clicks the checkout button, multiple systems (such as payment and credit-card networks) each charge a fee. Despite such payment, fraudulent transactions are not necessarily always eliminated. In a decentralized e-marketplace, traders transact with each other securely and directly, and the network of nodes validates and records each transaction. 3

Decentralized marketplaces using the blockchain as a foundational block are a viable alternative to firm-controlled marketplaces, yielding advantages from how decentralization supports marketplace functions, matching transaction support and institutional infrastructure. 1

 

Limitations of Firm-Controlled E-Marketplaces

Firms controlling e-commerce platforms support multiple networks, including customers, resellers, application developers, advertising partners, and financial intermediaries. Here, I address limitations with respect to firm-controlled marketplaces and the main marketplace functions. 1

Matching sellers and buyers. E-marketplaces thrive due to the network effects they facilitate when buyers, sellers, and third parties (such as resellers) trade with one another. Either a seller-driven (or marketplace-driven) promotion or customer-initiated search will facilitate matching. Buyers benefit because the marketplace reduces search costs. Sellers benefit because the marketplace offers product listings at no marginal cost and because of shared inventory and logistics costs. E-marketplaces facilitate reach (buyers can be located anywhere) and transaction immediacy (buyers/sellers can trade at any time). 22

E-marketplaces reduce search costs
for buyers by efficiently listing and re-
trieving goods and services in databas-
es. In addition to reducing such costs,
marketplaces increase revenue by en-
couraging consumption by altering
users’ purchase preferences through
product recommendations, bundling,
and other product (or service) machi-
nations. Likewise, B2B/B2C market-
places facilitate customer credit to
increase consumption. By providing
APIs, marketplace platforms facilitate
ease of integration with third-party
resellers or franchisees to further in-
crease a platform’s reach.

Matching characteristics of markets is not performed efficiently in today’s B2B/B2C marketplaces; for example, price changes facilitated by algorithms can make certain goods pricier online compared to similar offerings sold through conventional brick-and-mortar stores. Likewise, price matching offered by brick-and-mortar retailers negate the price-based advantages of e-marketplaces. The behaviors of sellers and buyers affect an individual firm’s decisions with respect to the marketplace and vice versa; for example, if firms controlling a marketplace decide to stop accepting certain payment methods, market participants would have to either alter their payment behaviors policies or stop transacting on the platform. If firms controlling the platform decide to provide differential pricing for similar products across customer segments based on profit-max-imization algorithms, traders would gain (or lose) the ability to buy (sell) from (in) markets where price is low (high). Consider how the taxi-ride-hail-ing service Uber uses proprietary algorithms to determine ridesharing prices that may not account for an individual driver’s actual profit margin. This has led to protests in cities with traditional taxi services drivers have found to not be profitable. 5 When network effects are disruptive to the market, a monopolistic firm that aims to maximize its own profit can try to alter participant behavior, without necessarily improving the efficiencies that might otherwise be realized in an e-marketplace. With Uber, though the rider (customer) benefits due to lower prices compared to a conventional taxi service, the drivers (service providers) would be worse off due to discounted pricing as determined by the platform.

Facilitating transactions. Facilitat-
ing transactions is what a marketplace
does to enable the exchange of value
between buyers and sellers. The buyer
pays the seller and the seller transfers
the physical good (or service) to the
buyer on the platform. A variable trans-
action cost is associated with each
transaction due to banks, credit insti-
tutions, logistics providers, and other
intermediaries. In most transactions, a
legal entity ensures transaction valida-
The blockchain supports several key
functions:

Distributed storage and listings. A
network of nodes lists items offered
through the marketplace by individual
businesses, eliminating single-point-
of-failure scenarios and preventing a
single controller firm from manipulat-
ing the shared central database;
Transactional validity. Fraudulent
and duplicate transactions are prevent-
ed through timestamp-based validation;
Transactional persistence. All trans-
actions concerning an asset or service
traded in the marketplace are stored on a
publicly accessible and verifiable ledger;
Transactional anonymity. The true
identity of marketplace participants
is hidden from other participants and
the network by allowing users to create
multiple wallets to be used on the net-
work for transactions; 18
Transactional privacy. Transaction
details are hidden from the network
(though the ledger is public) by the
blockchain automatically encrypting
transactions;
Transactional traceability. Each
transaction can be traced back to the
sender’s and the receiver’s true iden-
tities through a combination of tech-
niques (such as IP tracing and block-
chain graph analysis). 18 Traceability is
used by government regulators (or ana-
lysts) to detect theft, money laundering,
and other illegal activity on the net work,
and can be both computationally and
economically expensive, depending on
blockchain implementation; and
Transactional immediacy. A mecha-
nism built into the network consum-
mates each transaction in the shortest
possible time, with many implementa-
tions of the blockchain achieving instant
validation through “proof of service,” 4
“consensus,” 21 and “proof of stake.” 2

Most important, the blockchain eliminates the central authority needed to validate transactions, thus realizing many computational efficiencies; for example, transaction costs due to contract enforcement (such as following a sale) can be eliminated when the network validates the transaction. Likewise, the payment (good) transfer between buyer (seller) and seller (buyer) is recorded in a common, secure ledger. 7 To illustrate such efficiency, consider a conventional e-commerce store. When a buyer