the great evolution of the marketplace

As the digital economy continues to mature, we are seeing major innovations in how humans connect and work together. One of the biggest tools for this has been software-powered marketplaces; platforms that brought together networks of users to transact.

These platforms have enabled an entirely new level of global connectedness and commerce, but face major challenges.

The chicken and egg problem causes poor user experience and pushes users to other marketplaces. When marketplaces fail to have a sufficient amount of users on both sides of the market, users are forced to create accounts on multiple marketplaces. This is referred to as “multi-homing” — a well-known phenomenon, especially on ride-sharing platforms like Uber and Lyft where drivers can’t find enough work on one platform alone.

These networks rely heavily on user reputation to make their marketplaces work. Unfortunately, users are never able to have full transparency on reputation due to it being fragmented across any number of marketplaces that users interact with. As Olaf Carlson-Wee, founder of Polychain Capital, put it “You can’t see your Uber driver’s reputation on Airbnb.” Furthermore, you can’t see your Upwork freelancer’s reputation they’ve built on Freelancer.com. This lack of transparency causes reduced efficiency in finding the best match for skilled work marketplaces and can worsen predatory behavior on all marketplaces.

Finally, these networks are built on principles of the past decade; platforms own, monetize, and control all user content. Governments like The State of California and the EU have passed laws like GDPR to try and give users more control over their data. There is a huge movement in social media to provide users with custody over their own data (and new monetization routes because of this). In contrast to social data, work history is one of the most valuable tools we have to ensure our earning ability. Having this data held captive by centralized marketplaces is a frog in boiling water, especially as more widespread geographic restrictions devastate livelihoods.

The way labor marketplaces do business hasn’t changed significantly since the launch of Elance in 1998.

But that’s changing.

Three key trends are driving an evolution in labor marketplaces; providing users with a better experience, lowering barriers to entry, and increasing efficiency:

Unbundling: the process of breaking down large, monolithic platforms into smaller, more specialized ones. Market networks: systems that combine the main elements of both networks and marketplaces; identity/reputation and multi-party transactions. Crypto-economic user-owned networks: networks that are owned and governed by their users. These trends unite to help a new type of marketplace take shape, one that is fueled by interoperable protocols, allows users to own their own data, and transact with counterparties across many other marketplaces at once.

In this piece, we’ll explore each of these trends and how they are creating a paradigm shift in the way humans work together.

Unbundling: The Niche-ing of Marketplaces Unbundling is not a new trend. Since 1995, Craigslist has been a go-to site for a wide range of services, making it a one-stop shop for many people. However, in the past decade, Craigslist has faced competition from newer, more specialized platforms that focus on specific aspects of what Craigslist offers. For example, Airbnb, Toptal, and Tinder are platforms that have emerged as alternatives to Craigslist’s housing, short-term work, and personal sections, respectively. These newer platforms have “unbundled” Craigslist’s services, offering a more focused experience for users looking to buy or sell specific types of items or services.

Even recently, we’ve seen platforms that seemed like Glovo, a food delivery app, that seemed very “niche” a few years ago face competition targeting an even smaller niche; for example, Mamafood, an app founded in 2021, is connecting hungry patrons with mothers who prepare home-cooked meals.

The curious thing about unbundling is that the platforms that specialize are able to better serve their niche market and therefore expand the Total Accessible Market (TAM) for that type of service. Craigslist’s valuation is estimated to be around $3B based on 2022 revenue numbers. Craigslist, while it has a larger portfolio of services, wasn't able to serve the niche of short-term rentals as effectively as Airbnb. As a consequence, even though Airbnb is serving a smaller niche, Airbnb is worth $113B as of 2021.

According to a study by the Harvard Business Review, this trend is already well underway, with many large platforms such as Google and Amazon breaking down into smaller, more specialized services. This study found that over 70% of large platforms have already begun this process of unbundling.

One trend that has sped up unbundling is the lowering of technological barriers to creating marketplaces. For example, the creation of Shopify created an entirely new market for e-commerce store operations because it was now possible for virtually anyone with minimal technical knowledge to create one of these businesses. Now, niche online e-commerce sites give Amazon a run for its money; while it may sometimes seem like a monopoly, Amazon controlled only 15.3 percent of all US e-commerce in 2021.

Market Networks: Reputation + Connectivity Another trend that is contributing to the rise of a new breed of labor marketplaces is the emergence of market networks.

According to NFX, a leader in network effects research and experienced marketplace investor, “Marketplaces provide transactions among multiple buyers and multiple sellers — think Poshmark, e-Bay, Uber, Patreon. Networks provide profiles that project a person’s identity and lets them communicate in a 360-degree pattern with other people in the network. Market networks combine the main elements of both networks and marketplaces, use software to focus action around long-term projects and not just quick transactions, and promote the service provider as a differentiated individual (less fungible).”

According to a survey by their team, over 80% of market network users reported increased satisfaction with their buying and selling experiences on these platforms compared to traditional marketplaces.

As we become more specialized in our work, market networks become an essential tool for helping skilled workers find opportunities.

Crypto-Economic User-Owned Networks Blockchain technology is about a whole lot more than “decentralized finance”. Blockchain is a new tool for social coordination and collective ownership; all managed in a decentralized way, without intermediaries.

Decentralization refers to the idea that a network or system is not controlled by a single entity (i.e. Upwork, Uber, Postmates), but rather is owned and governed by its users.

In the case of user-owned crypto networks, this means that the network is not owned by a single company or organization, but rather is owned and controlled by the users who hold the network’s underlying cryptocurrency of the network.

This type of decentralized network allows for greater transparency and accountability, as the network’s operations are visible to all users. This can help to build trust among users, as they can see that the network is being run fairly and in accordance with its underlying rules.

This type of user-owned network can live forever, outside of the control of any one intermediary. This revolution is explained well in Jacob Horne’s Hyperstructures Thesis.

Most importantly, crypto-economic networks provide built-in incentives for participation and share upside in the network’s success. This completely changes the dynamics between users, platforms, and the networks they are built upon. Network bonding theory explains this phenomenon.

When Three Trends Collide These trends unite to help a new type of marketplace take shape, one that is fueled by interoperable protocols, allows users to own their own data, and transact with counterparties across many other marketplaces at once.

It is becoming increasingly clear that the transition is not only possible but inevitable.

User-Owned Market Networks Grow Faster Research by NFX found that market networks that are user-owned are better able to grow and maintain network effects. This is because user-owned networks align the incentives of users and the network itself, leading to more active participation and engagement. In fact, user-owned networks were found to have an average growth rate of 30% per month, compared to just 15% for traditional marketplaces.

Crypto Incentives Counter The Cold Start Problem Metcalfe’s Law states that the value of a network is proportional to the square of the number of users on the network. This means that as a network grows, its value increases exponentially. For example, if a network has 10 users, its value is 100 (10²). If the number of users doubles to 20, the value increases to 400 (20²). This is why network effects are so important for marketplaces, as they can lead to a virtuous cycle where more users lead to more value, which in turn attracts even more users.

However, achieving and maintaining network effects can be difficult, especially in the early stages of a marketplace. This is known as the “cold start problem,” and it refers to the challenge of getting a marketplace off the ground and attracting enough users to create value. As Andrew Chen writes in his book The Cold Start Problem, “the hardest part about marketplaces is getting them started.”

Open Protocols Separate The Platform From The Network As Andrew Chen describes, platforms and networks are two separate things, but they are often used together in the context of online services and applications.

A platform is a technology or set of technologies that provides the underlying infrastructure for a particular service or application. For example, a social media platform might provide the infrastructure for users to create and share content, connect with other users, and engage with the content shared by others.

A network, on the other hand, is a group of interconnected people, devices, or other entities that can communicate and exchange information with each other. For example, a social media network is a group of people who are connected to each other via a social media platform, and can share content, messages, and other information with each other.

Over the past decade, we’ve come to conflate these two distinct things, but the dawn of blockchain tech has started to change that.

Uniswap for example provides one open and composable protocol that pools liquidity for trading pairs. This provides more efficient trading for users. Uniswap is a base-layer protocol that many thousands of applications can interface with to create the user experiences they desire. Much of the time, users of third-party platforms integrating Uniswap don’t even know they are using Uniswap’s protocol.

The blockchain-based “networks” of the future will become as ubiquitous but nonetheless forgotten as SMTP is for email.

Open Protocols Empower Unbundling By lowering the barrier to entry for bootstrapping network effects (by being able to tap into shared liquidity of services and users) and by providing core tooling that replaces centralized backends, open market network protocols will empower a Cambrian Explosion of marketplaces being created.

No longer will building labor marketplaces be something that only a Silicon-Valley backed startup can achieve.

Organizations like coding boot camps will be able to create platforms that serve their students, pulling in gigs sourced from platforms around the world and never worrying about “building up” the other side of their marketplace.

Entrepreneurs will be able to build geographically specialized, work type specialized, niche of niche platforms in record time.

A whole new generation of marketplaces will emerge, serving millions that were previously unservable by more un-specialized platforms.

The implications of this are enormous for human progress.

The Inevitable Evolution of The Marketplace The combination of unbundling, market networks, and crypto-powered user-owned networks is leading to a major transformation in the digital economy. These new forms of marketplaces are more user-friendly, align the incentives of users and the network, and are better able to sustain network effects. As more and more people adopt these new technologies, the old, monolithic marketplaces that exist today will be forced to adapt or die. The future of the digital economy is decentralized, user-owned, and built on the power of blockchain technology.

The implications of this transition are enormous. Not only will users have more control over their own data and transactions, but businesses will be able to operate more efficiently and with greater transparency. The rise of these new marketplaces will also bring about new opportunities for entrepreneurship and innovation, as anyone with a good idea and a blockchain-powered network will be able to create a marketplace and connect with buyers and sellers around the world.

This vision is not hypothetical. It’s here today.

There are a growing number of teams building this next generation of open, interoperable, market networks — my team is one of them.

TalentLayer is the open protocol for labor markets; a hyperstructure that pools liquidity for users, services, and offers ~ the core elements of labor transactions ~ across any number of integrated marketplaces, ride-sharing apps, freelancing platforms, and more. TalentLayer lowers the barrier for new marketplaces to be developed by providing shared network effects and by providing core tooling to go to market faster and with less investment.

Learn more about us here.

The way we work together is changing.

It’s changing for the better.

It’s just getting started.