DeFi Deep Dive – What Are Decentralized Marketplaces?

Written by Ivan on Tech

Aug 30, 2020

Decentralized marketplaces are a fascinating use case of blockchain technology. These crypto marketplaces allow users to deal directly with each other, instead of using a centralized point of contact. Traditional marketplace platforms may provide a system and platform that’s familiar. However, they lack transparency and charge high fees.

So, how exactly is a decentralized, blockchain-driven marketplace different from the standard affair? Is there a decentralized market out there that’s worth your time and attention? We will learn about all of this and much more regarding decentralized marketplaces in this article.

Decentralized marketplace vs Centralized marketplace

As mentioned above, all traditional marketplaces are more or less centralized in nature. In general, they function through having a company-owned platform connect different users to potential sellers. Nevertheless, this leads to the creation of middlemen. These middlemen can:

  • Charge exorbitant fees for allowing these transactions.
  • Regulate the transactions and censor the kind of products that the sellers can sell.
  • Finally, they have full control over the data that’s currently on their platform. Not only does this give them too much power, but it also makes them a prime target for hackers.

To elaborate on the last point, consider the following example.

In March 2020, researchers discovered a vast database containing the details of over eight million European customer records left wholly exposed on AWS servers. The records were collected via marketplace and payment system APIs belonging to Amazon, eBay, Shopify, PayPal, and Stripe.

The data exposed in those records include names, shipping addresses, email addresses, items purchased, phone numbers, and partially redacted credit cards.

Ok, but how are decentralized marketplaces any better?

A decentralized market has no middlemen. The concept is very similar to how your standard blockchain is run. You download the software client on your computer. The moment you run it, it will connect you directly to everyone else running the program. This way you can mitigate the need for any middlemen whatsoever.

Traditional online marketplaces

The following timeline that shows you the evolution of online marketplaces:

  • Craigslist and eBay, two of the oldest online marketplaces were launched in 1995.
  • In February 2011, we saw the first proper combination of cryptocurrencies and marketplace with the Silk Road.
  • Following a hackathon in Toronto in April of 2014, a project called “Dark Market” was launched. This Market was eventually forked to make OpenBazaar.

An overview of crypto marketplaces

Decentralized marketplaces are based on blockchain technology. As such, they inherently have the three core properties of blockchain:

  • Decentralization: There is no centralized entity which controls the system.
  • Transparency: The rules governing the marketplace are transparent and visible for everyone in the network.
  • Immutability: The blockchain utilizes cryptographic hash functions to integrate the immutability property. Simply put, once you enter data inside the blockchain, you can’t delete it.

The transparency and immutability combine to ensure that features such as reviews and ratings are completely honest and undisputed.

Which platform do we build a blockchain marketplace on?

While OpenBazaar is built on Ricardian smart contracts, most of your popular decentralized marketplaces have been created using Ethereum. 

As with DeFi, it makes perfect sense as to why Ethereum is a market leader for blockchain marketplaces. Firstly, it’s the pioneering smart contract platform that allows it to enjoy the first-mover advantage. Finally, they have the most desirable and respected developer community in the entire space.

However, Ethereum’s biggest issue is its present lack of scalability. Ethereum can only manage 15 transactions per second. If you want a high-throughput marketplace, you will need to get a faster and more robust platform. This is why developers have started experimenting with alternative blockchains.

Following is a screenshot taken from DappRadar that lists the top ten decentralized marketplaces (arranged in descending order of trading volume).

It’s important to note that this list doesn’t account for OpenBazaar. As you can see, Ethereum dominates this space along with WAX or Worldwide Asset eXchange. Rounding up the top ten is Ontology’s OpenKG. The platform that you prefer is dependent on what you’re in the market for.

Best decentralized marketplaces

So, now let’s look into the best decentralized marketplaces out there.

Best decentralized marketplaces #1: OpenBazaar

OpenBazaar is a P2P application that connects buyers directly to sellers. As we have mentioned before, it happens to be a fork of the DarkMarket project. OpenBazaar has enjoyed such high visibility due to the following:

  • It’s graphical user interface (GUI) is incredibly intuitive and easy-to-use.
  • The marketplace software is a simple plug and play. Install the software, and you are good to go.
  • Finally, there are many different types of items available on the platform for trade.

OpenBazaar is owned by a company called “OB1.” But, wait. Isn’t this the same as all the other companies we have talked about?? How does this make OpenBazaar any different from its centralized counterparts?

Well, in OpenBazaar, data sharing/tracking is a choice. If you opt not to do it, then your data will be shielded accordingly from OB1. You also have the option of transacting with Zcash, a privacy coin, to protect your transaction details.

At the end of the day, no single entity has any control over OpenBazaar. All the nodes in the P2P network equally contribute to the network. OpenBazaar accepts more than 50 cryptocurrencies, including – Bitcoin, Bitcoin Cash, Litecoin, and Zcash.

OpenBazaar: How does payment work?

To make the payment system as secure as possible, OpenBazaar utilizes Bitcoin’s Escrow feature. This is what you need to keep in mind about this feature:

  • Buyers and sellers can mutually agree on a trusted third-party before starting a trade.
  • The buyer sends their crypto of choice and locks them up in escrow.
  • These funds are released only when at least two of the three parties agree about its validity.

Now, speaking about the payments itself, there are three kinds that you should take note of – Direct, Moderated, and Offline.

Direct payments

In this system, the buyer simply sends coins to the seller when both parties are online. This is a straightforward transaction that doesn’t have a lot of complications.

Moderated payments

This is the escrowed payment that we were talking about. This mode of payment works like this:

  • The buyer chooses a third-party as a moderator.
  • The payment goes to the escrow. The buyer pays a fee while funding this escrow.
  • When the funds leave the escrow, the seller’s side pays a fee.

Do note that these payments can only go through if two out of three parties give their approval. So if the buyer or the seller isn’t available, they will have to interact with the moderator instead. However, if the moderator is involved, they will charge a fee as well. This is why buyers and sellers are incentivized to participate in the transaction actively. Buyers can also make moderated payments to an offline seller.

Offline payments

If the buyer plans to make a direct payment to an offline seller, the funds enter a temporary escrow account that both the buyer and seller could pull interact with any time then want. Anyway, the seller now has the following options:

  • They come online and have the freedom to either accept or reject the offer. If they accept the order, then the sellers will receive the funds minus a fee.
  • If the seller never comes back online or rejects the offer, the buyer takes back the escrow funds and pays a fee in return.

Best decentralized marketplaces #2: OpenSea

OpenSea is an Ethereum-based blockchain marketplace for crypto goods like collectibles and game items. Through this platform, buyers and sellers can directly connect with each other via smart contracts. Alex Atallah and Devin Finzer founded the company in January 2018. The co-founders have extensive experience with impressive backgrounds from Palantir, Google, Facebook, etc. 

Main partners: BlockStack, Quantstamp, Trust Wallet, Combinator, Coinbase, Founders Fund, Blockchain Capital, and 1C

This company has raised over $4 million, including a $2.1 million funding round led by Animoca Brands, Stanford StartX, and David Pazdan of MetaMask. Previous funding rounds included YCombinator, Founders Fund, Coinbase Ventures, 1Confirmation, Blockstack, and Blockchain Capital.

What can I do with OpenSea?

OpenSea is primarily famous for trading NFTs or non-fungible tokens. What do we mean when we say “non-fungible?” In layman terms, it merely means that each token is unique. Remember cryptokitties? Those collectible, virtual cats that once clogged up the Ethereum network? They are arguably the most famous example of NFTs.

How does OpenSea’s decentralized market work?

OpenSea is actually pretty straightforward and simple to use. Just follow the following steps:

  • The first step is to plug in your Metamask.
  • OpenSea’s application searches your wallet for all the collectibles that you may have. It will also tell you which crypto you’ll need to buy items in the marketplace.

Once you are in, you will have two option: buy an item or list an item,

  • Buying: Users are free to enter a bid if the seller has set a price or accept the list price.
  • Listing: Listing is free of charge. If the item is sold successfully OpenSea charges a nominal 2.5% fee on the final price. 

Best decentralized marketplaces #3: Particl

If OpenBazaar is your decentralized marketplace “O.G.” and OpenSea is the Ethereum-based alternative, you can think of Particl as the renegade that’s holding its own in the space. Created by Ryno Mathee, Particl’s goal is to build a decentralized, peer-to-peer, and utterly anonymous crypto marketplaces. Particl’s native token is PART. It’s a fork of ShadowProject (SDC), which happened to be another privacy coin.

One of the most innovative crypto marketplaces

The biggest factor behind Particl’s growth in recognition is its decentralized marketplace. The secure, P2P platform’s alpha version was released on May 31, 2018. Some features of the market are as follows:

  • The user data isn’t available on a server and nor is it shared with any third parties.
  • All the transactions are private and anonymous
  • The platform ensures a 100% decentralized and trustless economy.

Along with this, Particl also happens to be very easy-to-use:

  • The desktop client can be easily downloaded and installed. 
  • Once installed, the next step is to create your wallet within this marketplace to conduct all your purchases.
  • Merchants using Particl can increase their profit margins by up to 40%.

PART – Particl’s native token

Here are some things to note about the PART token:

  • PART transactions are hidden and fully anonymous.
  •  It’s atomic swap compatible. This means that it can move from user-to-user without having to go through an exchange.
  • PART ensures privacy by leveraging cryptographic techniques like Ring CT.

Advantages and disadvantages of decentralized marketplaces

Advantages

  • The lack of a centralized point of entry reduces the attack surface by a tremendous amount. With no single point of failure, this model is much more secure.
  • Transparency and immutability allow developers to establish predetermined rules that apply to everyone in a non-biased manner.
  • Lack of a central governing body also means a lack of censorship.
  • The absence of intermediaries reduces transaction costs by a significant amount.

Disadvantages

  • The lack of centralized control can spin into all-out anarchy. Lack of legal framework and assistance can lead to reluctant buyers.
  • They can be a challenging prospect for regulators to ensure legal enforcement, leading to bans and service interruptions.

Conclusion

Decentralized marketplaces are an extremely obvious use case of blockchain and smart contract technology. As we have seen, they have several distinct advantages over their centralized counterparts. We hope that you gained some value from this article and will definitely give them a try.

By the way, do you want to learn more about blockchain technology and its numerous use cases? If so, then make sure to check out our blockchain courses at Ivan on Tech Academy. Ivan on Tech Academy is one of the most popular blockchain academies available, and is a one-stop-shop for everything blockchain-related.

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