Chapter 4 Data Analysis and Results
4.6 Lending sharing economy industry potential
4.6 Lending sharing economy industry potential
For companies like Salt there is very solid demand indicated by the current markets.
Fintech credit refers to credit activity facilitated by electronic platforms. This presumes borrowers to be matched directly with lenders. Some platforms, however, use their own funds for lending. Forms of credit that can be facilitated by such electronic platforms include secured and unsecured lending, as well as non-loan debt funding. Aside from the peer-to-peer lending platform model that connects individual borrowers and lenders, lending business models include the notary, guaranteed return, balance sheet and invoice trading.
Credit market size varies across different jurisdictions. The largest online credit market is China, followed by the US and the UK. Generally, credit provided by fintech platforms accounts for a small fraction of overall credit, but it is growing quickly and may have more significant shares in specific credit market segments. The adoption of these fintech solutions and greater decentralization are likely to have both positive and negative implications for financial stability.
By leveraging new technologies, lending platforms developed by the fintech industry should be able to offer more competitive borrowing rates. FinTech credit can increase competition in lending, which leads to increased overall degree of competition in credit markets. Such platforms may also pressure traditional financial institutions to be more efficient in their credit provision.
New platforms can drive financial inclusion. While this is a great outcome on its own, an increased reach of financial services may also benefit the overall financial system, by providing investors with access to alternative products that are less correlated with other asset classes. Furthermore, small businesses and self-employed individuals with limited access to credit may be able to obtain working capital and the funding they need
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for investment purposes. In emerging markets and developing economies, where financial inclusion is an evident problem, demand for fintech credit is especially strong.
Decentralized fintech solutions allow for realization of wealth through the access and promotion of previously-untapped wells of wealth. For example, according to the World Bank, there are currently 1.7 billion unbanked people. These people have some personal wealth, however, it is not managed by any regional or national banks. In Southeast Asia, 73% of citizens (438 million people) are unbanked and are not currently customers of the financial industry (International Finance Corporation (IFC) & World Bank, 2017).
If credit provided by fintech companies were to acquire a greater market share, this could benefit market structure in a few ways. Fintech credit platforms may help to diversify sources of credit in the economy. A lower concentration of credit in the banking sector might be beneficial in the event of financial crisis in the banking industry.
Fintech credit platforms provide another way by which credit could flow to other parts of the economy if bank lending were impaired. Therefore, the rapid development of peer to peer lending could play a useful complement to the role of traditional finance.
However, in certain countries, banks are becoming a major supplier of funds to fintech credit platforms thereby offsetting some of the potential benefits of the decentralization of credit provision.
Finally, interconnectedness in the financial system could be lessened. As opposed to banks, fintech lending platforms are unlikely to have significant direct financial exposures to each other. Unless they are funded in large part by the banking sector, this could lead to a more resilient network and positive contribution to the diversification of risk across the financial system.
4.7 Decentralized sharing economy leading model
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In order to build a decentralized sharing economy infrastructure, a few choices need to be made regarding the IT design and platform features.
The leading model is based on the Blockchain Market Engineering Framework by Notheisen et al, which provided support for researchers in analyzing the elements of blockchain-based platforms. The current research model includes two core layers: the infrastructure layer and the application layer. The infrastructure layer consists of a protocol layer and a hardware layer. It forms the core technology of the platform. The blockchain infrastructure is defined in the protocol layer, and is implemented by the interconnected devices in the hardware layer.
Figure 2. Blockchain Infrastructure Model (Menne, 2018)
The application layer of this infrastructure represents the services offered to the users and the features of the platform. It includes the digital trust infrastructure which consists of trust building elements. The application layer and the infrastructure layer combined form the platform design which is influenced by the user requirements and the
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adopted blockchain and build the platform on top of it (for example, on top of Origin Protocol that allows sharing platforms to be built on the Ethereum blockchain), or to create a completely new blockchain. Using an existing blockchain has the advantage that there are already significant number of users that guarantee the stability and security of the network. The most common choice for a decentralized sharing economy organization is the Ethereum blockchain. However, a significant disadvantage of adopting an existing blockchain is that it leads to less control, and less opportunities for customization to the specific needs of the company. In addition, the company needs to decide on whether to use a private, public, or a hybrid blockchain.When building a completely new blockchain, it is important to make a deliberate choice on using a suitable consensus mechanism and a cryptographic protocol. This has an influence on the security and the efficiency of the blockchain network. The two main consensus mechanisms are Proof-of-Work (PoW) and Proof-of-Stake (PoS) (Menne, 2018). PoW is used by the Bitcoin blockchain and uses computational power as security for the consensus. This consensus mechanism is highly established, while being quite inefficient and energy-consuming. PoS uses the balance of a certain miner as security for the consensus, assuming that harming the network by manipulating the transaction flow would be against the miner’s self-interest. This mechanism is foreseen to be implemented in a future version of Ethereum, as it is less energy-consuming and reduces centralization risks. Therefore, for a platform with a high number of transactions that have to be processed in a timely manner, a better choice would be the PoS consensus mechanism.
It is known that when sharing economy platforms offer a user interface with detailed
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have to be stored somewhere. At the moment storing these files on the blockchain is very inefficient as the scalability, and the low transaction throughput of blockchains is still a challenge.
Using the Interplanetary File System (IPFS) can resolve this issue. When using the IPFS, only the hashes of the files are stored on the blockchain, which guarantees the authenticity of the files while not overloading the blockchain. As transactions on sharing economy platforms often involve privacy sensitive data, it is crucial for the blockchain company to guarantee transactional confidentiality.
Gaining users’ trust is one of the main success factors for sharing economy platforms.
Therefore, the creation of a digital trust infrastructure for the users is very crucial. The digital trust infrastructure is highly dependent on identity verification, which is why using a global decentralized identity platform, as proposed by Goldman Sachs and IBM, is highly discussed. Despite giving up control of the identity verification process, this makes the process more efficient and trustworthy.
Another important aspect of building a successful model for a decentralized sharing economy company is offering a proper payment processing and a user interface. When implementing a payment system, one of the first things to decide on is whether to use an existing cryptocurrency or to offer a platform native token. A lot of blockchain startups choose to develop their own token, because that offers more control over the cryptocurrency and, most importantly, provides a way to raise funds for the project by means of an Initial Coin Offering (ICO). However, since users first would need to buy that token in order to be able to pay, using an own token could become a barrier for user acceptance, as well as cause high marketing expenses. As an incentive to attract first users of the platform, it is often considered to sell token at a reduced price first.
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4.8 Cross Comparison on Case Studies
After analyzing the above information about the three companies in the case study, as well as the industry forecast and knowledge on the basics of sharing economy business model and blockchain based business structure, a cross comparison has been made between the three use cases. Despite the three companies being from three different industries and using the blockchain technology to decentralize the ecommerce, fundraising and lending services, there are a few main similarities that were observed in this research.
One of the core features of decentralization that plays an important role in building the business of the three case studies, is the removal of intermediaries such as brokers, which could quickly make the roles of the traditional sharing economy companies redundant. While for the past ten years the sharing economy platforms have guaranteed the transparency and security of transactions, now that the blockchain technology allows for the same results, it is very likely that the whole business of such platforms will need to adjust to these technological changes in the next few years.
In a decentralized sharing economy platform, there is no central managing power that decides on the fee structure for the transactions. Therefore, the fees can be significantly reduced, which will make decentralized platforms more attractive to users. Originally, decreased fees were one of the main benefits that early cryptocurrencies adopters recognized over using traditional bank services.
Platforms such as Uber and Airbnb ultimately prevent communication between users and control the data flow within the sharing network. The removal of intermediaries gives control over personal data back to users and creates a true peer-to-peer connection, allowing them to make decisions about the value and terms of the product/service exchange. The elimination of intermediaries is possible with implementation of smart
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automatically. As David Maduri confirmed in the interview conducted by this thesis:
“Take for instance the complicated value chains where customers and service providers had to rely on middlemen to operate. This had made the process longer, more expensive and prone to inefficiencies in many sectors of the economy like lending, tourism and even transportation. Decentralized marketplaces in many areas of the economy are changing this by making the interactions between the service providers and customers less expensive, direct and flawless.”
Another additional benefit of decentralizing sharing economy platforms that has been observed during the research is related to the general fintech revolution that is happening in the global markets. The use of cryptocurrencies lowers transaction fees and does not require a bank account, which could enable the inclusion of unbanked, under banked and low-income consumers.
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Chapter 5 Conclusion
This research has been conducted with the purpose of answering the following questions: Is it better to build sharing economy solutions on blockchain instead of centralization? What is the economic and social impact of such switch? Who are the main leaders in this new market of decentralized sharing economies?
With this purpose, there have been data collected from publications and company blogs about blockchain technology in general and about its usage in the ecommerce and market place, peer to peer lending and business crowdfunding. To support the research, there has been close work performed with three cases of decentralized sharing economy companies that are in their early startup stage. The research included interviews with team members and working with their marketing materials.
As can be observed from Chapter 4, decentralized sharing economy platforms like Origin, Ainves and Salt are disrupting the space of online marketplace, P2P lending and crowdfunding. The main value that this new type of companies are bringing is the transformation of the peer-to-corporate-monopoly-to-peer to just peer-to-peer, as it should be.
During the research it has been observed and concluded that it is better to build sharing economy solutions on blockchain instead of centralization. The main economic and social impact of a decentralized sharing economy platforms are the following:
• the fees per each transaction can be significantly reduced, which will make decentralized platforms more attractive to users
• sharing economy platforms can be safer and more transparent for users since their personal information will no longer be stored with the monopoly company, but on the decentralized network
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• unbanked people will finally be able to participate in online commerce and spend or invest their spare money
• Allowing the use of cryptocurrencies on the platforms will make transactions much faster than the current system.
Leading companies in the decentralized sharing economy industry will need to have certain infrastructure built in order to succeed. Based on the research results, the model of these new businesses should include two core layers: the infrastructure layer and the application layer. The infrastructure layer consists of a protocol layer and a hardware layer. The choice of the blockchain platform is also very important. In addition, a proper user interface and payment processing is key to building a sophisticated platform for transactions.
Based on this research, it has been concluded that modern entrepreneurs that seek to build an online platform business that involves peer-to-peer goods or services exchange should consider building it on top of blockchain technology. This will allow them to provide more benefits to their users and meet expectations of the modern consumers.
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