a16z In-Depth Analysis: How Do Decentralized Platforms Make Profits? Pricing and Charging Strategies for Blockchain Startups

Original Title: "Monetizing decentralized platforms: How blockchain startups can set prices and fees" Authors: Gérard Cachon, Tolga Dizdarer, Gerry Tsoukalas Translated by: Block unicorn

Preface

Web3 aims to reduce reliance on intermediaries, potentially lowering fees and giving users greater control over their data and assets. For example, the AI computing costs provided by Gensyn are only a fraction of those of AWS, while Drife promises to free drivers from Uber’s 30% commission.

However, while lowering user costs sounds attractive, setting fees and prices is a delicate balance that platforms must handle carefully. The most successful decentralized marketplaces do not completely reject fees; instead, they combine decentralized pricing with thoughtful, value-added fee structures to balance supply and demand.

In this article, based on our research, we explain the role of pricing control and fee structures in platform economics and governance; why zero-fee designs are doomed to fail, regardless of the designers’ intentions; and how blockchain platforms should consider setting prices using a new model we call “affine pricing,” which is based on transaction volume and serves as a mechanism to resolve the conflict between private information and market coordination.

Platform Economics 101: Why Pricing and Fees Matter

The success or failure of digital platforms depends on how they manage two core levers: pricing control and fee structure (i.e., the fees the platform extracts from sellers and buyers using the platform). These are not only revenue tools but also market design tools that shape behavior and determine outcomes.

Pricing control determines who sets the transaction price. For example, Uber uses a centralized algorithm to set fares, optimizing supply-demand balance and consistency. In contrast, Airbnb allows hosts to set prices autonomously, while guiding them with algorithmic suggestions. Each model addresses different issues: centralized pricing ensures large-scale coordination; decentralized pricing allows suppliers to incorporate private information (such as costs, quality, or differentiation) into their strategies. Neither model is absolutely superior; effectiveness depends on the specific context.

Fee structure not only affects revenue but also determines who participates and how the market operates. Apple’s App Store charges up to 30% in fees, but this filters supply and funds infrastructure; this may dissatisfy app developers, but users are largely unaffected. In contrast, Ticketmaster’s high fees drive artists and fans to other channels. On the low-fee end, Facebook Marketplace’s free listings attract scams, while some near-zero-fee NFT platforms are flooded with low-quality NFTs, degrading user experience. If fees are too high, suppliers leave; if fees are too low, quality declines.

Many blockchain projects have adopted zero-commission fees. The logic is that removing the platform’s ability to extract value will yield better outcomes for suppliers and users. But this view overlooks the role that well-designed fees play in market operations.

Fees are not just a way to capture profit; they are also coordination mechanisms.

The Trade-off Between Information and Coordination

The core of platform design lies in a contradiction: leveraging suppliers’ private information versus coordinating the market to improve efficiency. Our research shows that the interaction between pricing control and fee structure determines whether this contradiction is resolved or worsened. Here’s our perspective:

When the platform sets prices, it can more easily coordinate competition between the supply side and individual suppliers. But since the platform cannot know suppliers’ private costs, prices often adversely affect suppliers and buyers: too high for some, too low for others. Since platforms usually take a commission from each transaction, this inefficiency leads to profit loss.

If suppliers set prices themselves, they can reflect true costs and capabilities. Low-cost suppliers can compete at lower prices. In theory, this leads to better matching and more efficient outcomes. But if coordination is lacking, this approach can backfire, manifesting in two scenarios:

1. When competition is fierce, such as when products are highly substitutable, a “race to the bottom” occurs. Higher-cost suppliers exit, reducing supply while demand rises, undermining the platform’s ability to meet demand.

2. Secondly, the average price drops, which may benefit consumers but directly harms the platform’s commission revenue.

When competition is too weak, such as with highly complementary products, suppliers tend to overprice. Many companies join the platform, but each sets prices too high, causing the average price to rise and driving customers away. This is not hypothetical. In 2020, Uber tested “Project Luigi” in California, allowing drivers to set their own prices. What happened? Drivers overpriced, causing customers to switch to other platforms. About a year later, the project was discontinued.

Our analysis shows that these results are not anomalies; they are equilibrium outcomes under standard commission contracts. Even when optimized, such contracts can still lead to persistent market failures. Therefore, the real issue is not how much commission the platform should charge, but how to design the fee structure to ensure the system works for all parties involved.

How Quantity-Based Fee Structures Solve the Problem

Our research reveals that a targeted fee structure—specifically, a quantity-based “affine” fee structure—can cleverly solve market coordination problems while preserving price customization. This affine fee approach uses a two-part fee structure, where agents (suppliers) pay the platform:

1. A fixed base fee per transaction, and

2. A variable component that increases (surcharge) or decreases (discount) based on transaction volume.

This approach affects suppliers differently depending on their costs and market positioning.

Take the decentralized GPU market as an example, where suppliers’ costs vary. Some suppliers have naturally lower costs due to more advanced technology, widespread use of renewable energy, or higher cooling efficiency, while others have higher costs but may offer better reliability. Under a basic commission model, when competition is too fierce, low-cost GPU suppliers set extremely low prices and capture a disproportionate market share. This leads to the aforementioned market distortions: some suppliers exit, limiting transaction volume, while dragging down the average price.

In this case, the optimal approach is a quantity surcharge: as suppliers serve more customers, the fee per transaction gradually increases. (In a blockchain environment, quantity-based fees may be vulnerable to Sybil attacks depending on the nature of the product, so some form of identity verification may be required.) This naturally restrains the most aggressive low-cost suppliers, preventing them from capturing an unsustainable share of the market at excessively low prices.

Conversely, when competition is moderate or weak, the optimal approach is a quantity discount: as suppliers serve more customers, the fee per transaction gradually decreases. This incentivizes suppliers to lower prices to increase transaction volume, effectively stimulating more competitive behavior without forcing prices below sustainable levels. On decentralized social platforms, this might mean lower fees for creators who attract more engagement, encouraging them to offer high-quality content at more competitive prices.

The beauty of the affine fee mechanism is that the platform does not need to know each supplier’s costs. The fee structure creates the right incentives for suppliers to self-regulate based on their private cost information. Low-cost suppliers can still charge lower prices than high-cost competitors, but this fee structure prevents them from completely dominating the market in ways that harm the overall ecosystem’s health.

How do these mechanisms work? Why? Our mathematical simulations show that platforms using properly calibrated quantity-based fee structures can achieve over 99% of theoretical optimal market efficiency—in our theoretical framework, far outperforming centralized pricing and zero-commission models. This creates a market where:

• Low-cost suppliers maintain a competitive edge but do not capture excessive market share;
• High-cost suppliers can continue to participate by focusing on market segments that value their differentiated products;
• The overall market reaches a more balanced equilibrium, with appropriate price dispersion;
• The platform generates sustainable revenue while improving market functionality.

Our analysis shows that the optimal fee structure depends on observable market characteristics, not each supplier’s private cost information. When designing contracts, platforms use observable signals—price and quantity of services—as proxies for hidden costs, allowing suppliers to retain pricing control based on their private information while addressing the coordination failures that arise in fully decentralized systems. This makes affine pricing practical, as platforms can implement it without knowing the fees charged behind the scenes by each supplier.

The Road Ahead for Blockchain Projects

By adopting traditional commission-based or zero-fee models, many blockchain projects have undermined both their financial sustainability and market efficiency.

Our research shows that well-designed fee structures are not at odds with decentralization—they are key to creating functional decentralized markets. The quantity-based fee approach we propose offers a clever middle ground, preserving supplier autonomy while addressing the inherent coordination problems of decentralized markets.