Ride-Share and Blockchain Architecture

November 26, 2023

The world of ride-sharing and blockchain technology might seem miles apart, but they share a fascinating parallel in how they handle periods of high demand. This post focuses on the similarities between surge pricing in ride-sharing apps like Lyft and Uber and the concept of gas fees in decentralized finance (DeFi) applications, particularly during peak usage times.


The Mechanics of Surge Pricing in Ride-Sharing

Picture this: it’s late at night, or perhaps during rush hour, and you’re trying to book a ride home. The initial price seems reasonable, but as you wait for a driver, the minutes tick by with no match. Frustrated, you cancel and try to rebook, only to be greeted with a new, significantly higher price. Unfortunately, this happens all the time. Ride-sharing platforms use demand-based algorithms to adjust prices in real-time, changing prices based on factors like driver availability, local demand, and even weather or local events. For example, during a large concert or sports event, prices can jump due to the sudden influx of ride requests. This system ensures enough incentive for drivers to operate in less desirable conditions, balancing the supply (drivers) with the heightened demand.

Blockchain and Gas Fees: A Comparable System

In the blockchain space, a similar economic principle operates through gas fees. These fees are not just arbitrary charges but are crucial for the functioning of the network. They compensate miners who use their computational power to validate transactions and secure the network. When the Ethereum network, for instance, experiences high transaction volumes – for example, during an NFT drop or a significant market movement – gas fees can spike dramatically. This surge is akin to a bidding war and is unique to the way blockchains process data, where users must pay more to have their transactions processed faster. A notable example was the boom of the DeFi space in 2020, where gas fees reached unprecedented levels due to the explosion of decentralized apps and services.

Dynamics of Supply and Demand in Two-Sided Marketplaces

Ride-sharing and blockchain systems operate as two-sided marketplaces, with one side requesting a service and the other providing the service. In the case of Uber and Lyft, riders are the ones requesting a service (ride-share), and drivers are the ones providing that service. The market for blockchain systems is a little more nuanced. Users of a blockchain system want their transactions to go through. In traditional finance, this is handled by a bank or a third party, making the process somewhat straightforward. In DeFi, however, miners are the ones who process transactions and add them to the blockchain, making them the service providers in this ecosystem.

These marketplaces are deeply influenced by the fundamental economic principles of supply and demand, with prices dynamically aligning with the intersection of these curves. Consider a typical workday scenario in ride-sharing: demand is relatively low as fewer people require rides, but supply remains high due to the availability of full-time drivers. This imbalance results in lower prices. Conversely, in the blockchain ecosystem, periods of reduced activity lead to lower gas fees. Here, the supply of miners is relatively constant. Since miners don’t typically spin their compute power up or down depending on the time of day, demand is the primary driver of price fluctuations. On the flip side, when people leave a concert at an out-of-the-way venue, there’s high demand for drivers as everyone is trying to get home, but low supply since most drivers don’t want to go to this far-away location. Similarly, if news drops and everyone suddenly wants to buy Ethereum, this surge in demand will cause gas prices to skyrocket. This high demand and low supply paradigm drives the prices up so high in these situations.

Why does this make sense? From the supplier’s perspective, these high-demand, low-supply scenarios present a unique opportunity. Supply-side agents, such as drivers and miners, are motivated by profit and are inclined to maximize their earnings. In such instances, they could charge premium rates, knowing that users, driven by urgency or necessity, are willing to pay more. This pricing flexibility is characteristic of two-sided marketplaces, allowing suppliers to adjust rates in response to fluctuating demand, thereby optimizing their profit margins while still attracting service requests.

At the heart of this comparison lies the concept of decentralization. In ride-sharing, drivers operate as independent agents, choosing when and where to drive. Similarly, in blockchain networks, miners are independent validators. This decentralized nature creates a dynamic market where prices (be it fares or fees) are dictated by real-time supply and demand. The autonomy given to drivers and miners in these systems is crucial for their adaptability and responsiveness to changing market conditions.

Implications and Future Outlook

Understanding this parallel between ride-sharing surge pricing and blockchain gas fees offers more than just an interesting comparison. It sheds light on the fundamental principles of supply and demand in decentralized systems and the growing role of two-sided marketplaces in everyday consumerism. As these technologies integrate into our daily lives and society at scale, understanding these mechanics becomes increasingly essential.

Within these efficiencies also lies opportunity. Market mechanisms are an active area of study in academia. While supply and demand are core principles, Keynsian economics tells us that these apply in the long run in many circumstances and that markets can be highly inefficient before reaching an equilibrium. In the blank space of these innovations and inefficiencies are where new market incumbents can anchor themselves, tackling these problems of surge pricing, low participation on either the supply or demand side and optimal matching, amongst many more.

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Written by Samarth, a builder, problem-solver, and amateur gymnast.