Crypto in the context of online classifieds

Posted on September 11, 2017. Filed under: Uncategorized |

Peer to peer transactions are not a new thing. In the offline world they have been around forever. I killed this chicken, I go to the market, I sell it to you for $10, and there is nobody between us ensuring that the $10 bill you give me is good, that the chicken I give you is delicious, or that in the exchange, once I hand over the chicken, you don’t just run away without giving me the $10. In a sense our physical proximity, and if I really think about it, the threat of physical violence is probably what enforces that our peer to peer transaction goes off smoothly. In more advanced societies, I suppose there is also the threat of law enforcement that governs certain bad scenarios in that transaction (specifically the last one), but still there is no one between us. The opposite of this peer to peer transaction would be an intermediated transaction…rather than selling direct to you, I could sell my chicken to a grocery store, they could ensure you of quality, safety, delivery, etc…and in doing so take a portion of the value in our transaction.

In the online world, peer to peer transactions can be dicier. If I can’t physically authenticate the goods or services being exchanged…if I can’t see the chicken I’m buying with my own eyes, if I can’t run and tackle you for slipping me a bad $10 bill…it can be harder to establish peer to peer trust when transacting. Online, the middle man like, say, Ebay, plays a more important role in our transaciton than the grocery store would offline. Both parties come to trust the middleman, their brand, their fraud policies, their handling of payment, etc…and a class of transactions that might not feel safe on say, Craigslist (which doesn’t provide much in the way of intermediary trust), begins to feel safe on Ebay.

Not all peer to peer transactions are the same. Certain classes, where say the economic value exchanged is low or the risk of physical harm is low, can achieve high liquidity online even in low trust environments. As the stakes rise, or the liklihood of fraud rises, liquidity and trust hold enjoy an inverse relationship.

Before 2004, trust in the context of online peer to peer transactions really only existed in two ways. Either…you would conduct your exchange with someone through a trusted (and expensive) intermediary…or you could transact in a platform that attempted to strengthen trust between strangers primarily through reviews. Reviews, seller ratings, etc…were a way for the people at the market to share information and experiences about transacting at the market. I don’t have data on this, but I assume that seller/buyer reviews significantly increased liquidity in certain classifieds verticals relative to what was happening in say Craigslist alone.

Reviews had (and have) their weaknesses. How do I trust the reviewer?…especially when reviews are anonymous or pseudonymous…well…enter the social web. In ~2004 social networks emerged and gained widespread adoption in the subsequent few years. For the purposes of the post, I’d suggest that the advent of the social web and social graphs was a technical breakthrough (although technically i suppose it was more of a social or design breakthrough)…but obviously Facebook and the concept of social graphs online was a fundamental invention that changed every application of the internet that followed.

Investing in social in 2004 would have lead you to direct investments in social networks like Facebook, Myspace, Bebo, and the thousand other vertical networks that largely spawned and died around that time. I don’t think people really considered at that time the downstream implications of social graphs on online identity, and the subsequent penetration of these graphs into many sectors and classes of application that appeared initially to have nothing to do with “social” as an invention.

But, sure enough people figured out that by porting my known social graph from say Facebook, into a trustless peer to peer transaction in a place like Craigslist, I could increase the feeling of safety in transacting directly with strangers, and therefore improve liquidity in some of the less liquid verticals of peer to peer transactions. If you figured that out early as a VC you would have started to invest in “social classifieds” verticals…maybe you would have made bets on social graph enabled dating (friend of a friend liquidity in things like Zoosk), or even in marketplaces that overlaid reviewer’s social graphs in order to give reviews that were already contributing to trust more credibility. If I could find a reviewer on on facebook or twitter and establish their legitimacy, that would make it easier to trust their view of the stranger with whom I was about to transact.

And while you might have made some $ investing in social classifieds with this newfound trust layer penetrating existing peer to peer transactions, what you wouldn’t have seen coming was a completely new form of peer to peer transaction, that didn’t exist prior to the social web…and that would have been Airbnb. Letting a stranger stay in my spare room at home, or letting a stranger stay a few days alone in my home is a form of peer to peer transaction that had virtually no liquidity relative to what we see today. The use case didn’t exist. I would argue Airbnb could have never existed without the trust layer that it borrowed from the advent of the social web…Airbnb was and is an application that is native to the technical advance of social network technology…it isn’t an optimization of an existing use case or class of transaction…it’s something entirely new that was unlocked.

There are still many existing peer to peer transactions where reviews or social identity still don’t enable a level of trust to adequate to achieve deep liquidity online. I subscribe to the belief that the blockchain, and coin governed systems specifically, represents an opportunity to create new and strengthened trust in some of these classes of transaction. If you believe that there are certain transactions where I feel comfortable screwing a stranger who knows my friend, but not screwing a stranger when doing so would cost me $1000, than you should agree that economic incentives for good behavior codified into a blockchain based protocol governing such transactions can improve trust and liquidity in those instances. And if you are a VC or angel investor or crypto investor today, you might be looking for those existing low trust peer to peer verticals…even more interesting, however, is to ask what are the ways that we aren’t yet transacting at all…what are the native peer to peer transactions that can only emerge with strong, economically enforced trust, and can I buy the coin that governs that trust? Personally, I’m looking for both and would welcome the opportunity to help flush out protocol designs in this realm. I have time, thought, and capital to support this type of thinking.

p.s. i’m not really a web historian…feel free to correct dates, point out contra cases, etc…

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at (p.s. i don’t use spell check…deal with it)


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