreds of years in some cases such as banking). Mergers, debt leveraged acquisitions and “roll-ups” and more recently digital monopolies based on network effects have locked the old guard into behemoth structures. No entrepreneur would think of competing against these companies and, if they did, no investor would back them.
TL/DR: if you want to compete against Amazon, forget about raising VC money. The good news is VC is no longer operating the only toll booth as described in the chapter on Why The Blockchain Economy Won’t Be Financed By Ye Olde Artisanal VC Funds.
The Dark Web and mainstream are very different markets
The two key features of the decentralised marketplaces appeal to totally different types of customer:
- No fees has mainstream appeal, but is only a nice to have for the Dark Web. If you want to buy a product that is illegal,you can live with high fees, it is the access that matters.
- No censorship is a must-have for the Dark Web, but nobody else cares. Customers on the Dark Web want a market like Silk Road that cannot be shut down – and Bitcoin shows this is possible. However, this is totally irrelevant if you simply want a legal product at a good price (aka mainstream).
The Dark Web may move to privacy-centric coins or to TOR (as described in this chapter).
Decentralized exchanges for cryptocurrency trading aka DEX may point the way
There is one market where decentralized marketplaces are gaining traction today. These are the decentralized exchanges aka DEX that are used for trading cryptocurrency assets.
The reason why decentralized marketplaces are gaining traction today for trading cryptocurrency assets is simple – centralised exchanges are often hacked (think MTGox and many others). To avoid having your money hacked/stolen, you want to control your own assets. For physical goods, that is not a problem today, because you control the warehouse. It is only hackable if it is a digital product. A cryptocurrency is only one type of digital product. This points to to a possible route to the mainstream for decentralized marketplaces for digital products where the ownership can be easily stolen – think any creative work, code, research etc.
Particl wins the decentralized purity award but will mainstream care?
Open Bazaar was the first to create a zero fee decentralized marketplace. Daily Fintech covered them in January 2016 when they were coming to market having raised VC funding. Traction has been weak.
There have been other attempts such as Syscoin, BitBay, Citify and NXT,
A more recent entrant is Particl. This is more radical because it is community funded rather than VC funded, via a Token that gets used in the marketplace.
Particl is still at the Alpha test stage. This is very early bleeding edge technology. It is unclear where or if it will get traction.
My thesis, based on some time living in India, is that some form of zero fee decentralized market may get traction first in India.
Could decentralised markets happen first in India?
The 3 reasons why India could be ground zero for decentralized marketplaces:
- Lots of tiny merchants that are very price sensitive. These road side stands, called kuranas in India, are like a decentralised Walmart (hyper efficient at a systematic level).
- A billion plus consumers who are price sensitive. For the 600 million underbanked (aka “the next billion” or “the on ramp to the middle class”), low price is essential. However this also applies to the relatively affluent urban middle class; Indians love to bargain, it is part of Indian culture.
- A market where payments is being systematically commoditised. This is happening through “the India stack” (with the 1 billion on Aardhaar being the most critical component)
The real battle is in payments.
Ecommerce and sharing economy services are really payment systems with a domain specific wrapper. They work for both parties in the transaction (buyer and seller) because payment is so easy.
When cryptocurrency based payment systems bring near-zero instant payments globally, decentralised markets will happen. We are at the very early stages of this one.
Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).