Market design is another important aspect that people tend to forget. We figured out who to incentivise, now we need to set the environment up. There is plenty of academic literature to read up, including Nobel Prize winner, Alvin Roth. Let’s break this pillar down into something easy to understand before jumping into the more complicated things.
More articles in Market Design series:
- Market Design: Who Gets What and Why
- Market Design and Blockchain
- Market Design case study: Civil Token
Why should I care? Is this even important?
Everything is important, but this is truly an important aspect you must consider when designing your environment.
You live in a small rural village with only 250 people living there. Everyone has a car. You decide to launch a business like Uber in the city. Considering it’s a small village, everything is within walking distance, there are so little people and everyone has a car, do you think your Uber business will succeed? Probably not really. There is no demand.
Now you live in a big city. Think London or Singapore or New York (choose a big city). Everyone has a car. Everyone drives to work. There is no public transport. However, the city only has ONE main road with 2 lanes in each direction. How do you think it will work? You’ll probably spend 4h a day stuck in traffic. Will you want to live in this city if there is another similar option elsewhere? Probably not. It’s too congested.
Now you give up. Rural and big cities are all not right so you move to a medium sized city. There are public transports and cars available. There is also plenty of space. However, you realize that the city has tons of robbery, drug dealers, homeless people shooting up drugs into their blood and signs of human trafficking. The police in the city also seems to be a cahoot with the mafia. Would you want to live there? It’s too unsafe.
These 3 city examples explain the 3 elements of why you should care. When creating the environment, you need to make sure that there is demand (aka thickness of market), ease of transaction (aka decongestion) and safe to use (aka safety). If you nail these 3 elements, users are more likely to use your system.
What should I take note of?
As mentioned in the city examples above, to take note of the 3 elements.
- Thickness (size of network): bring all the relevant parties who want to transact together. Make sure you consider timing of transaction like when should offers be made and how long it can be left open.
- Ease of congestion (reduce congestion in the network): make sure that there is sufficient time to consider the options. Otherwise, there are too many offers and no time to consider them (aka congestion). You can resolve this issue by having the system to help people make better choices. For instance, ranking choices so people make better decisions or make verification super cheap or free so the system isn’t cogged up with transactions to approve.
- Ease of use (make participation safe and simple): make it easy for people to join and also make it safe for them to join. AKA increase privacy mechanism, fully autonomous coins, reduce information kept about the participants.
How do I get started?
Get started with understanding who are the participants in your network. Then understand what is the problem and how to extract the true value from it. Experiment with ways to make the system safer and easier to use!