Democratizing the Platform Economy: The Quiet Revolution Through Blockchain

Blockchain – a bursting bubble or disruptive transformation? The Internet has created digital marketplaces that efficiently bring supply and demand together. The success of tech giants such as Google, Apple, Facebook, and Amazon, but also Tencent and Alibaba, can be largely explained by their two-sided digital marketplaces and the resulting platform economy. The platform companies seem to be growing inexorably due to the increasing marginal utility of their marketplaces. However, the development of distributed ledger technologies (DLTs) such as blockchain is now putting the tech giants themselves under pressure. DLTs connect the market participants directly and thus circumvent the platform company as an intermediary while also avoiding their excessive transaction fees. The winners are the directly value-creating parties.

Blockchain mainly became known through Bitcoin with all its ups and downs. Over the past few years, initial coin offerings (ICOs) created another wave of attention. But while media perceptions follow the trend, the true revolution usually takes place in secret. The establishment of the Internet was also initially characterized by short-term, speculation-driven overcapitalization before the sustainable implementation of the new technology and a lasting change in competition produced companies such as Google, Amazon, Facebook, and Alibaba. This article discusses how the platform economy can be disrupted by DLTs.

The platform economy is based on the establishment of digital two-sided marketplaces. As an intermediary, a platform company connects two market participants. For Uber, these are, for example, drivers and passengers. The platform operator receives a transaction fee for matching the two market players. Central to the success of platform companies is the growing marginal utility of a network: the more drivers register for Uber, the more attractive the platform is for passengers. More passengers, in turn, attract more drivers. The network effects described here lead to transparency and reduced transaction costs. At the same time, however, these lock-in effects also lead to a growing dependence of marketplace participants on the marketplace itself. If platforms such as Uber, Booking.com or Airbnb reach the critical mass of marketplace participants, quasi-monopolistic market situations arise allowing platform operators to push through ever-higher transaction fees. For example, Uber currently receives up to 28.5 percent of the fares solely for providing its platform in Berlin.

Decentralized platforms bring fairness

The most important functions of central platforms include the validation and execution of transactions, the secure record-keeping of the transactions carried out, and the maintenance and further development of the platform. By using DLTs, these processes can be performed in an automated and distributed manner by the platform network itself. The consequences are revolutionary: the previous platform company is bypassed, and its platform business model becomes obsolete. Economically, a redistribution is taking place in favor of directly value-creating companies. What would a decentralized Uber look like? The decentralized app (DApp) connects drivers and passengers directly with each other, without the need for an intermediary. Matching continues to take place via a central marketplace and thus retains the positive marketplace effects – albeit operated on the basis of a now decentralized platform. The high transaction fees, which were previously paid to Uber as the sole intermediary, will now be shared between suppliers, customers, and other value-adding network participants.

Disintermediation requires companies to rethink their business model logic

The advantages of DLT-based decentralized platforms are obvious: connecting companies and customers directly creates a much closer customer relationship, the data sovereignty of the platform company is eliminated and the dependency on the previous platform company is finally resolved. An example of this is the cooperation between the Lufthansa Group, Air France/KLM, Air New Zealand, Nordic Choice Hotels and the decentralized travel platform Winding Tree, which is based on open source software. Winding Tree eliminates intermediaries such as Amadeus – and thus their influence on the airline and  hotel industries. Transaction fees will be lowered, reducing costs for directly value-adding companies such as Lufthansa and SWISS. This is also of interest to customers, as some of the savings can be passed on to them. The underlying concept here is to achieve a standardization through open source infrastructure, on the basis of which the marketplace is then established with its products and services. Participating companies can obtain a knowledge and technology advantage through their involvement in the development of the decentralized platform as a new standard and thus gain a competitive advantage.

Many companies today are trying to set up their own centralized platforms. However, only very few projects really succeed in the long-term. “The winner takes it all” – the nature of network effects allows only a few dominant marketplaces. For example, Amazon orchestrates the majority of the European Internet trade today with a share of almost 49 percent. As a reminder, the platform operates the marketplace. A central, dominant marketplace reduces transaction costs and creates transparency about supply and demand making it greatly desirable. With a decentralized platform, however, the mechanisms of its operation are democratized, so that ownership and voting rights are distributed among all network participants. For companies, it can be an enormous advantage if transactions are carried out securely, automatically and decentralized by technology. Eventually, clearly regulated data management processes regarding ownership and use, closer customer relationships, complexity reductions and efficiency increases of the market mechanisms become possible. If all of this is achieved, the true revolution will quietly take place behind the loud hype around blockchain. The opportunities are manifold and here, too, the motto is: “Think big, start small”.