Block by Block: Marketplaces

E-commerce has been a growing part of how businesses and consumers purchase products and services since the beginning of the consumer internet era in the mid-1990s. E-commerce now drives trillions of dollars worth of sales, and is still growing at double-digit percentages year over year. Startup brands are increasingly becoming digital-native verticals, selling their products exclusively online -- at least at first.

Leading the growth of e-commerce marketplaces are companies like Amazon, Alibaba, and eBay -- the American firms both more than 20 years old, and Alibaba closing in on that milestone. The services provided by these marketplaces are important: Connecting sellers and buyers worldwide through the internet has already had a lasting impact on consumer purchasing behaviors and how businesses operate. However, as commerce becomes increasingly digitized and consolidated — Amazon, Alibaba, and eBay account for 65% of cross-border e-commerce purchases — the risks of centralization becomes more apparent.

Where are the points of entry for decentralized marketplaces?

• Censorship: Centralized e-commerce marketplaces can dictate the rules on their platforms and can censor the sale of products and services at will. While centralized marketplaces typically ban the sale of items based on legality, there are many instances where bans are politically, morally, or competitively motivated. For instance, in 2014, Etsy banned the sale of products branded with the name and the logo of the Washington Redskins football team. In 2018, Amazon banned the sale of a guidebook for 3-D printing guns, citing content guidelines. Yet, the e-commerce giant continued to offer similar books like "The Anarchist’s Cookbook" on its platform.
• Restrictions: While product and services restrictions are often applied based on legality, many centralized marketplaces restrict the sale of products that are perfectly legal. For example, eBay prohibits the sales of partially-used cosmetics and used socks. Etsy bans magic spells and products associated with witchcraft.
• Data collection: Centralized marketplaces often collect data on their users to improve their competitive edge and operations. This becomes concerning when companies begin to abuse their data collection abilities. In 2016, Bloomberg reported that Amazon collected data on popular products sold by its merchant customers and then used that data to release competing products under its own brand — often underselling its merchants.
• Bots: Because account creation is free on centralized marketplaces, many marketplaces run the risk of Sybil attacks, the use of fake accounts to distort a rating system. The prevalence of review bots on Amazon has been well documented. These bots are operated by businesses that sell positive or negative reviews for specific products. Some Amazon merchants leverage these bot-review services to attack their competitors — leaving negative reviews on their product pages.
• High Fees: Because of the imbalance of power, centralized marketplaces often charge their sellers exorbitant fees to use their platforms. Some platforms like Walmart charges sellers up to 15% on certain items, while others like eBay charge multiple fees including listing, insertion, and referral fees. On Amazon, depending on whether the company stores and ships your product, there are also several layers of fees.

With the problems facing centralized marketplaces, how do decentralized marketplaces solve them?

• Censorship → Uncensorable: Decentralized marketplaces do not have central authorities that dictate rules and carry out bans. As such, sellers and buyers on decentralized marketplaces do not carry the risk of censorship. No entity can remove a listing from a decentralized marketplace or ban a particular merchant from selling products.
• Restrictions → Unrestricted: Due to their decentralized nature, there are no restrictions on products sold on decentralized marketplaces. For example, the sale of tobacco-related products is prohibited on marketplaces like Amazon and eBay. OpenBazaar, on the other hand, does not restrict or limit the sale of any products.
• Data collection → Data Privacy: On decentralized marketplaces, there are no central authorities that collect data from their users. In fact, many decentralized marketplaces actively encourage the use of privacy-enhancing features and tools like Tor and anonymous accounts.
• Bots → ~Bot-less: The threats from Sybil attacks are not entirely solved on decentralized marketplaces. However, many decentralized marketplaces attempt to make it difficult and uneconomical for bots to participate on the platform by requiring proof-of-work to create accounts or proof-of-burn to give reviews.
• High Fees → Fee-less: Decentralized marketplaces are by their nature non-profit entities. Apart from blockchain transaction fees, trades on decentralized marketplaces are free.

What are the barriers to entry?

• Trust: Decentralized marketplaces lack the brand and safety associated with trusted brands like Amazon and eBay. Similar to the early age of the internet, when consumers were nervous about using their credit cards online, decentralized marketplaces will struggle to build trust. Customer service, especially as it concerns defective items and/or returns, will be more difficult for many separate merchants to master.
• Adoption: A majority of consumers are currently happy with centralized marketplaces. Consumers consistently give Amazon top ranks in brand surveys. Decentralized marketplaces often promote themselves to merchants and sellers through low fees and limited restrictions. However, to get user adoption, decentralized marketplaces have to convince consumers that their platforms are better than centralized ones. The high friction user interface and user experience found in decentralized marketplaces will make them difficult for consumers to adopt.

Trade is an important part of how societies operate. Those that control trade, can actively shape the zeitgeist of society. As commerce continues to move online, the risk that a handful of companies can control how we buy and sell may push people to look for alternatives. Decentralized marketplaces are a possible alternative to the increasingly Amazonian e-commerce world. But as Amazon and Alibaba continue to take an even bigger share of all commerce, the challenge for upstarts only grows more daunting.