Winding Tree 2023: Disintermediation is The Only Way

Can you believe it’s been fourteen years since the launch of the first blockchain? While on this year’s Bitcoin Genesis Day we didn’t feel as excited about the Web3 space, we must remember the original Satoshi’s vision: Bitcoin was created because it was abundantly clear that concentration of power (and money is power) in the hands of a small group of people almost always has profound detrimental effects, sometimes affecting the whole world!

The concepts of decentralization, disintermediation, and self-custody, are the foundations of Web3. And yet, out of stupidity or greed, people entrust billions of dollars to charismatic individuals. (How many centralized exchanges and Ponzi schemes must fail before the world realized that?) Remember: the moment you give your crypto to a trusted third party, you exit the realm of Web3. When FTX or any other crypto-related centralized service fails, the original promise of Web3 still holds true: no one can take your crypto without your permission. Web3 does not, cannot fail!

Before 2008 we had no other way, no technology for coordinating large groups of people without a trusted third party: we had to use banks for money transfers, and market makers, like Expedia or Booking, in the case of Travel. Today’s Web3 tech offers a feasible alternative to the flawed centralized coordination mechanisms. Today’s Web3 tech stack is fast, secure, stable, and (almost, sigh) fully decentralized.

Annually we all pay over 1,000,000,000,000 (one trillion!) US dollars in commission fees to intermediaries whose job is nothing else but to match buyers and sellers. That is how much money is extracted from travelers, airlines, hotels, and, at the end of the day, from local communities all over the world. I’ll leave figuring out where the money goes as your homework, but that money is as good as if we set it on fire.

Travel, on one hand, has a $1T expense, and on another hand a new technology that could solve the problem of criminal inefficiency, and many, many others. What is the industry waiting for? Why do people still want to pay those commissions?

The answer is a lot more convoluted than I would want it to be, and surely we can’t blame it just on the travel industry; here are some pointers:

• Bad crypto UX: it’s extremely hard to deal with crypto in a safe and secure way
• Limited crypto use-cases: most projects in crypto are for trading and speculation
• Substantial amount of crypto fraud and scams
• Web3 is a technology that has to have a critical mass of users to be useful; coordinating a large group of people and companies to do the switch is extremely hard

In addition to that, Travel remains a complex mix of historical relationships, kickbacks and incentives, legacy technology, and marketplace dominance with much entrenched vested interest. It is hardly surprising that there is resistance to change.

At Winding Tree, we’ve been experimenting with various go-to-market approaches for years, and the most viable direction that emerged so far is corporate travel, where instead of educating and coordinating large numbers of small companies (that stand to gain very little at first), a few big players (that have tens to hundreds of millions of dollars at stake) form a gravitational attractor that then has the effect of pulling all smaller companies in its orbit.

As in any change journey, there are always leaders, innovators, and early adopters, and we’ve been very fortunate that our partner company Simard continues to work relentlessly to onboard companies like Ernst & Young, American Airlines, Air Canada, United, and many others.

The next chapter in the Winding Tree journey will be to create a new suite of tools to support the use cases that our corporate partners bring to the table. At the core, the problem is the same: they want to transact with each other with as little third-party mediation as possible. ORGiD, the identity tech that we created at Winding Tree, is already used by some of these companies, but in the next iteration of our offering, we are presented with a brand new set of challenges that revolve around settlement, scalability, security.

As you may remember, we created ORGiD with the idea that the most important part of any decentralized marketplace is the identity of its participants. While it still holds true in the long term, in the environment we operate right now, with a small number of players, it’s not of utmost importance. In the ORGiD-inspired design we posited that after the peer discovery and trust verification, the actual transactions will happen via the parties’ APIs, directly. We proposed this design back in 2018 when there were few ideas for Ethereum scalability. While still in their early stages, today we have a few Layer 2 scalability solutions that we could use to harness the full potential of smart contracts.

We experimented with a fully smart-contract-powered design in April of last year, and while our app was used by just a few users, we were able to save them twenty thousand euros. The application was deployed to Gnosis chain, a side-chain to Ethereum that uses xDai stablecoin as its native token. The ability to write immutable (or collectively owned) computer programs that can operate with real money (that is what smart contracts are) is still extremely underrated. In this case, it provided both hotel and its guests with a completely automated booking and payment system in one, while without blockchain one always has to deal with two separate, sometimes disconnected, systems, which is a lot more expensive and painful for both sides.

While Gnosis is a great ground for experimentation, we were aware that its blockchain will face the problems that Ethereum encountered when it achieved scale: it became too slow and too expensive. Critically, all the transactions were completely public. Layer 2 solutions that are available on the market today already can scale transaction throughput by a factor of 1,000–10,000, but they still have the issue of privacy.

Enter Layer 3 (L3)

According to Vitalik Buterin, creator of Ethereum, the layered approach where Ethereum (Layer 1) is used for security, rollups (Layer 2) for scale, and an L3 for customized functionality (for example privacy), “makes sense.”

An L3 does not just solve a few problems fundamental to the business of our partners, but it is also capable of reducing the time-to-market, for example by providing a few custom JSON-RPC methods, which would allow individual users to continue using the wallets they already use, and an integration with a Web3 library, like ethers.js, for application developers.

The decentralization aspect of the L3 is proposed to maintain via a community-appointed operator for now, with the ability to further decentralize and scale the platform in the future. Layer 3 also allows us to build a completely new token economy where LIF would play an essential role.

Considerations

• We need to provide a unified way for connecting buyers with suppliers: “integrate once, connect many.”
• Suppliers must be guaranteed to get paid for the booking.
• System must be support high transaction throuhput and high look-to-book ratio.
• Privacy of finalized transactions, including the parties, must be maintained.
• On-demand pricing (revenue management) use case must be supported.
• Built-in identity management for all parties, including the traveler.

High Level Design

We propose to build an EVM-compatible L3 solution with LIF as a native token, and a few marketplace-specific features that would be seamlessly integrated into the blockchain API (privacy, order book mempool). This approach would allow the network to process thousands of transactions per second, while not making significant compromises on security, and allowing for completely private transactions. It also opens up a clear path to DAO revenue, which will be based on paying LIF as blockchain transaction fee, plus a ~1% DAO fee.

Concerns

• Centralization. We acknowledge that this solution is centralized (for performance and time to market reasons). We see multiple decentralization paths starting with community-appointed L3 operators, as it’s uncommon in crypto.
• Bridge Design. It is not an easy task to design a L1->L2->L3 bridge.

Further technical details of our proposal are still being worked on, the jury is still out, but please have a look at the discussion here and here. L3 tech is in its early stages, and we are working with a few L2 providers to make sure we choose the best one. We aim to release an L3 for any of your decentralized marketplace needs by June 30, 2023.

Communication

We will be posting about our progress at least once a month or whenever there is an update that is worth discussing.