The application of cryptocommerce: The Safex marketplace

The team at Safex, backed up by the open source development company Balkaneum, are developing the next generation of online marketplace. You can find the Safe Blue paper at this link.

Many of us in the community believe that Safex will be the beginning of a new paradigm in online selling, the true start of crypto commerce.

For the remainder of the article I will outline why I think that Safex is the future, and how the implementation of the marketplace will solve many of the current issues facing online sellers.

Why not just use Bitcoin to buy and sell?

The two main factors that preclude Bitcoin from being an efficient marketplace currency to buy and sell are low liquidity and high centralization. These issues are compounded by relatively slow transaction speeds and a volatile market value.

Bitcoin is an extremely centralized cryptocurrency. Approximately 96% of all Bitcoins are stored in only 3.28% of addresses[1], meaning that very few people control the majority of the supply. This can lead to large manipulation of market price of Bitcoin which is a problem for investors, but an even bigger problem for those who are trying to buy and sell using it.

As discussed in a past article, Bitcoin is not liquid enough to act as a medium of exchange[2]. The velocity of Bitcoin closely follows the velocity of M2 money in the USA, suggesting that Bitcoin is mostly being used as a store of value, rather than as a medium of exchange[3].

These problems are inherent due to the design of Bitcoin’s emission schedule. Bitcoin is good at what it is, an investment, but it is not a medium of exchange. Simply put, a currency that is used to buy and sell on a marketplace must be very liquid with low price volatility. Bitcoin fails this test. We need something better.

Why then is Safex Cash a good currency to buy and sell with? How will the Safex marketplace solve the current issues with e-commerce trading?

The Safex team are uniquely positioned to change the face of online buying and selling. Like many other cryptocurrencies, they have a world-class development team[4], but unique to Safex are two priceless assets: Daniel and Ivana. Daniel Dabek[5], the founder of Safex, is the visionary, while Ivana Todorović[6] brings evidence based economic practice to the cryptocurrency industry.

The first major piece of intellectual property which Safex has brought to the industry is a realistic coin emission curve[7]. It is this emission curve which allows Safex to solve the first major issue in crypto commerce:

1. Price volatility and low liquidity

The problem of high price volatility and low liquidity is a plague on cryptocurrencies, one which stems from a lack of imagination. When Bitcoin was born, the emission design was simple – emit lots of coins early and halve the emission rate every four years. “This decreasing-supply algorithm was chosen because it approximates the rate at which commodities like gold are mined”[8], but crucially, it does not approximate the rate at which new technologies are adopted by a population. Since then the majority of new currencies have blindly copied this emission or made slight but qualitatively inconsequential modifications.

The result of this emission design has been centralization of cryptocurrencies where the majority of the currency is controlled by relatively few. In turn, this has led to relatively low liquidity (i.e. low money velocity), “pump and dump” events, and generally high volatility. The trouble caused by poor economic design has almost certainly slowed the mass adoption and acceptance of cryptocurrencies by the general populace.

However, as described in the blue paper[9], the Safex emission curve is fundamentally rooted in sound and proven economic practice. By using a (more realistic) modification to the classical Roger’s theory of the “diffusion of innovation”[10][11], the Safex team have created an emission curve that more closely follows the adoption of new technologies – and is likely to mirror the adoption of the new marketplace.

The result of this modification is that fewer coins are emitted early on, hence, less of the currency is controlled by a few individuals, it is less centralized, and hence, less volatile (it is harder for a single person or a small group to control the price up or down as they see fit).

Since the currency is spread more between individuals it is likely to also be more liquid and used to buy and sell on the Safex marketplace more than being held on to. With this emission schedule there is less incentive to “HODL” Safex Cash (SxC, the currency of the marketplace), since the advantage to doing so is reduced compared to currencies with a Bitcoin-type emission design. Again, this will lead to more liquidity in the marketplace and less volatility.

The Safex emission curve gives Safex Cash the best chance of succeeding as a medium of exchange where other cryptos have failed.

2. The need for privacy

As previously mentioned, consumers value their privacy to the point that they will change their purchasing behavior (or simply not buy an item at all) if they do not feel secure on a marketplace. Cryptocurrencies inherently provide a level of anonymity, but cryptos with a public ledger provide less than a true privacy coin. For example, if someone ever discovered your public Bitcoin key they could look through the history of your address and see every transaction which you had performed.

This is not the case for privacy coins such as Safex Cash. Based on the Monero currency, Safex Cash will employ “Ring Confidential Transactions”. Among other purposes, when sending a payment this technology prevents the recipient gaining knowledge of the sender’s current wallet balance and transaction history. It also prevents a third party who is observing a transaction from discovering the identity (in terms of identifying a blockchain address) of the sender and recipient.

Additionally, there will be an encrypted private messaging protocol built into the blockchain, allowing secure conversations between buyer and seller.

With the proven privacy/security features built into the Safex platform the issue of anonymity among online shoppers is solved. Now anyone can shop without fear of being tracked or of losing control of their private personal information.

3. The unbanked: a pool of new customers

The developing world is potentially a large source of new custom for online-sellers. More and more people are being connected to the world via mobile devices. The Safex marketplace will be accessible from anywhere in the world, and available to anyone with an internet connection through their PC or personal devices.

Not only will this lead to a larger potential customer base but will also increase the potential number of suppliers from which online sellers can purchase goods unique to, say, Africa, for example.

This also allows people from any community in the world to compete for services and to sell their own goods at a fair price, without any middleman. Imagine a farmer in the middle of the Amazon jungle buying an online course from the Safex marketplace on how to better irrigate his crops.

Imagine an aspiring New York musician downloading never before heard tribal music uploaded to the marketplace from the deserts of Namibia. If technology and the internet have made the world a small place, then it’s time to get to know your neighbour!

4. Reducing scam reviews

In many e-commerce platforms it is possible to leave a review without purchasing a product from the vendor. It has been reported[12] that a general way to reduce these “Sybil” attacks is to charge a fee for reputation generating actions.

This ability is built in to the Safex blockchain[13]. In fact, anyone with an (anonymous) account on the Safex marketplace can leave a rating and feedback after a trade. The feedback fee is automatically included in the blockchain transaction fee.

Considering that there is a small fee to create an account, a transaction fee, and the cost of purchasing a product to be eligible to leave feedback, the cost of running a Sybil attach against a competitor is high, hence the frequency of such attacks will be low. Therefore, the Safex marketplace has in-built functions to protect a seller’s reputation.

5. No more chargebacks

Online merchant operating costs will be reduced when payment is made using cryptocurrency (such as Safex Cash) since fraudulent chargebacks are no longer possible. A transaction on the Safex blockchain will be rapidly confirmed (the block time is 1 minute, so a transaction should be confirmed in 10 to 15 minutes) and is irreversible after this confirmation.

The short block time of Safex Cash effectively eliminates the risk and costs of chargebacks. However, the Safex marketplace will also have in-built escrow and arbitration services which will give peace of mind and protection to both the buyer and seller. The Safex marketplace is designed to protect both customer and merchant.

6. Low transaction fees, high transaction speed

In part 2 of this article I discussed how the average transaction fee for traditional payment methods was large compared with payments made using cryptocurrency. Specifically, Bitcoin averages a 1% transaction fee[14]. There was a point near the end of 2017 where the Bitcoin blockchain was backed up with pending transactions (some of these transactions took days to process), while fees for transactions also rapidly rose. Two fundamental reasons for this period of slow transactions and high fees on the Bitcoin blockchain were:

A. Relatively long block times

B. A fixed block size

Such an event is significantly less likely to occur on the Safex blockchain. Firstly, the block time for Safex Cash will be 1 minute compared with 6 minutes for Bitcoin. A consequence of this is that the Safex blockchain can process 6 blocks of transactions in the time it takes the Bitcoin blockchain to process a single block.

Secondly, the block size on the Safex blockchain is dynamic, meaning that as more transactions occur the block size adjusts to fit more transactions within a single block. The net result of a short block time and a dynamic block size is that competition to get transactions into the next Safex Cash block will be low, hence, the transaction fees will be much lower than on the Bitcoin blockchain.

I predict that the average Safex transaction fee will be less than 0.1% net.

7. Simple and low-cost platform fees

As exhibited in part two of this article, the fees for selling products on current e-commerce platforms are large and vary depending on what and where you are selling.

The fee structure for many platforms can be quite confusing for sellers. Not only can the percentage fee charged on the sale cost vary depending on the type of item sold, but there are often flat rate charges per item listed, and subscription fees to budget for.

Some platforms even take a percentage of the shipping fee. Incredibly, in some cases fees can account for over half of the sale price. It shouldn’t be so difficult to sell online.

The Safex marketplace will have a simple and low-cost fee structure to sell any item on Safex platform. This is outlined below:

Create an account: 2 Safex Tokens (one time only) Create a title market: 200 Safex Tokens (optional, one time only) Platform Fees: 5% of sale value

As of 28th July 2018, the USD price of 202 Safex tokens to pay part i) and ii) is a little over $6 USD. Although the cost of 202 tokens will increase over time, this one-time fee will remain very affordable as a start-up cost.

I expect that most stores will create their own title market so that all their products can be sold under the same title, making it easy for customers to browse all of the store’s products.

Given the simple and low fee design of the Safex marketplace, the reduced cost of chargebacks, and low transaction fees, most vendors will save at least 15% on their costs. In the extreme case of udemy.com, a person who sold online courses through a website connected to the Safex marketplace could reduce platform fees by a staggering 45%!

For a merchant who turns over the average revenue for online stores of $750,000 USD per year[15], that can equate to a $112,500 to $337,500 saving in annual costs. While it is likely that some or even most of this decrease in cost will act to increase profits, I expect that some of the saving will be passed on to customers, making items and services cheaper to purchase, and making it more likely for a customer to purchase an item in the first place.

8. Airdop cashed-up investors

A consideration for online-sellers who become the early adopters on the Safex marketplace is a potential spike in sales at the launch of the marketplace. In the coming months, in order to encourage use of the new marketplace, 5 million Safex Cash will be “airdropped” to Safex investor (a further 5 million will be airdropped to the Safex team for promotion and other costs).

As I have previously discussed[15], for the marketplace to flourish it is important for investors to spend their airdropped Safex Cash on the marketplace. Therefore, it is likely that any sellers on the marketplace will find their goods being purchased at a rapid rate by the early Safex investors.

9. API integration for website and applications

The Safex API (application programming interface) is open source so anyone with a background in programming will be able to integrate purchasing items using the Safex marketplace directly into their website or application..

Balkaneum and others will be developing tools and guides to help to on-board merchants into the Safex economy. If you are willing to sell your products on the marketplace then there will be help for you to do so. Safex wants you!