The future of cryptocurrency turns on OpenBazaar
Posted: Sun Jan 03, 2016 1:11 pm
I've mentioned many times over the past year that OpenBazaar will be the "killer app" that takes cryptocurrency to the mainstream, but I realized that I hadn't ever written a full description of why I believe that will be the case. In this post, I'll first review what the reasons are for my belief that OpenBazaar is what will make cryptocurrency indispensable. Then, I'll talk about how OpenBazaar's continual delays have created itself a problem by concentrating on bitcoin as its sole supported payment method, an assumption which was valid at the time the platform was conceived but which no longer is true.
OpenBazaar is a distributed database of commerce that allows anyone to buy and sell items on a blockchain. By cutting out the need for an intermediary like eBay that charges as much as 12% for many transactions, the price of goods in online auctions may fall. Once OpenBazaar is released, it may be difficult for centrally-managed auction sites to compete with arbitrators who charge 1% for their services and which accomplish the same function - to ensure that transactions go smoothly.
OpenBazaar has devoted a significant amount of time on developing web frontends for storefronts. At the same time, they have limited their support of cryptocurrencies to bitcoin. The storefront focus, combined with bitcoin's high transaction fees, will make OpenBazaar initially noncompetitive for small transactions where the bitcoin fees for a reliable transaction can reach 2-5%, before fees charged by the arbitrator are considered. With PayPal charging 2.9% of credit card payments, and those payments being charged to the seller where the buyer doesn't see them, buyers may still prefer traditional channels for small purchases. However, for large purchases like TVs or cars, OpenBazaar will allow consumers to save huge amounts of money. There will also be categories of "grey market" products that were acquired legally, like printer cartridges and event tickets, that are marked up by the vendor because there are associated products that are being sold at a loss to encourage their sale. These products are prohibited for sale by the major auction sites not because of the law, but for political correctness or to avoid angering large corporations. When you can buy something at 1/5 the price on OpenBazaar that would cost 5 times more in the store, that will turn heads.
I believe that OpenBazaar's significant focus on web development has been a huge mistake. For one, it has delayed the project by a long time, and second, web GUIs don't add much value to the system. The true benefit in OpenBazaar, as with all cryptocurrency, is the ability for software to use it to make automated transactions. Instead of GUIs, the developers should have been doing research into categorization, taxonomies, and natural language understanding - because understanding what is being sold is more critical than displaying it.
The key to understanding the reason OpenBazaar will explode is that while bitcoin transacts in money, OpenBazaar transacts in products. Once products are viewed as a commodity represented by tokens, then many use cases far beyond a human buying a pair of sunglasses appear. Here are a few possibilities:
Imagine that you are an independent retail store that sells the hottest video games, and your competitor is Gamestop. Currently, you obtain your consoles, games, and accessories through a wholesaler. Ordering is performed by your employees, who guess at what will sell and what won't. When things don't sell, you lose money discounting them at whatever price can be had in the store. With OpenBazaar, you can make significant improvements on this model. In the first iteration, you eliminate the wholesaler and install simple software that interfaces with your point of sale system. When a game sells, the software searches OpenBazaar and orders a replacement, saving you the huge markup the distributor places on your product and allowing you to lower your prices to undercut the store next to you. In a second iteration, the software searches previous OpenBazaar listings to determine if sales of this particular game are trending upward or downward and adjusts its reorder quantity to compensate, avoiding reorders of products that won't sell and avoiding being out of stock for items that experience a surge in popularity. In a third iteration, the software detects excess inventory and automatically clears it out by creating a listing when the price online is higher than what discount would need to be applied to move it locally, eliminating the need for clearance sales and heavy discounts.
Next, imagine that you are a commodity trader who trades oil. While performing research on oil prices, you predict that an extremely hot summer is coming next year and that there is likely to be a shortage of air conditioners. You rent a warehouse and use software that buys up air conditioners at prices below your bidding price to store them until next year. Since the price of air conditioners is likely to rise before the heat actually arives, the software can then trade air conditioners like it would trade oil, stocks, or bitcoins by relisting them at the time you choose. Eventually, a market will arise where a listing can be created for the right to buy the air conditioners in June. If you don't own a warehouse, you can still get into this with smaller items like collectible coins. Futures markets are likely to arise for almost everything.
Next, imagine that you are a collector of celebrity memorabilia. The provenance of items is critical to determining their value: for example, a bat used in the World Series is far more valuable than one that sat in the locker room but was never touched by the players, even if they are in the exact same condition. Determining whether an article is genuine is difficult or impossible. However, if OpenBazaar becomes commonplace, a world where most items have a pseudonymous history associated with them is possible. The World Series bat, sold by Major League Baseball to an account, would then gain value if the same account is selling the bat later. That information is timestamped, permanently stored on the blockchain and can't be lost or forged after the fact, like certificates of authenticity.
Finally, OpenBazaar could theoretically be used to trade items that are not tangible, like CPU time and memory usage on servers, allowing bots to copy themselves to more or less capable servers while humans deal with the physical infrastructure behind them.
All of these applications are much more important than humans browsing an eBay like interface, and understanding what is being sold is a necessary for these applications. As has been shown with bitcoin, people aren't spending bitcoin in stores; machines are using bitcoin to send value to each other. Likewise, machines will use OpenBazaar to trade items with each other. That's why OpenBazaar has made a mistake in focusing on humans rather than helping computers to understand the items being listed on its system.
In making that mistake, they unfortunately have to accept the consequences of it. OpenBazaar was originally conceived during a time when the bitcoin network appeared capable of handling all the transactions it would be making. Obviously, that is no longer true. 200,000 transactions per day is within the realm of a few corporations trading items with each other, so a "chicken and egg" problem has arisen. Had OpenBazaar launched earlier, then programmers could have experimented with its most promising features and attracted buyers due to the low cost of bitcoin's fees. The rise in demand could have been so swift, and that the blocksize crisis would have become so bad, that people would have been spurred into action, allowing OpenBazaar to flourish on bitcoin.
The problem for the project is that if OpenBazaar launches now on bitcoin, uptake is already limited because nobody can use bitcoin to buy cheap items. Imagine someone walking into a store and, after the transaction is non-refundable, the merchant tells the customer that he has to wait a day for his product or (in the future) raise the price to possibly have a better chance of getting it now. Anyone who has been in business knows that customer service is paramount and would avoid any business opportunity that has the potential for customer dissatisfaction like this. It's impossible to stay in business when there are reliable competitors. Because OpenBazaar delayed so much working on the wrong things, nobody started liking it before this problem reared its head.
OpenBazaar is the future of cryptocurrency and its killer app. But bitcoin has chosen a path that is not compatible with the promise of being able to trade a large number of items with automated software, the use case that OpenBazaar solves. If the OpenBazaar developers don't do so themselves, someone will fork OpenBazaar to work with a network like Monero, which does not have artificial blocksize limitations and which can handle volume from day one. Since software can easily go from USD -> BTC -> XMR, the Monero OpenBazaar would grow exponentially. Remember that it doesn't actually matter what the fees are for the bitcoin network, since OpenBazaar simply can't sell any more items than the bitcoin blocks could include, no matter how much people pay. Thus, bitcoin-only OpenBazaar has a hard limit in it - and that limit is actually smaller than even the combined total of the darknet markets now, given that people are transacting off-chain in those markets.
OpenBazaar is stuck in a tricky situation that occurs to many companies that try for perfection instead of just getting a product out. They have been overcome by events, and need to reevaluate their plans in light of what are now more and more likely permanent limitations of bitcoin. At bitcoin's low transaction volume, large price declines in online commerce are unlikely, because OpenBazaar will come to dominate all bitcoin transactions and the transaction fees will rise so much to eliminate the price savings between OpenBazaar and outside merchants. If they release with only bitcoin support, OpenBazaar uptake will be muted and people will wonder what all the fuss was about. If they choose a different coin, expect cryptocurrency usage to explode as people realize the dramatic cost savings that OpenBazaar provides, and the numerous possibilities that software can implement with it.
OpenBazaar is a distributed database of commerce that allows anyone to buy and sell items on a blockchain. By cutting out the need for an intermediary like eBay that charges as much as 12% for many transactions, the price of goods in online auctions may fall. Once OpenBazaar is released, it may be difficult for centrally-managed auction sites to compete with arbitrators who charge 1% for their services and which accomplish the same function - to ensure that transactions go smoothly.
OpenBazaar has devoted a significant amount of time on developing web frontends for storefronts. At the same time, they have limited their support of cryptocurrencies to bitcoin. The storefront focus, combined with bitcoin's high transaction fees, will make OpenBazaar initially noncompetitive for small transactions where the bitcoin fees for a reliable transaction can reach 2-5%, before fees charged by the arbitrator are considered. With PayPal charging 2.9% of credit card payments, and those payments being charged to the seller where the buyer doesn't see them, buyers may still prefer traditional channels for small purchases. However, for large purchases like TVs or cars, OpenBazaar will allow consumers to save huge amounts of money. There will also be categories of "grey market" products that were acquired legally, like printer cartridges and event tickets, that are marked up by the vendor because there are associated products that are being sold at a loss to encourage their sale. These products are prohibited for sale by the major auction sites not because of the law, but for political correctness or to avoid angering large corporations. When you can buy something at 1/5 the price on OpenBazaar that would cost 5 times more in the store, that will turn heads.
I believe that OpenBazaar's significant focus on web development has been a huge mistake. For one, it has delayed the project by a long time, and second, web GUIs don't add much value to the system. The true benefit in OpenBazaar, as with all cryptocurrency, is the ability for software to use it to make automated transactions. Instead of GUIs, the developers should have been doing research into categorization, taxonomies, and natural language understanding - because understanding what is being sold is more critical than displaying it.
The key to understanding the reason OpenBazaar will explode is that while bitcoin transacts in money, OpenBazaar transacts in products. Once products are viewed as a commodity represented by tokens, then many use cases far beyond a human buying a pair of sunglasses appear. Here are a few possibilities:
Imagine that you are an independent retail store that sells the hottest video games, and your competitor is Gamestop. Currently, you obtain your consoles, games, and accessories through a wholesaler. Ordering is performed by your employees, who guess at what will sell and what won't. When things don't sell, you lose money discounting them at whatever price can be had in the store. With OpenBazaar, you can make significant improvements on this model. In the first iteration, you eliminate the wholesaler and install simple software that interfaces with your point of sale system. When a game sells, the software searches OpenBazaar and orders a replacement, saving you the huge markup the distributor places on your product and allowing you to lower your prices to undercut the store next to you. In a second iteration, the software searches previous OpenBazaar listings to determine if sales of this particular game are trending upward or downward and adjusts its reorder quantity to compensate, avoiding reorders of products that won't sell and avoiding being out of stock for items that experience a surge in popularity. In a third iteration, the software detects excess inventory and automatically clears it out by creating a listing when the price online is higher than what discount would need to be applied to move it locally, eliminating the need for clearance sales and heavy discounts.
Next, imagine that you are a commodity trader who trades oil. While performing research on oil prices, you predict that an extremely hot summer is coming next year and that there is likely to be a shortage of air conditioners. You rent a warehouse and use software that buys up air conditioners at prices below your bidding price to store them until next year. Since the price of air conditioners is likely to rise before the heat actually arives, the software can then trade air conditioners like it would trade oil, stocks, or bitcoins by relisting them at the time you choose. Eventually, a market will arise where a listing can be created for the right to buy the air conditioners in June. If you don't own a warehouse, you can still get into this with smaller items like collectible coins. Futures markets are likely to arise for almost everything.
Next, imagine that you are a collector of celebrity memorabilia. The provenance of items is critical to determining their value: for example, a bat used in the World Series is far more valuable than one that sat in the locker room but was never touched by the players, even if they are in the exact same condition. Determining whether an article is genuine is difficult or impossible. However, if OpenBazaar becomes commonplace, a world where most items have a pseudonymous history associated with them is possible. The World Series bat, sold by Major League Baseball to an account, would then gain value if the same account is selling the bat later. That information is timestamped, permanently stored on the blockchain and can't be lost or forged after the fact, like certificates of authenticity.
Finally, OpenBazaar could theoretically be used to trade items that are not tangible, like CPU time and memory usage on servers, allowing bots to copy themselves to more or less capable servers while humans deal with the physical infrastructure behind them.
All of these applications are much more important than humans browsing an eBay like interface, and understanding what is being sold is a necessary for these applications. As has been shown with bitcoin, people aren't spending bitcoin in stores; machines are using bitcoin to send value to each other. Likewise, machines will use OpenBazaar to trade items with each other. That's why OpenBazaar has made a mistake in focusing on humans rather than helping computers to understand the items being listed on its system.
In making that mistake, they unfortunately have to accept the consequences of it. OpenBazaar was originally conceived during a time when the bitcoin network appeared capable of handling all the transactions it would be making. Obviously, that is no longer true. 200,000 transactions per day is within the realm of a few corporations trading items with each other, so a "chicken and egg" problem has arisen. Had OpenBazaar launched earlier, then programmers could have experimented with its most promising features and attracted buyers due to the low cost of bitcoin's fees. The rise in demand could have been so swift, and that the blocksize crisis would have become so bad, that people would have been spurred into action, allowing OpenBazaar to flourish on bitcoin.
The problem for the project is that if OpenBazaar launches now on bitcoin, uptake is already limited because nobody can use bitcoin to buy cheap items. Imagine someone walking into a store and, after the transaction is non-refundable, the merchant tells the customer that he has to wait a day for his product or (in the future) raise the price to possibly have a better chance of getting it now. Anyone who has been in business knows that customer service is paramount and would avoid any business opportunity that has the potential for customer dissatisfaction like this. It's impossible to stay in business when there are reliable competitors. Because OpenBazaar delayed so much working on the wrong things, nobody started liking it before this problem reared its head.
OpenBazaar is the future of cryptocurrency and its killer app. But bitcoin has chosen a path that is not compatible with the promise of being able to trade a large number of items with automated software, the use case that OpenBazaar solves. If the OpenBazaar developers don't do so themselves, someone will fork OpenBazaar to work with a network like Monero, which does not have artificial blocksize limitations and which can handle volume from day one. Since software can easily go from USD -> BTC -> XMR, the Monero OpenBazaar would grow exponentially. Remember that it doesn't actually matter what the fees are for the bitcoin network, since OpenBazaar simply can't sell any more items than the bitcoin blocks could include, no matter how much people pay. Thus, bitcoin-only OpenBazaar has a hard limit in it - and that limit is actually smaller than even the combined total of the darknet markets now, given that people are transacting off-chain in those markets.
OpenBazaar is stuck in a tricky situation that occurs to many companies that try for perfection instead of just getting a product out. They have been overcome by events, and need to reevaluate their plans in light of what are now more and more likely permanent limitations of bitcoin. At bitcoin's low transaction volume, large price declines in online commerce are unlikely, because OpenBazaar will come to dominate all bitcoin transactions and the transaction fees will rise so much to eliminate the price savings between OpenBazaar and outside merchants. If they release with only bitcoin support, OpenBazaar uptake will be muted and people will wonder what all the fuss was about. If they choose a different coin, expect cryptocurrency usage to explode as people realize the dramatic cost savings that OpenBazaar provides, and the numerous possibilities that software can implement with it.
