Web 3.0 Is Coming for the Sharing Economy

Financial services have tended to soak up all the attention in the world of blockchain, but a new era is coming. In the first wave of initial coin offerings, companies proposed decentralized alternatives to everything from consumer products to ride- and home-sharing services. Most of those proposed alternatives disappeared because the early concepts lacked an execution model, but the concept of decentralized products and services are sure to come back as the blockchain industry matures.

In my experience, participants in centralized digital markets, both buyers and sellers, are often unhappy with what is on offer. The most vocal dissidents tend to be the sellers in these markets who find their access to consumers is now mediated by immensely powerful marketplace operators. Not only do these commanding operators have far more analytics and insight into the market than they share, they have the power to change rules of the market whenever they want. This is on top of the sizable share of revenue they take for their services.

Paul Brody is EY's Global Blockchain leader.

I have noticed consumers are not always thrilled either. The low prices offered in the early days of ride-sharing and couch-surfing are gone. Like the sellers in the marketplace, many are not happy to find the rules are changing and the increasing fees are coming on both ends of the transaction.

As blockchain technology matures, it is increasingly possible to build competitive decentralized ecosystems that offer similar services. Companies are getting better at structuring decentralized markets, leveraging designs that reward consistency and quality, and infrastructure that can handle some level of decentralized dispute resolution.

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In other areas like decentralized computing infrastructure or financial services, a fairly typical business model is starting to emerge, where an open-source protocol is developed and a decentralized community takes over the long-term governance. A foundation or company is charged with doing the heavy work of maintaining and maturing the protocol in exchange for a sizable (but not dominant) chunk of the network governance and reward tokens.

This more mature decentralized approach balances the openness and transparency required to get buyers and sellers to join while putting enough incentive in the hands of a single entity to assure that someone takes a leadership position in maturing and shepherding the protocol forward. Companies like Aave, Compound Labs and SKALE Network are all deploying some variation of this model in finance. In my view, there is no reason why the same model could not be deployed for ride sharing or other services. These services have also put together all the infrastructure needed to support key activities like liquidity pooling and price discovery.

It will be the battle of Web 3.0 vs. Web 2.0.

When this new model comes to these sharing services, real-world, non-financial consumer services may face a much tougher fight than the decentralized finance (DeFi) community for a number of reasons. First and foremost, they are not going to market against a municipal taxi monopoly or regulated, century-old financial marketplace. They face relatively new digital natives. It will be the battle of Web 3.0 vs. Web 2.0.

Secondly, it would be useful for these emerging decentralized protocols to remember that, notwithstanding all the carping about these new “monopolies,” very few of them are actually profitable. Entrepreneur Jeff Bezos is famous for saying that “your margin is my opportunity” – but without margin there is no opportunity. From ride-sharing to meal delivery to couch surfing, profitability has been elusive for many of these companies. How do you unseat a “monopolist” who is still engaged in such brutal warfare with its own legacy competitors that they are not yet making money?

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Finally, the real world is exceptionally complicated. One of the things that has made DeFi such an elegant and compelling solution space is how little it depends on real-time connectivity to the physical world. Ride sharing and meal delivery, on the other hand, require nearly constant connectivity and updates to work well and they depend on data inputs from a variety of sources, some of which are very error prone. Very simply, these businesses are much harder than they look and they require a lot more active management than is evident from the outside.

To get a sense of how big the challenge is, compare precision-controlled environments subject to intense scrutiny, like regulated financial services or manufacturing, with crowd-sourced business networks. Manufacturing companies strive for Six Sigma quality, which amounts to 3.4 errors per million products or outputs. I can’t remember the last time my credit card company failed to correctly credit a payment, but my recent experience in burrito ordering has an error rate of one in three.

I may be unusually unlucky in the burrito department, but even so that’s a very high error rate to be putting into an immutable transaction infrastructure.

None of these challenges are insurmountable. It’s entirely possible I will look back with pity upon the investors who poured billions into building Web 2.0 marketplaces with subsidies and price wars only to find their payday disappear into a decentralized marketplace. In the meantime, I can’t wait to see how a new generation of real-world decentralized services protocols take shape.

The views reflected in this article are the view of the author and do not necessarily reflect the views of the global EY organization or its member firms.