Beyond Blockchain Marketplaces

Marketplaces are places where people gather to trade. In ancient times, marketplaces were physical locations where traders met to exchange valuable goods like silk or tea. In recent times, many marketplaces are online marketplaces like Amazon or App Store. As marketplaces have existed for a long time, it might seem logical that they should exist in Web3.

So why should marketplaces exist in Web3?

Let’s explore what a marketplace means as a concept. Market refers to all buyers and sellers of a good or service considered together. Place means a physical or virtual place where buyers and sellers meet. The concept of place implies uniqueness as there is a specific place where the trade takes place. Traditionally, once a buyer or seller comes to a place, they can’t simultaneously appear at a different place.

But Web3 marketplaces are not unique. Users can exchange NFTs through OpenSea, but NFTs are stored as code on a blockchain, not OpenSea’s database. The actual exchange place is the blockchain, a backend shared by all marketplaces. So OpenSea, a centralized marketplace, extracts a tax in the form of transaction fees from a fundamentally open-source transaction.

Many attempts to build a dominant blockchain marketplace include:

  1. Lowering marketplace fees compared to incumbents but keeping them greater than 0%

  2. A native token that accrues value through a claim on marketplace fees

However, both approaches are fundamentally misguided.

A reduction of marketplace fees merely represents an incremental improvement for users compared to Web2. As blockchains have no data lock-in, users will continuously flock to marketplaces with the lowest fees. The lowest possible fee is zero percent, representing a fundamental improvement in user experience over Web2 and providing a defensible, albeit non-extractive, marketplace position.

Native marketplace tokens provide users with ownership. And the argument goes – once users are owners, they become loyal and incentive-aligned marketplace participants who advocate for widespread network adoption. The problem is that rebates to tokens encourage wash trading and displace a marketplace’s potential product-market fit. When crypto prices decline, incumbent marketplaces with non-zero take rates and a preset maximum token supply have trouble bootstrapping the lost volume. Insurgent marketplaces with newly-issued tokens have a great shot at enticing user participation and ultimately unseating the incumbent’s network effects.

The Opportunity for Open Blockchain Marketplaces

Currently, every marketplace needs to build a unique backend for its needs in the form of smart contracts. Such a backend should be universally shared, as centralized liquidity makes for the best user experience.

Open blockchain marketplaces require:

  1. A data standard

  2. An immutable marketplace-like structure

Data standards create user trust and simplify the workings of a marketplace.

Immutable structures allow for composability, meaning anyone can leverage a permissionless building block to build more complex offerings upstream.

As the first example of open blockchain marketplaces, let’s consider NFTs. Open-source data standards already exist – Metaplex for Solana and ERC-721 for Ethereum. But an immutable, widely-adopted marketplace-like structure for trading NFTs does not yet exist. OpenSea can arbitrarily ban individual NFTs and users from transacting on its website. On Ethereum, Zora is building an immutable hyperstructure for NFTs, and SudoSwap is a decentralized, royalty-free NFT marketplace on Ethereum that is gaining traction. On Solana, Metaplex's Auction House protocol permits decentralized sales for NFTs, although most of Solana’s NFT volume flows through Magic Eden, a closed marketplace.

An open blockchain marketplace for NFTs would create a non-extractive and permissionless global liquidity pool that any marketplace can leverage. An immutable structure cannot turn its back on developers and extract value like Web2 companies. It can only cooperate and act as a building block for future development.

As a second example of open blockchain marketplaces, let’s consider freelance marketplaces. An on-chain data standard for freelance portfolios does not yet exist. Braintrust, the most popular crypto-native freelance marketplace, locks freelancers and employers into its platform by storing their data on a closed backend. So it is practically impossible to create a marketplace-like structure as there is no standard on which to transact. Hence, an open blockchain freelance marketplace requires on-chain credentialing, a non-trivial but solvable problem that suffers from the Standards Innovation Paradox.

Once on-chain credentialing is solved, a potential issue arises in the case of disputes between freelancers and companies. For instance, a company might claim that a freelancer’s work was not done to a stipulated standard. Dispute resolution requires intermediaries. So arbitration services (centralized or decentralized) will still exist. If an arbitration service behaves suboptimally – marketplace users will switch to a different arbitrator as all data is composable. A credibly neutral marketplace-like protocol would supercharge the freelancing industry.

Conclusion

Web2-like marketplaces are centralized and closed, while blockchains are decentralized and open. The extractive marketplace model is a skeuomorphic inheritance of Web2 that won’t survive given credible commitments and composability possible in blockchain systems.

Marketplaces are fundamentally about connecting buyers and sellers. Extractive marketplaces can’t endure in systems where assets are stored on open backends.

If an open backend standard doesn’t yet exist for a particular good or service, someone will create that standard, and a credibly neutral and non-extractive marketplace-like structure will commence.


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Note: this piece was originally published on Mirror.

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