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8/29/2023

Web3 vs. Web2 Marketplaces: Unlocking The Full Potential of Digital Commerce

Image description text: Web3 will unlock the true potential of digital commerce
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TL;DR

‍Web2 marketplaces have long served as the cornerstone for digital commerce. Initially launched as a rudimentary experiment, Craigslist pioneered the early marketplace blueprint of connecting sellers with potential buyers through listings. This nascent model was soon overshadowed by the meteoric rise of Amazon, setting new standards for user experience, efficiency, and scale. Social media platforms like Instagram and TikTok have since tapped into their vast user bases to create vibrant hubs for social commerce. Throughout these stages, Web2 marketplaces have not only adapted but have also consistently pushed the boundaries of what digital commerce could achieve.

But while their successes are commendable, these marketplaces have introduced their fair share of problems. From fragmented liquidity to high vendor fees and lack of enforceable royalties, the centralized nature of these platforms has left sellers constrained, often paying more while reaping less in value.

With its core tenets of decentralization and interoperability, Web3 has the potential to not only address these challenges but also elevate today’s global digital economies to new heights. This shift isn't about merely solving existing issues; it's about reimagining the foundation of digital commerce, making it more valuable, efficient, and enjoyable for all participants.

Intro to Web2 Marketplaces

For businesses, Web2 marketplaces act as comprehensive ecosystems, offering various services from order fulfillment and payment processing to logistics and data analytics. Their integration with third-party applications further sharpens the tools at a seller's disposal, streamlining operations and retaining users. Moreover, their ability to engage audiences through promotions and special events gives sellers unprecedented reach.

Meanwhile, consumers enjoy seamless user experiences, with the ability to quickly browse, compare, and purchase from an expansive array of goods and services. It's a blend of convenience and choice.

Catering to over 325,000 customers, and showcasing 12,000 products from 2,000 sellers, Amazon serves as the gold standard. By digitally consolidating supply and demand,  Amazon competitively priced products, attracting a surge of buyers and a plethora of third-party sellers.  The more products and services listed, the more buyers the site attracted, which in turn attracted more suppliers, who listed more products and services, and so on and so forth. Powered by this Web2 flywheel, Amazon's revenue leaped from a commendable $7 billion in 2004 to a staggering $514 billion in 2022, primarily fueled by online retail sales.

The Dark Side of Web2 Marketplaces

Yet, giants can cast long shadows. Around 2018, murmurs grew about Amazon allegedly mimicking products, misusing internal data, and skewing search results, favoring its private brands over other sellers' listings. While Amazon denies these claims, it highlights a glaring concern: the pitfalls of centralized marketplaces at scale. The centralization of these marketplaces grants them disproportionate influence over listings, policies, and vital user data. This sway doesn't merely risk a compromised user experience; it edges dangerously close to monopolistic behaviors.

Aside from maintaining disproportionate influence over listings, policies, and sensitive user data, Web2 marketplaces are often subject to liquidity fragmentation and excessive take rates. 

Driven by the need to offset the vast initial marketing expenditures essential to kick-start these marketplaces, these investor-run platforms impose a significant take rate. Once the formidable power of network effects kicks in, it provides these platforms the leverage to elevate this rake, sometimes reaching staggering heights of 20-40%. For smaller vendors, or those with tight margins, these platform fees are the difference between turning a profit or going out of business. 

This requires sellers to list and price their items differently across each marketplace, resulting in a poor user experience for consumers who are forced to scour each marketplace for the best price. For Web2 marketplaces like StockX or Rally Rd that match bids and asks, operating only in the confines of each siloed marketplace significantly hampers liquidity and makes many assets unsellable. 

Web2 marketplaces for art, digital assets, and other creative works also lack a mechanism for secondary royalties, depriving creators from earning on future sales of their work and reducing the ability to maximize the long-term value of their creations.

Why Web3 Marketplaces?

Unlike their Web2 counterparts, Web3 marketplaces are built upon the decentralized foundation of the blockchain. Rather than relying on centralized servers, blockchain-based marketplaces operate on a distributed network of nodes, reinforcing transparency, bolstering security, and entrusting more control to users. Each transaction is recorded on an immutable public ledger, reducing the ability for manipulation and fraudulent activity to near zero.

At the heart of these marketplaces are smart contracts – computer programs stored on a blockchain that run when predetermined conditions are fulfilled. These smart contracts are used to facilitate transactions, bypassing centralized middlemen like banks and payment processors, and their hefty transaction fees. 

But the true magic of smart contracts lies in their composability, meaning that a digital asset minted on one platform can be efficiently sold, traded, and showcased across multiple marketplaces, consolidating liquidity and erasing the demand for multiple listings. This liquidity aggregation and absence of transaction fees translate to more value retained by both sellers (or vendors) and buyers. Sellers can price their offerings more competitively, and buyers, in turn, enjoy better deals.

Smart contracts can also be programmed to reward creators with royalties on all secondary sales of their work, allowing them to continue to benefit from their creations long after the initial asset is sold. This ongoing revenue stream allows creators to capture legacy value from their creations, empowering them via a new and fairer way to monetize their work.
 

As a result, a digital asset minted on one platform can be sold, traded, and displayed across all marketplaces at once, unifying liquidity and erasing the demand for multiple listings.

Consider the global gaming industry, which, despite generating over $350 billion in revenue in 2022, mainly operates on a one-way transaction model. Players acquire in-game assets, yet lack the freedom to resell or trade them.

This one-dimensional model not only hampers the gaming experience but also represents a lost opportunity for the industry as a whole. Imagine the possibilities if players could resell, trade, or showcase their in-game assets across multiple platforms, generating a thriving secondary market. This wouldn't just provide additional avenues for revenue; it would also deepen player engagement and create a richer, more interconnected digital gaming ecosystem.

This is exactly the future our team is aiming to create. 

The Immutable Global Orderbook

Immutable's Global Orderbook is the first step in this journey, allowing studios and creators to automatically distribute digital assets across all 14 Immutable-powered marketplaces including Gamestop, Rarible, and TokenTrove. 

With the Global Orderbook, gamers transcend the role of mere consumers; they evolve into active participants in a vibrant marketplace that stretches throughout the entire Web3 gaming industry. Not only does this allow sellers to reach a wider audience and better control their pricing, but it allows buyers to instantly trade all assets, anywhere, at any time across any marketplace or ecosystem.  

The Immutable Global Orderbook unifies liquidity and assets across any and all marketplaces.

At present, 50% of transactions on Immutable occur on non-origin marketplaces, highlighting the liquidity, reach, and revenue opportunities of our ecosystem.This means that our Global Orderbook is effectively doubling liquidity for our game and marketplace partners. Leveraging the power of smart contracts and secondary royalties, creators and game developers can now perpetually benefit from their original work, with Immutable’s enforceable royalties naturally further fueling innovation within the industry. While other marketplaces waiver in their commitment to creator royalties, Immutable will always honor these as a core pillar of Web3.

While Web2 laid the foundation for a more convenient shopping experience, Web3 is set to revolutionize the landscape through decentralization, user control, and enhanced security. We couldn’t be more excited for what’s to come and we encourage you to join us.

To learn more, read about our Global Orderbook and contact us to discover how you can grow with Immutable.

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