Web3 Is A Threat To Platform Companies
From Amazon to Google, platform companies create value by connecting buyers and sellers to reduce coordination costs, collect and monetize customer data, and charge a commission on consummated transactions. This capital-efficient business model has made platform companies among the most valuable in the world, disrupting incumbents in almost every region and industry. However, a combination of technologies – including blockchain, smart contracts, artificial intelligence (AI), and decentralized autonomous organizations (DAOs), collectively known as Web3 – could perform these functions even more efficiently at a fraction of the price. This development could threaten the growth and even existence of many platform companies and radically alter the dynamics of the industries they so recently disrupted.
Business models for online multi-sided marketplaces have propelled companies like Alibaba, Amazon, AirBnb, Facebook, Google, Microsoft, Uber, and others to explosive growth around the globe. According to the World Economic Forum, platform business models account for 30% of global economic activity. A platform is a marketplace where producers and consumers come together to interact and transact. Companies that host platform marketplaces create value by matching and connecting these external groups, reducing coordination and transaction costs for buyers and sellers. Most platforms capture some of that value by charging a commission on transactions consummated on the platform. These are often levied as either a flat fee or a percentage of the transaction and can reach sizable sums. For example, Uber charges 25% and Airbnb charges 6% on top of the price of their services.
In Web2, information is stored in databases that someone owns and controls. You own the data on your own computer. Your credit card company owns the records of your transactions and controls your access to its credit. Google owns your search history (and lots of other data from its Gmail, Drive, Maps, and dozens of other popular solutions) and controls what you see when you ask for search results. The ownership and control of this data are the mechanisms by which these companies can improve the unique value that they deliver.
Instead of being housed in databases under centralized control, the Web3 technology of blockchain stores data in a distributed ledger of information that is shared and synchronized across a multitude of users. In operational terms, copies of each user’s data are replicated and stored on thousands of computers across the internet. No one person or company owns or controls the data. Any changes or updates to the data are synchronized across users once it is verified that any new transactions add to but do not otherwise modify the history of transactions recorded on the ledger. There is not one blockchain, but thousands of them, each developed to support different services or utilities.
The blockchain’s most original and most famous implementation is Bitcoin, a cryptocurrency that acts as a store of value and medium of exchange. Despite its fame (or infamy), Bitcoin is only a single instance of the blockchain concept that by no means represents the full scope of the technology’s utility.
A traditional contract is an agreement that is supported by the legal structures of a central authority. That authority can be a government with the power to coerce adherence, such as a nation’s courts and government. Or it can be a company that sets the rules for an interaction that leads to an exchange of value. For example, Uber declares the conditions under which a rider will be charged and under which a driver will receive payment. It creates, adjudicates and enforces its own rules. The company can hold the funds in escrow or employ yet another entity to perform this service.
Web3 has its own decentralized analogy, called a smart contract whereby the users declare what they seek and the conditions under which their desires would be considered fulfilled. A computer algorithm determines when these parameters are met and therefore when it can transfer funds. Initiation of the smart contract is voluntary by all parties; there is no adjudication or coercion. Indeed, there is no central authority whatsoever. As a result, the ease of initiating and the costs of enforcing this contract are low.
Decentralized Autonomous Organizations (DAOs)
Together, these two concepts – blockchain and smart contracts – enable a new kind of entity: a decentralized autonomous organization (DAO). Once humans set the rules and codify them into algorithms for smart contracts and blockchain validation, the DAO operates without any human guidance or intervention to perform valuable economic functions. Artificial intelligence bots like ChatGPT can optimize the DAO’s ability to match buyers and sellers. For example, the DAO called Blockchain Based Ride (B-Ride) can offer the same functionality as Uber without the 25% commission.
Despite their technical potential, DAOs are not yet a threat to centralized platform companies for several reasons. First, as with all other services, platforms must make potential customers aware of their existence with a go-to-market strategy. This typically requires an investment of labor and financial resources. A platform company secures the latter to purchase the former by selling shares of ownership in the company. In contrast, an automated platform has no ownership and thus no means to raise these initial funds. Absent a groundswell of word-of-mouth support, automated platforms might thus struggle to gain initial momentum.
Second, platform companies already have established, wide-spread networks of buyer and sellers. The first buyers and sellers in a DAO are unlikely to have an acceptable match of services, and thus unlikely to consummate a transaction and deliver any value to early participants, regardless of the low commission rate. Similarly, new DAOs will not have any of the ratings and reviews that give confidence to buyers and sellers about the services being considered for exchange.
Finally, many platform companies have used their initial success, brand awareness, customer data, early cash flows and human ingenuity to fund radical innovations that have spawned entirely new platforms. For example, Amazon commercialized its own data infrastructure as Amazon Web Services (AWS). Facebook (now a part of Meta) purchased Oculus to begin a transition into virtual reality. People within these companies exercise creativity to consider new potential platform services and features, selection to determine which of these new ideas merits further consideration based on both evidence and their analogous experiences, and social connections to help people in the company transform the service. To date, artificial intelligence cannot readily perform these functions since they rely on several human cognitive functions, including the ability to make trade-offs and to prioritize multiple incommensurate options under conditions of uncertainty. A DAO’s value is most precarious when the environment necessitates rapid changes in the goal, algorithms or audience. Rapid innovation therefore seems more likely to occur in company-controlled platforms than in DAO-enabled platforms. In turbulent conditions, this power would help platform companies retain advantages over slower-moving DAOs.
Implications for Platform Entrepreneurs
This article has described two extremes of platform models: monopolistic rent-seeking platform companies with high commissions on the one hand and automated distributed platforms that use open source blockchain and smart contracts to offer free transactions with no hidden costs or motives on the other hand.
An evolution from the first to the second might engender hybrid companies that use some of the two technologies to reduce operational costs and empower consumer innovation, but still maintain some intermediary function and power, including the ability to charge a moderate commission. This hybrid step offers perceptive entrepreneurs a market opportunity and a platform business model that still identifies and targets buyers (producers) and consumers (sellers) with a mediated role in facilitating interactions.
At the very least, entrepreneurs currently designing new company-mediated platforms should include elements and strategies that protect against a proliferation of DAOs. This should include the ability to adapt the company’s marketing campaigns and facilitation tools rapidly to find market spaces where DAOs have yet to tread. The entrepreneur’s ability to innovate quickly in response to market and customer changes may be a key resource that allows company-mediated platforms to survive against DAOs.