The sharing economy is the biggest disruptor to the way business is done since the Industrial Revolution.

Most people are familiar with the giants in the space like Uber, Lyft, and Airbnb. The combined value of these three giants is already over $118 billion, with room for growth.

The sharing economy has completely changed how people procure their products and services and how many people earn or supplement their living.

At the same time, few have considered one of the most essential elements fueling this great disruption. Until more people recognize what it is and how to protect and improve it going forward, the sharing economy runs the risk of stagnating, like the industries they disrupted.

The Current State of the Sharing Economy

In 2015, PricewaterhouseCoopers estimated that the sharing economy would grow from a global worth of $15 billion in 2014 to $335 billion by 2025, with many describing this new form of commerce as nothing short of a revolution.

The 5 Biggest Problems Hurting the Sharing Economy’s Growth

While the sharing economy has forever influenced the way business is conducted, the centralization in the industry can lead to a new wave of monopolization, that these companies were aiming to disrupt.

These aren’t problems that affect one individual sector of the sharing economy, either. We’ve brought out the five most significant issues with the current state of sharing economy below.

1. Reputation is Centralized — Not Shared

One of the central features of the shared economy is the power of one’s reputation. In some ways, it introduces an exciting change to the way many consumers are accustomed to using reputation during their buying decisions.

For generations, it was the seller that had to guard their reputation and bolster positive perceptions of it whenever possible.

With the sharing economy, a negative reputation could cost the consumer an opportunity to rent a home, catch a ride, or benefit from a number of different services.

Of course, another way of looking at this is that the sharing economy merely has rediscovered the oldest qualification for doing business. Previously, a certain degree of trust was required before two parties could execute transactions with one another. Long before courts and contracts, respectable reputations were prerequisites for entering into handshake deals.

While it may seem quaint that this new industry has brought back the importance of appropriate behavior, the way it’s been done is also a major challenge to its future.

In the past, tight-knit communities made it easy for word to spread about one’s reputation, whether it was good or bad. This, in turn, made it easy for businesses and individuals alike to know whom to trust. It was the social equivalent of a credit system.

Unfortunately, the sharing economy lacks this type of resource.

Imagine if, every time you wanted to use your credit card, you had to explain to the business which the company was that would be securing the transaction. It would make your card worth little more than the plastic it’s printed on.

But because companies know Visa, Mastercard, American Express, etc. — all brands with a strong reputation — you’re able to use those cards to purchase things.

When you go from Uber to Airbnb, you can’t bring your reputation with you. Companies that don’t recognize you can’t give you credit for the reputation you may have built elsewhere.

This slows down adoption by users. Why bother with a new provider when you’ve spent so much time building credibility with a specific company, especially if that enviable reputation makes you a more valued customer?

Of course, this problem also causes significant tension between the buyers and sellers who use these platforms. Even one of the most successful companies in the entire sharing economy — Airbnb — doesn’t have a reliable database where it can conduct background checks on its new users.

According to Airbnb, they are only able to conduct background checks on U.S.-based hosts and guests when they have first and last names, plus DOBs (date of birth). Furthermore, they, “do not have these identifiers for all hosts and guests and therefore cannot guarantee that [they] have conducted a check on every host or guest.”

With a decentralized database, all the companies would be equally responsible for contributing to the database, in the name of increased efficiency in operational costs and user safety.

Even the poster children of sharing economy can’t predict the user’s value or potential harm before the user has made their first transaction on the platform.

However, the overlap of users in the sharing economy services is actually not that big. Back in 2016, 72% of all Americans had used at least one sharing economy service, but only 15% had used Uber or Lyft, and only 11% had used Airbnb or VRBO. Signaling that by sharing data even the more prominent players can benefit.

2. Monopolies (Still) Ruin Everything

Another problem with centralized systems for cataloging reputations is that they are already leading to monopolies.

The “sharing economy” sounds excellent and is usually held up to be the antithesis of a system where monopolies could thrive. After all, the entire idea is centered around the fact that anyone can now start their own business.

The truth is that the sharing economy has laid fertile ground for some massive monopolies, which are already growing at a breakneck pace.

The largest companies have private databases about their users’ reputations. The importance of this information cannot be overstated. Essentially, it tells them which users are worth serving because they produce a positive ROI and which are going to be more trouble than they’re worth.

A new company trying to enter the sharing economy has to start from scratch. This will mean suffering some short-term losses as they discover who is worth trusting and who is not.

Of course, they’re at a further disadvantage where this particular element is involved because it naturally follows that people who are prohibited from one company will go find other providers that don’t know better.

For example, imagine someone who has been banned by both Uber and Lyft. They still want to get places at an affordable price, so they turn to the newest ride-sharing provider that has no history with them.

Obviously, this probably won’t work out well for that new competitor.

Now, imagine these new companies having to deal with the same problem again and again. What chance do they have of ever becoming a real threat to a competitor that is quickly becoming a monopoly?

Meanwhile, these growing behemoths can continue focusing on the users that they know will help them boost profitability. In this context, it’s easy to see how the sharing economy — which hinges on the power of reputation — is feeding tomorrow’s monopolies.

For consumers, this might not seem like a pressing problem. After all, if you’ve never had a bad experience with your favorite company, it’s probably hard to sympathize with one of their upstart competitors.

Nonetheless, the problem with monopolies is that their lack of competition allows them to stagnate. At some point, they have no reason to invest in improving the products or services they offer. Yet, at the same time, they can continue to raise prices.

The challenge of private reputation databases is actually behind this problem, as well. If new companies had access to this information, no company — no matter how long they had been in business — would be able to rest on their laurels.

If large companies are able to quit innovating while also raising their prices, the sharing economy will die. The irony will be that it will do so for the same reason so many of the industries it disrupted — from taxis to hotels — were so ripe for disruption.

3. Bad Customer Behavior Is Holding Back the Entire Industry

As we’ve now touched on numerous times, without reputation — and the trust it inspires — the sharing economy would never even exist.

The problem is that, in its current form, the only real incentive is not to incur punishment for bad behavior. For example, you need to behave yourself in a Lyft driver’s car, or you could be banned from using the service.

That may seem simple enough, but the problem of poor customer behavior is actually extremely widespread and is holding back the entire industry.

There have been various cases, where Uber drivers have been attacked and their cars or their other personal properties damaged.

The same goes for Airbnb, where homes of hosts have had severe damages. A guest threw a party for 300 people in a Texas Airbnb, resulting in over $18,000 worth of damages.

While these incidents have made it to the media, there are several minor incidents every day, that never make it outside the internal review and reimbursement system.

The unfortunate truth is that not everyone is trustworthy.

Even if only a small minority of the population is capable of such bad behavior, it has a ripple effect on the entire industry.

First, companies have to find a way to make up for those costs. They’re not going to pay them out of their own pocket, either. Those costs get passed on to the consumers in increased service fees.

Second, once again, this is a problem that affects new companies far more than the established ones. For one thing, the soon-to-be-monopolies have a much higher tolerance for those losses before they need to adjust prices. New companies, many of which only have their venture capital to survive on, are at quite the disadvantage.

Third, without a decentralized resource by which reputation can be measured and monitored, the real potential of the industry as a whole would be limited — as users with bad experiences are less likely to use the service again or stop as providers until a better solution comes along.

As Josie Cox pointed out in an article for the Atlantic, “The inherent problem with many of the biggest players is that their business models are based on trust, yet they’re growing so quickly that they’re forgetting that.”

In other words, many of the most unflattering headlines these companies have earned in recent years have come because, in their rush to grow, they’ve neglected the importance of users’ reputations. Cox points to a first-of-its-kind lawsuit wherein a guest sued Airbnb because she was sexually assaulted by a host, citing the company’s negligence.

Although Airbnb claimed they had done a background check on the host and had found no prior convictions, the case highlights just how vital it is to make sure both sides of the transaction are trustworthy people.

4. Users Must Start Over with Each Platform and Can Be Banned for No Reason

Something we’ve touched on a couple times now is that users can’t just take their reputation from one company to another.

Again, it’s like having to establish who your credit card provider is every time you want to make a new purchase with a new company. It’s difficult to imagine how modern-day commerce could even exist with that kind of environment.

Recall that, earlier, we brought up how, in traditional commerce, companies were the ones that had to go to great lengths to protect their reputations and how, in the sharing economy, that model has mostly been flipped. Companies — especially the monopolies-in-training mentioned above — have much more power when it comes to deciding whom they will and will not serve.

Of course, to some degree, that’s their right. Companies shouldn’t need to accept any customer, especially one who has demonstrated they will cause the business serious problems.

That said, these companies can also ban at will and, as you’re about to see, they’re not obligated to provide any explanation. The problem is that users are then forced to start from scratch with new platforms.

Jackson Cunningham experienced this firsthand when Airbnb banned him for life. According to Cunningham, he had been “a loyal AirBnB evangelist since the early days” and had “referred dozens of friends when it first launched.”

Eventually, Cunningham came to believe that the problem stemmed from a bad review he received from a host — one he claimed was “fabricated.”

Nonetheless, he was left with no way of responding to what he believed was misleading information:

“I emailed AirBnB to report that the host had fabricated details in her review — details which could be proven within the Airbnb platform. But I was told it’s against their policy to censor reviews, even if they’re dishonest.”

He now has to move on to another platform and begin building credibility with that marketplace, starting from nothing — despite a long history of otherwise being a very well-received guest at other properties.

This isn’t just a problem for one side of the equation, either. Those that Airbnb relies on the most — homeowners who actually provide the “product” — are equally capable of being banned with no formal explanation.

Kelly Kampen was another longtime user whose account was terminated by Airbnb for reasons that were never explained.

Prior to the termination, Kampen had earned “over 356 positive 5-star reviews” and had hosted more than 700 guests over the course of 2+ years.

That’s not all.

In his article, Kampen says:

“I am a strong supporter of AirBNB. Over the last 2+ years, I have hosted over 700 guests in my house and been an ambassador to AirBNB in so many ways, from presenting at a dozen local events educating new hosts, helping new guests become familiar with the platform, writing articles, going on podcasts, running TravelersChat, a Slack community for AirBNB hosts and currently developing a small SaaS app to help hosts. This year I was to speak at the AirBNB Open in Paris, my trip was being paid for by AirBNB. (airfare & accommodation).”

Airbnb has never publicly responded to Kampen’s articles, but he has published screenshots that prove he was terminated despite impressive reviews for his services.

Like Cunningham, Kampen would have to start over with an Airbnb competitor if he wanted to continue renting out his home to guests. Without the valuable reputation he had built over his 2+ years with Airbnb, he would be forced to start from nothing and try to rebuild that credibility.

Once again, when these large companies “own” all the information about users’ reputations, it makes the sharing economy prohibitive to newer startups.

It’s also unlikely that the large companies would take such severe actions against longtime users if their reputation profiles were sourced from multiple services and would not let these former super customers go and leverage their reputations elsewhere.

5. “The Sharing Economy Isn’t About Sharing at All”

In 2015, The Harvard Business Review published an article entitled, “The Sharing Economy Isn’t About Sharing at All.”

While the title may seem harsh, the article was largely a refutation of the popular notion — at least, at the time — that a major driving force behind the sharing economy was that people craved social interaction with one another and liked the idea of “sharing.”

Instead, the article describes the sharing economy as “an access economy.”

“It is an economic exchange, and consumers are after utilitarian, rather than social, value.”

This is an important distinction to make when thinking about the future of the sharing economy because it’s fundamentally different than how traditional industries have marketed to customers.

In the past, customers have always thought about ownership. In the sharing economy, they think about access.

This leaves companies operating in the latter with much fewer options to compete. For example, the vast majority of people who are merely after access don’t care about branding. They want to get from point A to point B. They don’t care if it’s Uber or Lyft who takes them.

Even though users are open to trying new services, newer companies are still at a real disadvantage. They have much fewer options for competing against more established companies — companies that also have the power of reputation databases on their side.

As we discussed in the second subsection, this lack of competition will lead to monopolies throughout every sector of the sharing economy. That, in turn, is almost guaranteed to cripple the entire industry and create companies that act a lot like the ones they were designed to replace.

Introducing the Solution: Layer Protocol

Our first-hand experience from building companies in the sharing economy inspired us to tackle a core problem — that reputation isn’t transferrable.

What you spend years building with one platform can’t be used to optimize your use of another. This is an especially bizarre problem when you consider that convenience is one of the major draws that bring people to the sharing economy.

The Sharing Economy Needs a Decentralized Database

There is only one solution that will address this main shortcoming and the problems it causes: a decentralized database that any of these companies can securely exchange data — one that keeps up-to-date records about an individual’s reputation.

This type of solution would keep monopolies from getting comfortable, as no one would have an unfair competitive advantage because of a more extensive database of reputations. Furthermore, none of these larger companies could use this database as a second service, ensuring that their smaller competitors need to purchase data just to secure the records they need to operate successfully.

A decentralized database would better serve everyone, though — not just smaller startups. As we outlined above, bad customers cost money. Even the largest companies have to regularly put up with them because they are also onboarding new customers every day without having no prior information on them.

For example, someone who gets banned from Airbnb for destroying property today probably won’t have any issues renting a home from VRBO.

That same person also wouldn’t have any difficulty securing a ride from Uber or Lyft.

There is currently no way of knowing what to expect from potential users until after their first transaction. Just imagine how much every company would save if they were able to identify which customers were going to cause the most problems before ever suffering from their behavior.

Introducing the Blockchain to the Sharing Economy

Decentralization is crucial to Layer’s effectiveness, and that’s why Layer is built on the blockchain.

The blockchain is central to the building of the decentralized web 3.0. Its widespread adoption is all but inevitable.

For those who are unfamiliar with blockchain, think of it as a distributed database that is able to maintain a shared list of encrypted records. The records are known as blocks. Each block in the chain contains the history of all the blocks that came before it. This includes timestamped data about each transaction right down to the second.

Blockchains have two primary parts.

One is this immutable network that the entire chain maintains. The other is a decentralized network that facilitates and verifies every transaction.

These components are what make blockchain absolutely essential to the sharing economy. By using it to record the reputation of individual users in a decentralized database, it will remain accessible to every company — big, small, new, and old.

At the same time, this access won’t risk invalidating it. The blockchain’s “memory” is eternal. There’s no need for companies to worry that the information they’re relying on has somehow been corrupted.

The Simplest Path to Better User Behavior

Without the ability to “cause problems” with one provider and just switch to another in order to avoid any consequences, it’s easy to see how utilizing the blockchain will actually lead to better behavior by users.

The biggest incentive users currently have for behaving well is avoiding any significant punishment from their service provider.

Unfortunately, as we’ve already established, that isn’t always much of a threat when users can just switch to using a competitor.

However, with an industry-wide reputation, users have an incredibly compelling reason to be good customers. Their poor reputation would affect their reputation even with platforms they have actually yet to use.

The Only Way Forward for the Sharing Economy

The future of the Layer Protocol looks very promising for a number of reasons — many of which we have detailed in this article.

However, chief among them is probably the fact that it represents the most critical evolution if the sharing economy is going to keep growing.

One’s reputation has become progressively more important in recent years. The better yours is, the more you can expect from the sharing economy.

Today, over 72% of Americans have used at least one sharing economy service and own a reputation profile in at least that one service provider or one in every service if they’ve used multiple. However, every time they try a new service, the service provider has no way to know their potential value until their first transaction.

First, this inefficiency allows bad actors to move from one service to another and abuse the centralized database structure. With a growing number of companies in the space, it is a significant expense to all new provides.

Second, since the majority of the population has used at least one of sharing economy’s services and none of the bigger players own a significant portion of all those reputation profiles, all service providers can benefit from sharing reputation data.

Third, people today care less about the brand providing them their home, their ride, their office, their postal service or other services, and care more about the access to the specific service. Decentralizing user reputation makes it easier for people to try new services without starting off fresh and building a new reputation every time, which only encourages competition.

With the Layer Protocol, we’re changing this.

If you’re as excited about the potential of the sharing economy, please visit our website to gain a better understanding of how Layer Protocol will be able to support it and join our Telegram group.