What is a blockchain-based or decentralized marketplace?

The blockchain economy — the rapidly evolving ecosystem of cryptocurrencies and marketplaces associated with them — is defined by decentralization. At its very core is the drive to replace systems that rely on a central authority with systems that govern themselves, that derive their strength from sharing authority, and that respect individual privacy and freedom.

This driving force toward decentralization was what motivated the development of Bitcoin. And that same goal underpins the emergence of decentralized marketplaces — the blockchain economy.

To understand what it means to be a decentralized marketplace, it is simplest to begin with what it means to be centralized. A market or exchange is said to be centralized when all buyers and sellers transact in a single venue, like a trading floor, website, or exchange. All buyers & sellers can interact with all other buyers & sellers.

Benefits

The primary benefit of such a market structure for users is convenience. There is a single place to submit orders, a single order book and a single price. This pools liquidity in one market, reducing search and transaction costs. And it promotes price discovery, with new information quickly captured in the market price. Usability and efficiency is at the core of the model. But this comes at a hefty cost.

First, there is typically a loss of privacy. Users must relinquish personal information to be granted access to the market. This information is retained by the central entity that hosts the market. Second, there is a loss of control. Users’ funds are held in a central repository. The entity controlling that repository has ultimate control of them. Third, there is a loss of security. Centralized systems are exposed to technical faults with critical infrastructure. They are also especially vulnerable to attack, offering clear targets for those who might seek to disrupt a market or to steal users’ funds or personal data.

Decentralized, marketplaces seek to overcome these problems, restoring primacy to the core principles of individual control, privacy and security, while at the same time retaining the desirable, liquidity enhancing, characteristics of centralized markets. They achieve this by replacing the centrally hosted venue with a virtual one, built on peer-to-peer interactions, that provides access to the same, shared, order book, but over a decentralized network.

There is no mandatory requirement to provide personal data to create an account or information that needs to be stored on a central server. Users maintain complete control over their own funds, without having to relinquish that to a central authority to facilitate use of their services. Users’ freedom & privacy are respected. (And there are often — although not always — no fees.)

Moreover, a decentralized network is not regulated by a single business or government agency with motivations that may or may not be aligned with those of users. Rather, it is operated by the people, for the people. Eliminating central oversight gives participants much greater freedom and scope to govern themselves.

 

Decentralization

Decentralization also makes the market highly resilient. Blockchain-based marketplaces operate on their own encrypted platforms hosted across a network of computers. There is no single point of attack which could cause the whole network to be compromised and no central database that can be corrupted or fraudulently altered.

Cryptobridge, Blocknet, Komodo BarterDEX are three examples of the new breed of so-called decentralized exchanges, or ‘DEX’s. At present, the decentralization of these exchanges does tend to make them a little slower to match orders, compared to those with a centrally maintained order book. But progress is being made to improve the speed of these platforms.

Alongside currency exchanges is a class of decentralized marketplaces that seek to serve the needs of individuals and businesses seeking to buy & sell goods & services on the ‘real’ side of the cryptoeconomy. Of these, there are currently few working examples of decentralized markets. Most are hybrids that exhibit a degree of centralization. But there is one notable exception: BitBay, which at present is the primary, perhaps sole, example of a truly fully decentralized marketplace.

The Bitbay client enables sellers to list goods or services for sale, just as they do on other popular e-commerce auction sites. Users can also hold reverse auctions, in which sellers compete on price to be the supplier. And to ensure that participants act honestly, in the absence of central oversight, BitBay’s double-deposit escrow system eliminates incentives to cheat by making dishonest behaviours unprofitable.

Blockchain technology

Despite looking and functioning much like a conventional website-based marketplace, BitBay is, in fact, underpinned by blockchain technology & encrypted peer-to-peer communications. It is completely decentralized, with all of the upsides that come with it. Privacy, security and self-governance are paramount. As such, BitBay embodies what it means to be a truly free-market economy while at the same creating a secure environment for commerce to flourish without the need for unnecessary regulatory constraints or middlemen.

Alongside ‘traditional’ markets for goods & services, blockchain technology has opened the door to the development of innovative new marketplaces for all sorts of other things. For instance, there are decentralized blockchain-based markets that seek to create a sharing economy, which gives users access to common services, such as accommodation or transport, based on their respective contributions to the wider community. Other coins and tokens incentivise users to maintain distributed ledgers associated with the energy sector, medical records, diamond provenance, logistics and international remittances, to name a few.

The list of different types of economic activity and real-world problems being solved by the crypto-economy continues to grow. It remains to be seen how much further these decentralized markets will evolve, but they already point to a promising decentralized future, free from the weaknesses and abuses of centralized structures.

The blockchain economy is ultimately about individual freedom. At its most simple, it achieves this through the replacement of systems that rely on centralized hubs, with systems based on distributed networks. They are more democratic, more resilient and more secure. And they can achieve all of those things without sacrificing the benefits of centralization — namely, liquidity and price efficiency. As such, blockchain-based marketplaces offer us the possibility of new, better and fairer, ways to organise the economy we share.

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