The Sharing Economy as a Clearing House

There’s unarguably been an astronomical rise in the number of companies in recent years driven by the “sharing economy” - a label for the new marketplaces where everyday strangers can exchange physical and intellectual resources with one another instead of doing business with established professionals and corporations. The amazing success of Airbnb has propelled the likes of Skillshare, Taskrabbit, Getaround, Vayable, and slews of other “Airbnb for X” startups that few might have imagined five years ago. Looking back, why wasn’t it obvious that these marketplaces could work, that an entirely new economic sphere lay in our own backyards?

I’m not entirely convinced by the argument that the prevalence of social media has rewired us to rent out our apartments or cars to strangers, nor do I think the recent trend from ownership to access can explain why we’re now comfortable sharing things we already own. If I knew the secret to what made Airbnb successful (aside from inspring execution), trust me, I wouldn’t tell you, but I do find these companies oddly analogous to an institution I was very familiar with as a trader - the clearing house. To explain it simply, clearing houses act as intermediaries between traders so that the buyer is guaranteed to receive what she was buying and the seller is guaranteed to get paid for what she was selling. Traders also post collateral to the clearing house to ensure each side can pay out the other when the values of securities fluctuate. They are not, however, simply a third party that connects buyers to sellers; clearing houses virtually eliminate all counterparty risk, ensuring the trade occurs as contracted and that all settlements are paid accordingly. No clearing house has ever defaulted in the entirety of their existence.

In my view, these sharing economy companies serve as clearing houses for peer-to-peer transactions. I’ll use Airbnb as an example. I see platforms like Craigslist as brokers, third parties that bring people together but do not execute transactions and lack trust-building mechanisms. Airbnb is a clearing house. It has million dollar insurance policies for the owner and provides layers of trust and safety features for travelers. But it’s pretty obvious to say that Airbnb acts as a form of insurance and reduces counterparty risk to both sides. I think the more interesting and subtle reason Airbnb has been a successful clearing house is because it’s been great at commoditizing homes, standardizing and packaging a huge variety of different living spaces into more or less the same components.

Standardizing securities is one of the reasons clearing houses have been effective in finance. Going so far as to send teams of professional photographers to most of their host homes, Airbnb deconstructs each space into an album of beautiful pictures, standardized descriptors and statistics and reviews. By doing that, they’ve almost reduced individual homes into predictable products, commodities that can more easily be traded. This standardization is a testament to how technology has made it easier for us to compile and consume information. 

Another analogy: clearing houses act as the central counterparty to all trades, meaning all transactions between two traders technically occur with the clearing house as the counterparty. Similarly, every time a rental is made on Airbnb, the homeowner and traveler are both transacting with Airbnb rather than each other.

Reducing counterparty risk means that the costs of trading (transaction costs) are lower. Airbnb and other sharing companies seemed to have crossed a threshold where the transactions costs are low enough to merit a huge boom in peer-to-peer rentals.