Few would argue that the digital ads industry isn't broken. We've come to accept ads as a punishment for using free services, but they're invasive, annoying, and creepy; they collect too much information, and they can contain malware.

Even the companies running ads on their services know users hate them. Just watch a few videos on YouTube, and you'll eventually get a message box that encourages you to subscribe to the network's paid service to get rid of ads.

But users aren't the only ones complaining. Publishers are also finding ads less profitable; they're either bombarding their users with more ads or moving toward other methods, such as sponsorship programs and subscription-based business models.

Advertisers, too, are finding the practice increasingly inefficient, forcing them to spend more on ads, a considerable percent of which go to waste. (As a user, I don't even remember the last time I clicked on an ad in a website or streaming service.)

But this doesn't mean digital ads are completely dead. A handful of organizations, startups, and large tech companies believe they can fix the problems with blockchain, the distributed ledger technology that underlies digital currencies such as Bitcoin and Ethereum.

In the past year, blockchain has almost become like a hammer searching for a nail—or a marketing term for quick cash grabs. As someone who has been covering the space, I've seen companies trying to solve every problem with the internet by (nonsensically) "putting it on the blockchain," "tokenizing" it, or "decentralizing" it, which are all different ways to say the same thing. Blockchain isn't the solution to everything.

But I think blockchain has a chance to deliver on its promise in this case: It could change digital advertising from a landscape riddled with hostility and questionable practices to one that promotes transparency and cooperation.

What's Wrong With Digital Advertising?

"The biggest problems with the digital-ads industry are lack of transparency, fraud, and the big number of intermediaries," says Ivo Georgiev, co-founder of AdEx, a blockchain-based advertising network.

Under current online-advertising models, an opaque patchwork of intermediaries stands between advertisers and publishers and gains the most, at the expense of other involved parties. These intermediaries are companies like Google and Microsoft, which stand as gatekeepers between advertisers and publishers. They decide which ads are displayed on publishers' websites and also keep a large share of the revenue coming from those ads.

"Advertisers aren't always in control of where their ads are being displayed, and the costs are continually rising," says Saulo Medeiros, CEO of Kind Ads, another blockchain startup providing decentralized ads. Medeiros adds that on the other end of the advertising chain, publishers aren't in full control of the ads their websites display.

"Publishers are suffering in terms of reputation, and of course, in terms of revenue. Without transparency, the many middle parties along the way take a huge cut, and the publisher does not know how much they would earn in a better system," he says.

Revenue calculation formulas vary depending on the advertising platform a publisher registers with. For the most part, as their traffic and popularity grow, publishers see revenue growth. But they don't always see the details of how much money advertisers bid for placing ads on their website and how much intermediaries shave from the revenues.

Intermediary fees are also hurting advertisers, who have to spend more and more on ads. But without full transparency, they can't target their audience in an efficient manner.

"Without transparency, it's difficult to know how much revenue you're losing along the way as a publisher. For advertisers, the issue is the same: You're paying more when you don't need to. Also, we believe that the lack of transparency is a problem for targeting, as you cannot work directly with all the data that would be available to you in a transparent system," Medeiros says.

Publishers also have to give into the vast decision-making powers of those intermediaries. A stark example is YouTube's demonetization, in which the streaming giant unilaterally decided to reduce the ad revenues of many content creators.

Privacy Issues

Privacy is also a big concern with online ads. End users have little knowledge of how ad tech works and learn about the extent of its invasiveness only when they see creepy ads follow them across websites and ferret out their deepest secrets.

"Users don't trust publishers and advertisers," AdEx's Georgiev says. "They are afraid that their personal information is being misused."

Privacy-aware users use browsers and extensions that block ads and trackers, which again hurts the revenue of publishers that depend on ads to keep the lights on.

The EU's General Data Protection Regulation (GDPR), which came into effect last month, puts further strain on the way advertising technology is working. The GDPR requires publishers to be fully transparent about their data collection and mining practices. But publishers often don't even have access to or control all the details of the information that the technology they install on their website collects. That's why the deluge of notices and emails publishers send to their visitors are mostly a reminder that using their websites is a consent to giving away personal information.

"With GDPR, website owners have to notify web users what kind of cookies are being used on their websites and how much of your personal information is being stored and used. This is supposed to stop the misuse of personal information (which affects ads), but I doubt most people will read these privacy policies and pay attention," Georgiev says.

"The current ad-tech world is fundamentally incompatible with the GDPR—a lot of data about the user is being collected in a non-anonymized way, and that will have to change," says Medeiros.

Blockchain's Solution for Online Ads

Instead of storing information in centralized servers, blockchain uses a network of independent computers that replicate every record of data it generates. Data stored on blockchain is immutable, and no single company can own or manipulate it without controlling or hacking a considerable number of the computers in the network. Furthermore, public blockchains allow anyone to review and audit the information they store instead of keeping it in walled gardens.

With cryptocurrencies, blockchain's transparency and immutability have enabled true peer-to-peer exchange of monetary value without the need for intermediaries such as banks and financial institutions to establish trust between parties. The same concept is now being used in other applications, including the advertising industry.

Giorgiev believes that blockchain will play a key role in addressing the ad industry's transparency problem. "We believe most of the issues are solved with a decentralized (peer-to-peer) transparent system. The blockchain comes in when you need to solve the issue of payments, and when you need trustless trading between the publisher and the advertiser directly," he says.

Obviously, an advertising platform that removes intermediaries means bigger revenue for publishers and lower costs for advertisers. But publishers also get full control of their website's ad experience, says Kind Ads' Medeiros. And users get the opportunity to decide if and how their data is used and are compensated for being part of the cycle.

But what would advertising look like on the blockchain? Kind Ads provides advertisers and publishers with a platform where they can directly negotiate and deliver ads without going through intermediaries. Payments are made in KIND, Kind Ads' proprietary crypto token, without extracting platforms or commission fees (although every transaction on the blockchain has a small fee that goes to miners, the computers confirm and ensure the validity of transactions).

AdEx uses smart contracts, software that runs on the Ethereum blockchain, to enable advertisers to bid on publishers' websites with its ADX token. AdEx also keeps verifiable track of delivered ads on the blockchain and makes sure advertisers are paying for real impressions only, making it easier to prevent ad fraud.

Another interesting project is Brave, the decentralized browser created by Brendan Eich, the inventor of JavaScript and cofounder of the Mozilla project. Brave natively blocks ads and trackers on websites to prevent invasive data collection and to improve user privacy. If the user explicitly opts to view ads, Brave replaces displays ads that have been negotiated between advertisers and publishers on its blockchain platform. For each ad displayed, publishers receive Basic Attention Tokens (BAT). Every Brave user also has a BAT wallet integrated into the browser and receives a fraction of the BAT tokens delivered upon viewing ads.

This model could make ads much more enjoyable for users. It could also ensure that advertisers get more out of every dollar they spend on ads.

The Challenges of Blockchain

While the proposition of blockchain is promising, decentralized advertising platforms will have to compete with the likes of Google, Microsoft, and Facebook, which already dominate the market. Despite their questionable practices, the centralized ad networks are what most advertisers and publishers use. Without convincing them to abandon the giants, nascent blockchain companies won't be able to create the network effect to make them profitable and efficient ad platforms.

Another problem with blockchain applications is the value of tokens. Bitcoin was worth around $1,000 at the beginning of 2017; it spiked up to $19,500 by the end of the year and then dropped as low as $6,000 in 2018. Other cryptocurrencies and digital tokens have seen similar fluctuations, which casts doubt over their reliability as a means of storing value.

Cryptocurrencies also face a liquidity challenge. Since the advent of Bitcoin, proponents have hypothesized a future in which every store and online service accepts cryptocurrencies. But nearly a decade later, the adoption of Bitcoin is still very limited. Niche crypto tokens such as the ones offered by blockchain advertising platforms are used even less. Unless holders find an exchange where they can convert their tokens to Bitcoin or fiat currency, they won't be able to spend them anywhere. This could present a real challenge to publishers that depend on ad revenue.

Nonetheless, decentralized advertising is slowly but surely gaining traction among companies and drawing the attention of big names. Recently, IBM, which has its own blockchain development platform, partnered with advertising company Mediaocean to pilot a blockchain network for advertising. The platform has already attracted some notable participants, including Unilever, Kimberly-Clark, Pfizer, Kellogg's, and IBM's own Watson.

This might be a good first step toward the adoption of blockchain in the advertising industry. As with every evolving technology, a lot of initial solutions will likely die off and give way to their successors. But there's a strong belief that blockchain and its many applications are here to stay. It will be interesting to see what the online advertising space will look like in a year or two.

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