Why it makes sense to run digital ads on the blockchain

6 min read

Ads

If you’ve used YouTube for any amount of time, you’ve probably been annoyed by ads that delay the start of videos, or worse, those that interrupt videos in mid-play. It’s not just you—the folks running YouTube already know how annoying their ads are, and testament to the fact is the popups that encourage you to sign up to YouTube Red, the streaming giant’s paid premium service, to “ditch the ads.”

YouTube ads

It’s not just YouTube. Most sites that deliver content bombard you with different flavors of ads, above the banner, below the banner, in the sidebar, in the middle of the text, through popups and more. Even our games have become infected with ads. Want to unlock a hidden level? It’s okay, you must just suffer through this ad. Did you just lose your last life? You can have another one—if you look at this 30-second ad video.

Ads have become our method of payment—and our punishment—for using free internet. They degrade your experience, use up your bandwidth (especially if you’re on a limited mobile data plan), invade your privacy by stealing your data, they stalk you across different websites. They can also contain malware.

Everyone is suffering

But let’s be fair, ads do subsidize a lot of the content and services we consume online, and the companies that host them need to make money too. Short of charging us monthly and yearly subscription fees, ads are one of the only ways publishers can keep the lights on.

However, not even publishers are happy with the efficacy of digital ads, because they’re not a very profitable engagement. The revenue most publications make per ad impression is very low. That’s why they either put up paywalls or increase the number of ads they display on their websites to increase their revenue and make it worth their efforts.

Others, like The Guardian, try to convince their visitors to be kind to them and make donations, because “advertising revenues across the media are falling fast.”

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The Guardian has a message to its visitors

Paywalls only work for very large and authority publications such as The New York Times and The Wall Street Journal, not for smaller websites that don’t get enough attention to encourage subscription fees. As for invasive ad display policies, they come at a huge cost to the user experience. In response, users either install ad blockers or simply ignore the ads out of frustration and anger.

The advertisers, the organizations that pay to place ads on publications, also suffer from the entire hostility that haunts the digital ads industry. They must spend more and more money on ads, a considerable amount of which get blocked or ignored by angry users, or goes to waste in bogus fraud traffic.

So, if everyone is mad at the way digital ads work, what happens to the tens of billions of dollars that the industry is generating every year?

The problem with advertising intermediaries

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There’s one more party involved in the advertising cycle that we haven’t mentioned yet, and that is advertising agencies. These are the intermediaries that connect advertisers to publishers and display the ads on users’ browsers when they visit news sites or other content delivery platforms.

These are companies like Google, Facebook and Microsoft, which account for most of the digital ads market. When advertisers want to place ads, they can’t directly contact publishers. They must go through one of these intermediaries, which charge them for their ads and then distribute them across their network of publishers.

Here’s how this business model becomes problematic. The intermediaries take a good-sized cut of advertising revenue for themselves and pass-on the rest to publishers. This means advertisers must pay more and publishers get paid less.

Intermediaries also take away control from both publishers and advertisers and decide which ads get displayed on which outlet. Intermediaries also collect a lot of data about users to optimize their ad placement algorithms and to be able to make the right decisions on behalf of thousands of advertisers and publishers that have signed up to their network. The publishers that run the agency’s software often don’t even have enough information about how much data their website collects about users, how that data is used and what other parties it’s shared with.

This operational architecture renders the ad pipeline opaque. No one except for the intermediaries exactly know what’s happening in the advertising black box. The lack of transparency creates the grounds for questionable practices, such as ad fraud, where advertisers are fooled into paying for fake traffic that doesn’t result in any conversions. All these elements have created a general sense of mistrust and animosity between the different involved parties.

Why blockchain is relevant to advertising

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Before we dive into the blockchain solution, let’s be clear about something: Blockchain is not a silver bullet. In the past year, many organizations and individuals have used blockchain, tokens and ICOs to run scammy money-grabbing schemes or to raise the value of their stock. There are a lot of projects that claim to employ blockchain for absurd reasons and to solve non-existent problems.

All these shady uses of blockchain (and sometimes, only its name) have cast a shroud of doubt on the technology. Add that to all the ways hackers and criminals have used cryptocurrencies over the years for money laundering and crime, and it’s only natural that the public becomes a bit disenchanted with the blockchain industry.

But in this specific case, blockchain can actually provide a solution to the problems of the advertising industry.

If you don’t know what it is, study our blockchain explainer and read more about blockchain’s application in different industries. But in a nutshell, blockchain is a distributed ledger, a database that is replicated across many computers to obviate the need for centralized servers. Blockchain is transparent, which means everyone can review the information stored on the blockchain (the public kind at least) without going through any gatekeeper, and no one can limit access to the blockchain’s data.

Likewise, to store new information on the blockchain, users don’t have to go through intermediaries and can directly submit their data to the network of computers that maintain the ledger. (Blockchain is also resilient against data tampering and cyberattacks, but that is out of the context of this article.)

In respect with the online ads industry, blockchain’s biggest promise is to replace intermediaries with transparent, decentralized platforms where advertisers, publishers and users can all coordinate and agree on when, where and how to display ads.

What does advertising on the blockchain looks like?

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There are already several startups that have deployed decentralized advertising platforms on the blockchain. One of the earliest efforts was adChain, a blockchain-based registry that keeps track of all transactions and data associated with ad impressions. By making the advertising supply chain transparent and visible to everyone, adChain makes fraud much more difficult—if not impossible. Advertisers will also be able to verify which publishers have valuable traffic and are suitable for ad campaigns.

Other platforms such as Kind Ads use the Ethereum blockchain and smart contracts, software that runs directly on the blockchain, to enable advertisers and publishers to directly negotiate ad placements without the need for an intermediary. Every contract between an advertiser and publisher in Kind Ads is turned into a smart contract, which processes payments in KIND tokens, the company’s proprietary cryptocurrency. Whenever a user visits the website and an ad is displayed, the smart contract automatically transfers the negotiated amount of KIND from the advertiser’s wallet to the publisher’s address. Every transaction is registered on the blockchain for later auditing and review.

Another benefit of blockchain-based advertising is the power it gives to users. An example is Brave, a blockchain project by Brendan Eich, the inventor of JavaScript and cofounder of the Mozilla project. Brave has two main components. First is an ads marketplace that is similar to Kind Ads and works with its own cryptotoken, the Basic Attention Token (BAT). The other component is a namesake blockchain-based browser that comes integrated with a BAT wallet.

The Brave browser natively blocks all ads and trackers to improve users’ privacy and avoid invasive data collection. Instead it creates a profile of the user’s preferences, which it stores locally on the browser. Users can decide if they want to see ads, and when they do, they receive a fraction of the BATs that the ad impression is worth. This model improves ad conversion rates because users only see ads when they want to. This means advertisers can spend less on ads.

The challenges of blockchain advertising

While the intermediate-less world of blockchain-based advertising sounds promising on paper, it has its own set of challenges to overcome. Its biggest one will be to overcome the power of ad giants like Google, which have already locked in a large percentage of publishers and advertisers in their platform.

Blockchain startups will have to convince a considerable number of high-traffic publishers and advertisers to transition to their platform and create a network effect that will attract others. Publishers will only opt in for decentralized advertising platforms if there are enough advertisers to bid on their website and make the engagement profitable, and the advertisers won’t transition to those platforms if there aren’t enough publishers to choose from, creating a catch 22 situation.

Another problem with blockchain-based platforms is the liquidity of cryptotokens. More than a decade after the invention of cryptocurrencies, their adoption remains very limited and mostly constrained to bitcoin, the most popular cryptocurrency. Publishers must convert their earned tokens into fiat currencies to be able to use them. In most cases, this means going through several exchanges, which can be a frustrating and costly process. Publishers and advertisers must also deal with the volatility of cryptocurrency prices. In the first six months of this year alone, the value of cryptocurrencies dropped by nearly two thirds. These kinds of fluctuations might not be acceptable to people whose livelihoods will depend on the earnings they make from running ads on their website.

Only time will tell whether blockchain will be able to overcome these challenges and create decentralized marketplaces that will fix the endemic problems haunting the advertising industry. A lot of it will depend on whether tech giants will resist or welcome the blockchain revolution. At the very least, these projects will serve as a warning to the ad giants that if they don’t fix their mess, someone else will.

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