Article

HOW Amazon is Bad for Business

When you think about privacy violations, do you think about 1984 style mass surveillance? Many people do. But there are other large and powerful entities that can commit another form of privacy infraction — that against the business owner. A larger company that provides a service to a smaller one can use its access to the smaller company’s business data as a way to compete with the smaller, dependent business.

This is called “opportunistic behavior” aka ‘screwing partners over’, and happens specifically when two businesses enter into a contract with each other but are both serving customers in the same industry, and one decides to take advantage.

Amazon, the focus of this article, does this through the use of private-labels, where they launch their own brand of a popular product or service. The most known version of this is Amazon Basics, which offers many low-priced, off-brand alternatives to electronics products, aiming “to give customers the ultimate in selection and value”. Launched in 2009, Amazon Basics has come to dominate the online market-share for many electronics products, such as batteries, accessory cables, and speakers. A prime (pun intended) example of this is that, as of 2016 Amazon Basics dominated up to 31% of all online battery sales, and Amazon.com up to 94% of online battery sales. For the first quarter of 2018, Amazon also took home 61% of all private-label sales, most being electronic, compared to other retailers such as Walmart and Target.

What’s the issue? Amazon does not have to expose itself to the risk of launching a new product, responding to customer needs or doing research and development. They can simply use sales data on their platform to know which products are selling well, then ‘low-key’ copy the winning products, in concept, design and features, cleverly avoiding patent issues that may arise concerning design, and aided by a near-infinite budget. Amazon can have its market research done for it, with short-term benefit to the consumer, long-term benefit to Amazon, and an all around disadvantage to the original seller. For sellers, the online channel has become a direct competitor.

I started with Amazon but this issue concerning private-labels, and competition against sellers is not just limited to Amazon or tech products. Supermarkets often also have private-labels, or any retail store that has greater selling power than those that rely on their services. They compete for shelf-space with their sellers and already-established brands. Technology goods and services have a greater potential for innovation however, as there is more room for incremental and new advances in technology-oriented products than non-technology products. Amazon gets its own test market, while innovative sellers are disincentivized from creating useful products. They are disincentivized for fear of despotic competitiveness from the best channels to reach consumers.

And what does this have to do with crypto?

Crypto is built on blockchain technology, built for decentralization. Platforms such as marketplaces can be built on blockchains, which are resistant to centralized power imbalances where only central participants receive benefits. In the case of marketplaces, both the sellers and buyers can own the platform so that the sales channel, Amazon in our example, does not make major decisions that only benefit it.

The key detail that gives sales channels this power to undermine its sellers is ownership and control over sales data. An alternative is to provide a medium for sellers and buyers to transact on, where sales data is not automatically shared because there is no central ‘owner’ of the platform, while there is still a way for over-arching decisions to be made.

I am going to be realistic here, Amazon probably will not go away, and Amazon dominates markets because it is doing a good job of satisfying consumers and shareholders. Amazon does not force sellers to use its platform. The use of private-seller data may not seem like a problem to consumers. But it is a problem for both small and large businesses. And it is a problem for consumers in the long run, since innovation is stifled and competition (on the platform) is rigged. There has to be a trade-off between customer satisfaction coming from lower prices, and customer satisfaction from valued innovation. It is a given that consumers respond to price. Privacy-focused marketplaces may at first be a niche interest for privacy-oriented consumers and producers, but there is room to improve customer satisfaction over time. Eventually platforms will have the convenience and reliability of Amazon while allowing sellers to successfully sell the products that they designed. Privacy-enabling blockchains that are the medium for transactions, give sellers and buyers a novel alternative.

This article is part of an ongoing series on privacy that I’m doing as part of my work with Particl, a crypto-based privacy platform that is creating its first dAPP, a marketplace. See the video version here. All opinions are my own. 

Proof of Stake vs. Proof of Work | Who Will Win?!

CR0013 2 Proof of Stake vs Proof of Work | Who Will Win?.jpg

Why Proof of Stake Wins. The battle between proof of work aka POW and proof of stake aka POS is raging. I'm placing my bets.

Is proof of stake better than proof of work? In my opinion, yes. Here’s why:  

Blockchains are essentially distributed ledgers created for the storage of data. In cryptocurrencies, they are used to store transaction information, verifying their accuracy and ordering them chronologically. Because the blockchain is distributed with many participants on the network, there has to be a way of deciding who gets to write the next set of transactions, so that there is only one unique blockchain. There has to be what is called distributed consensus. When the first cryptocurrencies were created, proof of work was this method of creating distributed consensus, by having special nodes called miners compete to solve a cryptographic problem. This solved the problem of needing honest nodes to validate transactions, because there was a method of competition to select who writes the next block, and then the rest of the network could also verify that the recorded transactions were true after the work had been completed. Incentive was also provided to the miners in the form of a block reward, or creation of a new token/coin on the blockchain, when a new block was written.

This proof of work method of distributed consensus has some disadvantages that are increasingly becoming a problem in the cryptocurrency world. These include a concentration of mining power which defeats the goal of decentralization of cryptocurrencies as well as the environmental impact which is still in its early stages if true cryptocurrency adoption emerges in the future. Centralization comes in the form of mining equipment manufacturers being limited to a few companies, the fact that only certain people can afford mining equipment, that mining is concentrated geographically, and that mining pools can now overtake the network and write transactions in their favor if they choose to or deny service to others. The high electricity costs resulting from proof of work mining is only expected to increase as cryptocurrency adoption grows, and will still add a hefty weight to the transaction fees if there are no block rewards in the future. In the case of Bitcoin, where mining fees will eventually be reduced to zero, there is also the issue of less incentive for miners to remain loyal to the network when mining another cryptocurrency may produce greater profits. Loyal and dedicated nodes are necessary to secure the blockchain and provide distributed consensus.

These disadvantages of proof of work mining have been known for a long time, but many of the problems were not immediate before the scaling of cryptocurrency networks to what they are today. It is important to note that proof of work has its advantages in that it solved the problem it was created for, namely that of getting honest nodes to validate and record transactions. Due to some of its disadvantages however, another alternative called proof of stake has arrived that can provide distributed consensus just as well, if not better.

For proof of stake cryptocurrencies, instead of having miners compete through solving a cryptographic problem, the next node to write the block is chosen depending on their proof of ownership or proof of stake in the network. There is some variety in how exactly this is determined, but the amount of stake is generally dependent on the amount of coins a holder has as well as the length of time they have been participating in the network. So instead of the probability of being chosen to write the next block being depending on mining power, the probability is dependent on the holder’s ‘stake’ or investment, meaning amount and time in the network. These nodes are called stakers or foragers and new coins are ‘minted’ rather than mined’. The effect of this on solving the centralization and environmental issues of proof of work coins like Bitcoin, is significant. Many proof of stake coins began as proof of work coins and then decided to switch to proof of stake. Examples of proof of stake coins include  peercoin, lisk, nxt, particl. Ethereum is also on its way to becoming a proof of stake coin. There are also delegated proof of stake coins which are not to be confused with regular proof of stake coins and those have a slightly different system, which I will not get into here.

The first obvious issue that a proof of stake system of distributed consensus solves is that of reducing electricity costs. Proof of stake blockchains do not need its validators to initially purchase and update expensive mining equipment. Proof of stake also requires more loyalty on the part of the stakers than proof of work does from its miners. Proof of stake can also give rise to the monopoly issue, created through wealth disparities or mining pools, as large holders have greater chances of earning more. However, it is more difficult for someone to own 51% of the coins on a network due to prohibitive costs than for someone to have 51% of the mining power, and thus become a dishonest node. This scenario of sufficient mining power being concentrated for an attack to occur, has already been reached and its negative effect has only been mitigated due to the choice of mining pools, requiring trust. The cost to invest 50% of bitcoin’s market cap, not assuming the price will go up as someone buys that much, is far greater than the cost to buy the mining equipment to achieve 51% of the mining power. It is also more likely for an individual with concentrated power on the network to use it benevolently, in the case of proof of stake, because their major investment is the coin itself, and reducing trust by double spending or denying service, would negatively impact their own capital. There are also variations on how proof of stake can be implemented to ensure some distribution for how often a staker gets to write to the blockchain based on how recently they did it. And the likelihood of a node being chosen also depends on its time invested not only amount. Other advantages of proof of stake include lower transaction fees due to lower hardware and software costs to keep the network running, faster validation times, and a smaller chance of honest nodes leaving as miner rewards are reduced overtime. There is a lower likelihood of over-reaching governments being able to create prohibitive barriers to entry, such as needing a license to mine, since only running software is less conspicuous than running specialized mining equipment.

Understanding that the power and promise of blockchain technology lies in its decentralized nature, as opposed to the centralized institutions of today, methods of decreasing centralization through proof of stake are more likely to succeed in the long run than only relying on proof of work as it exists today.