Review: Decentralized Blockchain-Based Electronic Marketplaces [Communications of the ACM, January 2018] (Aside: Steem was mentioned!!!)

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In January's Communications of the ACM, Hemang Subramanian described many of the comparative advantages of decentralized block-chain based marketplaces over centralized, firm-controlled marketplaces. This article offers a review and summary of that pay-wall protected content.

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Review: Decentralized Blockchain-Based Electronic Marketplaces [Communications of the ACM, January 2018]

Introduction

Image Source: pixabay.com, License: CC0, Public Domain

In the January, 2018 issue of Communications of the ACM is the article Decentralized Blockchain-Based Electronic Marketplaces. This article, by Hemang Subramanian describes the use of blockchain to reduce the requirement for intermediaries in electronic marketplaces.

Subramanian is an Assistant Professor in the Department of Information Systems and Business Analytics in Florida International University's College of Business.

Unfortunately, it seems to be behind a pay-wall, but the article receives cursory coverage in this Vimeo embed:

Decentralized Blockchain-Based Electronic Marketplaces from CACM on Vimeo.

And suggests these "key insights:"

• Decentralization alters the paradigms of firm-controlled marketplaces by providing security, trust, privacy, lower transaction costs, and transaction integrity.
• Blockchain-based marketplaces improve matching, transaction, facilitation, and support for institutional infrastructure.
• Blockchain-based e-marketplaces open new frontiers in prediction markets, financial engineering, automated reasoning systems, and smart-contracts-based systems.

The article contains four central themes: (i) Background Information; (ii) Limitations of firm-controlled marketplaces; (iii) Advantages of decentralized market places; and (iv) Conclusion. This review article will cover the same themes.

Of particular interest to readers on this site, Steem is mentioned twice in the article. I don't know for certain, but this may be the first time that Steem has been mentioned in Communications of the ACM.

Here are some of the highlights from each of the sections, followed by my own discussion.

Section 1: Background information

In the opening section, the article introduces blockchain as an alternative to the "firm-controlled marketplace." In establishing this paradigm, Subramanian suggests and describes the following functions that can be fulfilled by a blockchain architecture:

• Distributed storage and listings
• Transactional validity
• Transactional persistence
• Transactional anonymity
• Transactional privacy
• Transactional traceability
• Transansactional immediacy

And it notes that blockchain's most important function is that it eliminates the need for a central authority to validate transactions. This section concludes by saying:

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.

Section 2: Limitations of Firm-Controlled E-Marketplaces

The limitations described are grouped in four sections: "Matching sellers and buyers," "Facilitating transactions," "Facilitating institutional infrastructure," and "Multilayered platform."

In the sub-section on sellers and buyers, Subramanian points out that markets thrive because of the network effects that are created when buyers, sellers, and third parties are linked together. This reduces search costs, increases revenue, and encourages consumption through strategies like bundling and product recommendations. However, Subramanian argues that this is not done efficiently in B2B or B2C (Business to Business or Business to Consumer) marketplaces. The fundamental limitation of centralized, or firm-controlled, marketplaces is described in this excerpt: "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."

The following sub-section on facilitating transactions examines this further, discussing how trusted intermediaries in centralized marketplaces add friction to buying and selling by inserting their own transaction costs. Importantly, it also notes that "Every marketplace (such as Amazon, eBay, Sony, and Target) in recent years has been targeted by at least one attack involving loss of information." Finally, international regulatory and legal regimes pose a major obstacle to trade across national borders.

In the next sub-section, on facilitating institutional infrastructure the author veers off course a bit. He does point out limitations including increased transaction costs for creating and renegotiating contracts, which precludes support for agile project management, but then he ventures away from limitations into blockchain examples that mitigate those limitations. Examples include Ethereum, Lazooz, and OpenBazaar. It is interesting reading, but is not necessarily consistent with the section heading.

The final sub-section doesn't actually describe any limitations at all, but segways into the next major section by introducing a layered description of a multilayered blockchain decentralized market place. This is summarized in the article's Figure 1 and Figure 2.

Layers are listed as follows:

• Layer 5: Quality of Service
• Layer 4: Decentralized Applications
• Layer 3: Blockchain
• Layer 2: Mining Software
• Layer 1: Network Infrastructure

Section 3: Advantages of decentralized market places

As with the previous section, this section is divided into subsections, which include: "Matching buyers and sellers," "Transactions," and "Institutional infrastructure."

In the subsection on matching buyers and sellers, it is noted that decentralized markets are superior in terms of privacy and security, and they naturally facilitate trust among participants.

The subsection on transactions claims that transaction costs are minimized by decentralized markets because intermediate parties are shut out of the transactions. It further claims that incentives for cyberattacks are reduced by transactional privacy and anonymity, and that decentralized electronic markets make micro-transactions possible. Finally, the section sort-of contradicts itself when it notes that returning goods and payments is facilitated by brokers (thus reintroducing third parties) with measures like notarization, arbitration, mediation, and multi-signature contracts.

Finally, the subsection on institutional infrastructure notes that the decentralized marketplace makes it possible to facilitate contracts with fully-automated, partially-automated, or manual enforcement. It also provides a table comparing the Blockchain-Based Decentralized Marketplace with the Traditional E-Marketplace with respect to four characteristics: Trust through Contract enforcement, transaction time, value, and privacy/security.

The table shows the following:

• In a decentralized network, contract enforcement can be done automatically by the network, whereas it requires a third party in the traditional marketplace.
• Transactions can be fast or instantaneous in a decentralized network, but happen slowly with issuance of a promissory note, letter of credit, or other centralized transaction.
• Blockchain networks can reward participants where traditional centralized solutions charge fees.
• Privacy and security can be enhanced by blockchain/decentralized solutions, but follow a weakest link model in centralized solutions.

Section 4: Conclusion

The article's conclusion may be of particular interest to Steem-holders as this is where Steem gets its mentions. The conclusion restates the findings of the previous section that blockchain-based decentralization is superior to centralized models in many ways, but it also notes that not all uses are appropriate for decentralization. It argues that physical products like Amazon and Overstock are only partially suited to decentralization whereas other uses such as: "digital products", "user-generated content", "prediction markets", "crowdfunding" and "currency exchanges" are "Very likely" to be suited for decentralization.

In Table 2, the article lists example cryptocurrencies that could suit these purposes, as follows:

• Physical products: Bitcoin, Dash, Ethereum, Monero
• Digital Products: Bitcoin, Dash, Ethereum
• User-generated content: Bitcoin, Ethereum, Steem
• Prediction Markets: Augur, Bitcoin, Ethereum, Truthcoin
• Crowdfunding: Bitcoind (sic), Dash, Ethereum, Zooz
• Currency Exchanges: Bitcoin, Dash, Ethereum, and Ripple

Note that "Steem" under bullet 3. The second Steem mention, follows immediately after the table, where it says:

Decentralization is used to create a social network (such as Steem) in which content creators are identified, recognized, and rewarded.

Following that, a number of other examples are given to support other examples in the table, then the article concludes with the following sentence:

By facilitating key marketplace functions, decentralization will, if successful, complement and rival traditional conventional e-marketplaces.

Discussion

If you can get past the pay-wall, I definitely recommend reading the entire article. If not, at least the video is worth watching, and I hope I've given the flavor of it here. The author has done a nice job detailing and contrasting the centralized and decentralized market paradigms, and made a compelling case for decentralization. I also thought the description of the multi-layered architecture provided a useful model for understanding.

Even though I agree with the article, I would still have liked to see the author do more to also recognize an opposing view. In my opinion, it was a little too much of a "cheer-leading" piece for a scientific article. For example, when the author talked about the decentralized model's ability to cross boundaries, he could have mentioned the problems that this creates for law enforcement and regulators, and when he mentioned anonymity, he could discuss the problems that it might create for things like copyright enforcement. Additionally, I would have liked to see Steem mentioned in every single row of Table 2. The author doesn't seem to have a full appreciation of Steem's capabilities, which makes me wonder about his depth of knowledge with the other cryptocurrencies, with which I am less familiar.

Those nit-picks aside, however, I still thought it was an excellent article and recommend reading it if you can gain access to it.

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As a general rule, I up-vote comments that demonstrate "proof of reading".

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Thank you for your time and attention.

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Steve Palmer is an IT professional with three decades of professional experience in data communications and information systems. He holds a bachelor's degree in mathematics, a master's degree in computer science, and a master's degree in information systems and technology management. He has been awarded 3 US patents.

Steve is a co-founder of the Steemit's Best Classical Music Facebook page, and the @classical-music steemit curation account.

Follow: @remlaps

RSS for @remlaps, courtesy of streemian.com.

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