Original Title: “Monetizing decentralized platforms: How blockchain startups can set prices and fees”
Author: Gérard Cachon, Tolga Dizdarer, Gerry Tsoukalas
Translation: Block unicorn
Introduction
Web3 aims to reduce reliance on intermediaries, potentially lowering costs and giving users greater control over their data and assets. For example, the AI computing costs provided by Gensyn are only a fraction of AWS, while Drife promises to free drivers from Uber's 30% commission.
However, while lowering user costs sounds appealing, setting fees and prices is a delicate balance that platforms must handle properly. The most successful decentralized markets cannot completely reject fees; instead, they combine decentralized pricing with a thoughtful, value-added fee structure to balance supply and demand.
In this article, we will explain the role of pricing control and fee structures in platform economics and governance based on our research; why zero-fee designs are destined to fail, no matter how well-intentioned the designers are; and how blockchain platforms should consider setting prices using a new model we call "affine pricing," which is based on transaction volume and serves as a mechanism to resolve the contradiction between private information and market coordination.
Platform Economics 101: Why Pricing and Fees Matter
The success or failure of digital platforms depends on how they manage two core levers: pricing control and fee structures (i.e., the fees extracted from sellers and buyers using the platform). These are not only revenue tools but also market design tools that shape behavior and determine outcomes.
Pricing control determines who sets the transaction price. For example, Uber uses a centralized algorithm to set fares, optimizing supply-demand balance and consistency. In contrast, Airbnb allows hosts to set their own prices while providing guidance through algorithmic suggestions. Each model addresses different issues: centralized pricing ensures large-scale coordination; decentralized pricing allows suppliers to incorporate private information (such as costs, quality, or differentiation) into their strategies. Neither model is absolutely superior; effectiveness depends on the specific context.
Fee structures not only affect revenue but also determine who participates and how the market operates. Apple's App Store charges fees of up to 30%, but this fee filters supply and funds infrastructure; this may frustrate app developers, but users remain unaffected. In contrast, Ticketmaster's high fees drive artists and fans to other channels. On the low-fee end, Facebook Marketplace's free listings attract scams, while some nearly zero-fee NFT platforms are flooded with low-quality NFTs, degrading the user experience. High fees drive suppliers away; low fees lead to quality decline.
Many blockchain projects adopt zero-commission fees. The logic is that removing the platform's ability to extract value will yield better outcomes for suppliers and users. However, this perspective overlooks the role of well-designed fees in market operations.
Fees are not just a way to make profits; they are also a coordination mechanism.
The Trade-off Between Information and Coordination
The core of platform design lies in a contradiction: leveraging suppliers' private information versus coordinating the market to improve efficiency. Our research indicates that the interaction between pricing control and fee structures determines whether this contradiction is resolved or exacerbated. Here are our insights:
When a platform sets prices, it can more easily coordinate competition between the supply side and individual suppliers. However, because the platform cannot know the private costs of suppliers, prices often adversely affect suppliers and buyers: prices may be too high for some and too low for others. Since platforms typically take a commission from each transaction, this inefficiency leads to profit loss.
If suppliers set prices themselves, they can reflect true costs and capabilities. Low-cost suppliers can compete at lower prices. Theoretically, this would lead to better matching and more efficient outcomes. However, in the absence of coordination, this approach can backfire, manifesting in two scenarios:
When competition is fierce, such as when products are highly substitutable, "race-to-the-bottom competition" occurs. Higher-cost suppliers exit, leading to reduced supply while demand rises, thereby weakening the platform's ability to meet demand.
Secondly, average prices decline, which may benefit consumers but directly harms the platform's commission revenue.
When competition is too weak, such as in highly complementary products, suppliers often price too high. Many companies join the platform, but each platform's pricing is too high, leading to increased average prices and driving customers away. This is not unfounded. In 2020, Uber tested "Project Luigi" in California, allowing drivers to set their own prices. What was the result? Drivers priced too high, leading customers to switch to other platforms. About a year later, the project was discontinued.
Our analysis indicates that these outcomes are not anomalies; they are equilibrium results under standard commission contracts. Even with optimization, such contracts may still lead to persistent market failures. Therefore, the real question is not how much commission a platform should charge, but how to design a fee structure that ensures the system is effective for all stakeholders involved.
How a Quantity-Based Fee Structure Solves the Problem
Our research reveals that a targeted fee structure—specifically, a quantity-based "affine" fee structure—can cleverly address market coordination issues while retaining pricing customization capabilities. This affine fee approach employs a two-part fee structure, where agents (suppliers) pay the platform:
A fixed base fee per transaction, and
A variable component that increases (surcharge) or decreases (discount) based on transaction volume.
This approach has different impacts based on suppliers' costs and market positioning.
Taking a decentralized GPU market as an example, suppliers' costs vary widely. Some suppliers have naturally lower costs due to advanced technology, widespread renewable energy, or better cooling efficiency, while others have higher costs but may offer better reliability. Under a basic commission model, when competition is too fierce, low-cost GPU suppliers set extremely low prices and capture a disproportionate market share. This leads to the market distortions mentioned earlier: some suppliers exit, limiting transaction volume while pulling down average prices.
In this case, the optimal approach is a quantity surcharge: as suppliers serve more customers, the fee per transaction gradually increases. (In a blockchain environment, quantity-based fees may be susceptible to witch attacks, depending on the nature of the product, so some form of verification may be required.) This creates a natural dampening effect on the most aggressive low-cost suppliers, preventing them from capturing too much market share at unsustainable low prices.
Conversely, when competition is moderate or weak, the optimal approach is a quantity discount: as suppliers serve more customers, the fee per transaction gradually decreases. This incentivizes suppliers to lower prices to increase transaction volume, effectively stimulating more competitive behavior without forcing prices below sustainable levels. On decentralized social platforms, this may mean implementing lower fees for creators who attract more interactions, encouraging them to offer high-quality content at more competitive prices.
The brilliance of the affine fee mechanism lies in the fact that the platform does not need to know each supplier's costs. The fee structure creates appropriate incentives for suppliers to self-adjust based on their private cost information. Low-cost suppliers can still charge lower prices than high-cost competitors, but this fee structure prevents them from completely dominating the market in a way that harms the overall health of the ecosystem.
How do these mechanisms work? Why? Our mathematical simulations indicate that platforms adopting appropriately calibrated quantity-based fee structures can achieve over 99% theoretical optimal market efficiency—performing far better than centralized pricing and zero-commission models within our theoretical framework. This would create a market where:
- Low-cost suppliers maintain a competitive edge without capturing too much market share;
- High-cost suppliers can continue to participate by focusing on market segments that value their differentiated products;
- The overall market reaches a more balanced equilibrium with appropriate price dispersion;
- The platform generates sustainable revenue while enhancing market functionality.
Our analysis shows that the optimal fee structure depends on observable market characteristics rather than each supplier's private cost information. In contract design, platforms use observable signals—price and quantity of services—as proxies for hidden costs, allowing suppliers to retain pricing control based on their private information while addressing the coordination failures that arise in fully decentralized systems. This makes affine pricing practical, as platforms can implement it without needing to know the fees charged behind the scenes by each supplier.
The Future Path for Blockchain Projects
By adopting traditional commission-based or zero-fee models, many blockchain projects have compromised their financial sustainability and reduced market efficiency.
Our research indicates that well-designed fee structures are not at odds with decentralization—they are key to creating functional decentralized markets. The quantity-based fee approach we propose offers a clever middle ground that retains supplier autonomy while addressing the inherent coordination issues of decentralized markets.
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