These middleman can add value, or they can detract from it. They can provide an important role of curation and connection—or they can make it hard to discern real from fake products, or hide better-fit listings below pages of search results. They can provide valuable recommendations based on the data we provide, or they can turn around and sell it to someone who blasts us with ads.
With so many layers between origin and final product, customers have lost touch with the real costs of middlemen.
With so many layers between origin and final product, we have lost touch with the real costs of middlemen. These can include hard costs (the fees baked into each layer), or soft costs (such as how much extra time it takes a product or transaction to move through the system). Even for businesses, it is very difficult to know the true cost and value of an entire ecosystem of middlemen lined up between them and the products, services, and materials they use.
Until someone presents an alternative.
When Cost Is Uncovered
Recently, new models—such as modern direct-to-consumer and the “sharing economy”—have squashed these layers.
Disruptive direct-to-consumer retailers maintain end-to-end control over the making, marketing, and distribution of products, circumventing middlemen. For example, Warby Parker brought stylish prescription glasses to the consumer for a fraction of the price. Startups attacked the notoriously heavy-toll mattress industry with a dozen venture-funded players fighting for consumer mindset and even an early standout, Casper, raising almost a quarter billion in funding since inception. All of a sudden, consumers understood that they were overpaying middlemen for their glasses and mattresses. These companies cut hard costs; their products could be accessed at a fraction of the price. And they delivered additional value, as each company threw in new services that were important to the customer. Warby Parker made it easy to try on glasses at home. Casper provided 100-day no-questions-asked returns. Both provided careful curation of their product, and diligently crafted their brands to connect with their markets and communicate quality.
In under a decade, sharing economy players like Uber and Airbnb have changed the entire shape of industries. These modern middlemen serve as a platform to connect people with extra capacity in their cars or homes with people seeking rides or rooms. They provide value with a robust two-sided network of buyers and sellers, facilitating rapid, high-quality connections between them, handling payments, and providing controls (like insurance and ratings) that protect both sides of the network. But they have also unlocked new kinds of value by making it possible to do things that were difficult previously, such as finding a safe ride home from a dinner party in a sleepy suburb, or spending the night in a lovingly built, one-of-a-kind treehouse.
In exchange, they take fees that, while significant, can bring the cost lower than traditional alternatives. And customers have responded: the sharing economy is estimated to grow to $355 billion by 2025.63 It has become a phenomenon, shifting social norms and creating an entirely new precedent for our capacity to trust a stranger. When I was a child, it was clear I was never to enter a car of someone I didn’t know. The concept of sleeping in the bed of a stranger was so foreign it was never even discussed. I now hop into the cars of people I have never met, and sleep in strangers’ beds thousands of miles from home without hesitation—accompanied by my own beloved children.
These new models are opening our eyes, industry by industry—giving us a glimpse of the new kinds of value that can be released when the middlemen are compressed, and setting a new precedent for peer-to-peer commerce.
But what comes next could be even more profound.
What Blockchains Make Possible
Pure Peer-to-Peer
“Peer-to-peer” typically appears in the first five words of blockchain definitions. And indeed, the blockchain was born from the desire for extreme peer-to-peer. It was architected to make high-risk transactions between strangers safe. And it captured the hearts and imaginations of its devoted early developers for this feature possibly more than any other.
In Chapter 3, you learned that blockchains make it possible to directly transfer anything of value safely from one party to another without any kind of middleman. The linchpin is trust. The blockchain was cleverly designed to render all the elements needed to create trust between two strangers into code. Innovators are continually releasing new blockchains optimized for a specific set of use cases. But many of these blockchains focus on enriching the ability of two parties to safely exchange something of value that can be described in code, and just about anything can.
The blockchain was cleverly designed to render all the elements needed to create trust between two strangers into code.
In Code We Trust
Blockchains, in essence, make it possible to replace a middleman—and all the activities a middleman would perform—with code. That means that participants—whether consumers or businesses or both—can safely exchange valuable goods or services with someone on their street or across the world. They can do this without a company or any other organization sitting in the middle, siphoning off fees or “charging rent.” And if that person or business doesn’t come through on their commitment, they’re protected too.
The code can verify participants’ identity and reputation, register the transaction in a permanent record, and execute an escrow-like transaction when the goods or services are actually exchanged. The code can execute recourse, automatically, if one of the participants defaults on the arrangement. And that can become part of the permanent record (and reputation of that participant) as well.
Of course, evolving the way we make payments is one obvious use case, and there are many organizations—both new and incumbent—that are working hard on this.
But this is only the beginning.
A Broad Range of Industries Are Vulnerable
Any industry in which middlemen cause friction in a transaction—creating inefficiencies or skimming off significant fees—is a target for disruption. Not all businesses will be impacted the same way, as there are many different kinds of middlemen. But regardless, the pressure is on.
As we sat down over drinks one summer evening in San Francisco, Arianna Simpson, the Managing Partner of Autonomous Partners, shared her perspective with me. “I was in Zimbabwe, and saw firsthand that the institutions, the systems, weren’t serving people—there was a huge gap. I saw an answer in blockchains.” She continued, “The technology allows people to work outside of a system. If your financial system isn’t serving you, for example, well, you can just be your own bank. While I don’t think traditional infrastructures will completely go away, innovation will force existing players—players who have rigged the system to work in their favor—to become more transparent, to lower fees, and to pass more down to the end users instead of hoarding.” Arianna noted how in Zimbabwe’s recent political turmoil, the local price of bitcoin surged as citizens turned to the currency for its comparative stability.64
Use cases go far beyond the financial system. Here are three examples of middlemen that will experience different kinds of disruption as the technology matures and gains traction:
Traditional intermediaries
These companies can be in industries as diverse as banking, insurance, music, real estate, energy, and advertising. These entrenched players, with business models dependent on capturing high fees from the flow of value from providers to customers, are likely to experience significant new pressures and competitive threats. In each area, blockchain entrepreneurs are working on alternatives that offer direct exchange of value between parties. However, it will take some time for the technology to mature and for new competitors to unseat them. A more imminent threat may come from established players who acquire or partner with a blockchain-native team, combining their strengths and knowledge to move more aggressively in the market.
Sharing economy players
This category includes companies such as Airbnb, Uber, and Lyft. It seems almost ever
y region has a team building the blockchain version of “ ” (insert your favorite sharing economy company here). They are using blockchain functionality to lower costs and introduce stronger protections, such as verifying identity and reputation or providing micro insurance. However, these businesses live or die on the power of their two-sided networks. While some startups have certainly achieved explosive network growth (Instagram grew from 80 users to one million in just two months), any new sharing economy competitors will be significantly hampered by the challenges of creating both sides of a two-sided platform from the starting gate.
We can expect that new, blockchain-native startups will open up surprising sharing economy plays using creative approaches, and in unexpected industries. They will be able to leverage what they’ve learned from the giants, as well as the best of the new functionality made available to them via blockchains.
Other modern platform players
This category includes companies like Craigslist, Facebook, LinkedIn, Medium, NextDoor, Upwork, eBay, and Getty Images. Established platforms could use blockchain features to add new value to their existing business, leveraging their positions in the market and the strength of their communities to solidify their dominance and move into new areas that only blockchains make possible.
However, they will also get pressure from new competitors. Threats could come from companies that use blockchains to solve a key pain point or provide a significant upgrade in value for a large and highly networked community. They could conceivably leverage a rapid early foothold to springboard into related communities and gain network effects. Additional pressure could come from scandals that motivate consumers to move en masse to relatively young alternatives (if they have sufficiently evolved), jump-starting network effects.
Implications: A New Balance of Power
Death by Blockchains?
As blockchain development gathers steam, both insiders and casual observers have declared the death of the middleman. Purists even project a death knell for entire systems of government and finance. Venture capitalist and billionaire Tim Draper asserts “Blockchain is much bigger than the internet. It has the potential to transform industries that have historically been government regulated because they are so big. For example, banking, real estate, insurance, venture capital, health care, and government itself can all be completely transformed by blockchain.”65
It’s provocative thinking, and pushes our understanding of what’s possible. And it is answered by blockchain entrepreneurs who are developing true peer-to-peer, govern-by-crowd technology that can facilitate connection and exchange through a network without a middleman at all. From music to financial exchanges to advertising, there are dozens of industries that will be pushed by these extreme peer-to-peer models.
The Middleman Is dead. Long Live the Middleman!
But this picture is likely to reflect the spirit rather than the actuality of our world, at least for quite a while. Certain industries and types of customers will flow more easily into these new models. But others will move very, very slowly—and the total abolishment of the middleman goes contrary to behavior we’ve exhibited for centuries.
The value of a good or service is not intrinsic. It’s driven by whether it’s available when needed, where needed, and how difficult it is to attain—and if something goes wrong, how easy it is to fix. This is the role of the middleman: to create value by getting goods and services from low-value settings to high-value settings. They save us time. They save us effort. They provide essential services to make our experience of the product or service easier, start to finish. In 1995, at the dawn of the internet, Bill Gates wrote The Road Ahead, envisioning a friction-free economy, cleared of middlemen.66 And certainly, the internet unleashed a tsunami of disintermediation. But something else also happened.
We’ve Welcomed New Middlemen into our Lives
Entire new services have sprung up to curate products or save us time. Stitch Fix, with a market cap of over $2 billion, selects clothes for us and delivers them to our home. DoorDash and Instacart pick up takeout from restaurants or food from the grocery store, and bring it to our doorstep. Plated delivers recipes from top chefs with just the right ingredients so our family can try a new home-cooked meal without any research.
Now, more than ever, we want to get more out of our limited time. Many consumers have demonstrated that they are willing to pay extra to have others navigate through a complex and noisy world on our behalf.
The Hinge is Value
These new categories of middlemen each offer a fresh value proposition, finely tuned to the mindset and desires of today’s customers. These next-gen middlemen are laser-focused on getting inside the head of their customer so their service can command a (sometimes quite high) premium.
These new categories of middlemen each offer a fresh value proposition, finely tuned to the mindset and desires of today’s customers.
Blockchains’ capability to replace many traditional middleman functions with code means that many of these models may eventually be under attack (and most businesses play at least some middleman role). These businesses will need to focus relentlessly on creating perceived value for customers. Your particular flavor of disruption will depend on what kind of middleman you are. But regardless, the magnitude will be measured by the gap between what your customers understand your cost to be, and their perception of the value you provide. It is in these margins that the battles for the unblocked customer will rage.
Customers Don’t Understand What They Can’t See
Today, customers may not understand the full hard tolls and soft costs hidden away among layers of middlemen. Today, customers may not have a way to truly gauge your value. But as disruptors provide alternatives that cut cost and demonstrate more value, the gap will be revealed. Just like we saw as the internet matured, incumbents will fall that we didn’t think possible. Buy a house without title insurance? Send money to a stranger without a financial institution in between? These may be some of the first. By their very nature, blockchains were designed to shake the foundations of the most concentrated centers of power in our world today. This is where the gap tends to be largest, and this is where it will begin, but not where it will stop.
The disruption of your business will be in proportion to the gap between what your customers understand your cost to be, and their perception of the value you provide.
At Some Point, the Unblocked Customer Will Question Your Worth
There are different kinds of middlemen serving different kinds of customers, and so this must be interpreted in different ways depending on your particular business. But as blasts of disruption pock the B2B and B2C landscape, it will trigger a shift in customer mindset. As they are trained to expect a new way of business, customers will exert pressure, over time, that will metamorphose the role of a middleman.
We have seen the pervasiveness of this kind of pressure before in a movement coined the “consumerization of IT.” Trained by the slick and easy-to-use interfaces they were using in their personal lives, businesspeople started to expect the same standards in the workplace. While we are still midway through this transition, business software interfaces have gradually started to look more like consumer interfaces. And as millennials (who have been exposed since birth to excellent digital design) have increasingly dominated in the workforce, it has amplified this pressure. A client, the CIO of a midsize technology company, laughed as he told me a story about a recent hire. After a day of onboarding, in which the new employee got her first glance at the HR and business software she would use in her work, she knocked on my client’s door. “With all due respect, sir,” she began, “WTF?” Imagine what a baby born today, who may very well never use a bank, will demand of her middlemen when she enters the workforce in 20 years.
At some point in the coming years, your customers may start to question whether they really need you. For anyone that has dated, you know that moment can be the beginning of the end.
Businesse
s will no longer be able to passively extract value for the privilege of sitting in the middle of a transaction. Instead, they will need to work harder to actively contribute value to all parties—and proactively market that value.
Value Is Not One-Size-Fits-All
Customers who have the resources to spend for curation and convenience may someday see an explosion of middlemen offering to eradicate every inconvenience, every undesirable task from their lives—for a premium. Blockchains may help these middlemen harvest savings from the system, but instead of passing them on to consumers, they could invest it in adding blockchain-driven services and protections that remove friction, enrich their offer, and help grow their markets. For example, imagine a TaskRabbit-like service that comes packaged with identity and reputation verification of your service provider, as well as micro-insurance for all parties. Or a large retailer that could give you both one-click ordering and assurance that your products are not counterfeit.
For customers with fewer resources, the value of saving money may be paramount. We will see a full-frontal attack on models that have layers of tolls levied simply to pass a transaction through. One of the most extreme examples of this is the international money transfer. To send a payment cross-border, a customer must find and hire a transmitter to handle the transfer, which would have contacts with financial institutions in both the transmitting and recipient countries. Further complicating the process, these banks often have their own intermediaries. There are typically at least four banks involved, and potentially others just confirming the transfer. They communicate with each other through a service called SWIFT. The process can take a week and each of the institutions involved charges its own fees. The World Bank tracks a global average of these fees—and it’s over 7%.67
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