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Liquidity is harder than you think, and scaling a two-sided marketplace is a real challenge.

Dec 14, 2017

‘…if we empower the 400 million millennials who collect virtual items to easily operate their own digital marketplaces and market directly to the video game communities they interact with every day, the global skins market will rapidly scale beyond its $50 billion size today’ — William Quigley, OPSkins CEO

Marketplaces have existed for a long time. They vary in size and focus, but all marketplaces share certain features. In simplest terms, a marketplace is a gathering place for commercial transactions — a clearly defined space where things are bought and sold. To thrive, marketplaces require order, confidence and trust.

Centuries ago, marketplaces would be found in city squares or village halls, rowdy places full of farmers trying to sell their chickens and people trading wheat for cotton.

Today, while traditional physical marketplaces still exist all over the world, they’ve also taken on a variety of new forms, facilitated by technology. Wooden stalls and boisterous traders have been replaced by the digital domains of Amazon and eBay.

One particular type of marketplace is the two-sided variety. A two-sided marketplace is formed when two distinct groups (i.e. buyers and sellers) come together to trade and by doing so bring network benefits to the other side. Some good examples of two-sided marketplaces are Uber and AirBnb. In both cases, the participation of one group — for example drivers for hire or suppliers of temporary housing — directly benefit from the involvement of the other party to the transaction (i.e. people seeking convenient transportation options to a local destination or a place to sleep while traveling). As can easily be seen in these two examples, the more participation from side, the greater the market benefits to the other. Two-sided markets need active participation of both transacting groups in order to thrive. The more involvement from one side of the market, the more desirable the market becomes to the other. For their contribution to the matchmaking process, marketplace operators generally receive a small percentage of the transaction amount while both parties are left better off economically for having participated in the exchange process.

So, what’s the catch?

At first sight this might seem like a win-win situation for the marketplace owners. All they need to do is connect buyers with sellers, then sit back and pocket the fees, right?

In reality, though, it isn’t quite that simple. A new two-sided marketplace faces a daunting challenge: How to attract one side of the market to participate before the other side has gathered in sufficient numbers to make it worth their while. Accordingly, marketplaces are traditionally extremely difficult businesses to scale. There’s a lot of work to do to make a two-sided market succeed. And much that can go wrong along the way.

Unlike a typical ecommerce business, operators of two-sided marketplaces need to establish trust and build tools for two distinct groups: the buyers browsing the available merchandise and the sellers contributing inventory to the market platform. These operators must develop reliable and scalable services for all parties participating in a transaction. Furthermore, the more mass market oriented the platform, the more difficult the challenges of operating it. Marketing to and educating both sides of a large consumer two-sided market is time consuming and expensive. Dynamic two-sided consumer markets require constant tweaking to create the right balance of supply and demand. That job becomes significantly more complex when the two-sided market participants are globally distributed, speak different languages and are accustomed to different payment currencies and methods when settling a transaction.

There’s a lot to manage, and it all has to be done in real time.

With two-sided marketplaces, there’s double to worry about. To return to the Airbnb example, the marketplace owners here have to constantly keep both the housing stock contributors and and the housing stock seekers happy. One day AirBnB might have to deal with an irate traveller who has arrived at her apartment to find it unkempt and freezing. The next day they might contend with a shocked homeowner whose most recent guests have left his beloved townhouse a mess and are refusing to pay damages. If problems like these go unaddressed for very long, the participants in the market lose confidence and market breaks down. Two-sided marketplace operators must be ever vigilant of these problems — and that’s not all.

Getting the balance right

Liquidity — or the amount of transactions conducted on a market platform — is one of the most important features of a successful a two-sided market. For the market to function well, there must be a critical mass, and a proper balance, of buyers and sellers. Too few sellers and buyers will be disappointed by a lack of variety and high prices as buyers scramble for what limited items are available. Too few buyers and sellers will abandon the market and seek out better places to achieve their sales goals.

It’s a delicate balance and one that can easily slip out of equilibrium.

Getting the buyer/seller ratio right in a global consumer two-sided market is a monumental undertaking. Ensuring the global pool of buyers are drawn to the vast selection of available merchandise and top sellers across the world come for the large pool of eager buyers requires an always-on 24/7 mindset.

These are the challenges facing the founders of OPSkins.com as they embark on their latest project, Worldwide Asset eXchange (WAX).

OPSkins is a hugely successful centralized virtual item two-sided marketplace. Launched by a highly experienced team of virtual item marketplace veterans in 2015, OPSkins serves the global community of over 400 million virtual item and video game skin collectors and sellers.

WAX is the next stage in the evolution of the virtual item industry — a decentralized, two-sided consumer marketplace that allows video gamers to buy and sell digital items directly from each other on a safe and scalable platform, without the need for a centralized operator in the middle and without the difficulties of fiat currency settlement..

Why does WAX have an advantage over other two-sided marketplaces?

Simply put, the team behind WAX are the best in the world at what they do. They aren’t intimidated by the enormous challenges of building and scaling a global two-sided consumer marketplace because they have done it before. Twice before in fact.

OPSkins is the largest centralized marketplace globally for in game skins. Prior to creating OPSkins, this same team built the largest marketplace globally for video game virtual items. And this team didn’t just create both the largest virtual item and the largest skin marketplaces globally. They invented the very concept of a video game virtual item trading. Back in 1998.

In the past year, the OPSkins team has successfully field tested many of innovations being incorporated into the decentralized WAX platform. They know what the global digital item trading community wants and these essential capabilities are embedded in WAX.

Need more evidence of the OPSkins teams’ credibility in ensuring that WAX becomes the leading decentralized platform for buying and selling virtual items? Well how about this. The OPSkins marketplace has reached massive global scale in just 24 months and now facilitates 2 million purchases weekly. OPSkins has millions of customers in nearly 100 countries. This scale brings coveted liquidity — one of the essential ingredients in a successful marketplace.

Even with the OPSkins team’s vast experience, the road to success has been filled with challenges. Establishing the initial trust with buyers and sellers in a new platform, scaling transaction processing speeds as the customer base has grown at a rapid pace, implementing new payment and banking services for a globally distributed customer base and developing new methods to lower the high cost of settling small dollar cross border transactions. The team behind WAX have accomplished all of these things in just 2 ½ years. And they have done this all while maintaining an optimal buyer / seller mix and erasing the credit fraud risks that come with operating a global consumer platform.

With over two decades of hard-earned experience running highly scaled digital businesses, the OPSkins team is now in the right position to launch WAX.

To ensure a safe, liquid and reliable two-sided marketplace, the creators of WAX have had to take several important steps.

The first of these is implementing the use of cryptocurrency. This is essential for WAX to work as planned, for a few reasons.

WAX is a global platform. A true global peer-to-peer, two-sided marketplace should allow a buyer in Japan to transact with a seller in the Philippines with minimal friction. Unfortunately, the payment processing costs and fraud risks associated with digital cross-border item settlement and payments using traditional fiat based methods makes this an expensive process.

With cryptocurrency, WAX can facilitate cross border transactions without the costs and frustration of converting Yen into Pesos, Euros into Dollars, or Pounds into Kronor.

Another area favoring the use of cryptocurrencies is microtransactions. Virtual items and skins are often sold for less than $5, cross border transactions of this amount are impractical using fiat currency.

Security has been a major preoccupation for the creators of WAX. Counter-party risk is a major inhibitor in developing a high volume digital marketplace for millions of globally distributed buyers and sellers. WAX eliminates this problem through the innovative application of distributed proof of stake protocols.

OPSkins has done a remarkable job creating a safe, highly liquid centralized marketplace for virtual items. The same team is now applying its extensive digital item trading domain knowledge and expertise to the development of WAX — the third time they have come together to build a virtual item marketplace.

Two-sided consumer marketplaces are tough to build and even harder to scale — there are specific challenges and risks that arise when dealing with non physical items / all digital merchandise. But with the introduction of WAX, the market for buying and selling virtual items is about to become bigger and more rewarding than ever before. OPSkins’ sterling reputation as a trustworthy, reliable and convenient marketplace will be a key factor in cementing WAX’s position as the decentralized marketplace of choice for buying and selling virtual items.

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