Blockchain distributed ledger technology, the tech behind Bitcoin, has the potential to improve ecommerce. These are early days, however. So early that many people don’t understand what a blockchain is and what it means for business. Let’s start with the basics, then look at some of the potential use-cases for ecommerce.
What is a blockchain?
A blockchain is a database “ledger” that cryptographically seals records of digital data or events in an immutable time-stamped chain. There are decentralized forms and centralized forms of blockchains.
Decentralized blockchains work best when there are many copies of the chain. Keepers of the chain (the network of computers that holds copies) must agree that a transaction has taken place before the transaction is committed to a block of transactions, stored on the chain. Decentralized forms of blockchain tend to be permission-less, meaning anyone can participate anonymously. Bitcoin is the most recognized application of a decentralized blockchain.
Centralized forms require knowledge of participants identity and a central organization stores the data. Ripple is an application of centralized blockchain technology. There are advantages and disadvantages to both systems.
In either form, participants can access and inspect the data store on a blockchain. However, no one can alter or delete information sealed in blocks on the chain. The ability for all parties to “see” into all transactions transparently makes blockchains ideal for areas of business in which third-party trust systems operate today.
Fundamentally, blockchains have the potential to make it easier and safer for enterprises to conduct business over the Internet. The inherent transparency that blockchains introduce can lead to:
- Cost reductions in payments
- Improved trust between customers and companies
- Supply chain efficiencies
- Fraud reduction
- Inverted advertising models
Thousands of companies, organizations and consulting firms around the globe are working to leverage blockchains to make industries work more efficiently and effectively.
Here are the top five areas to watch:
Traditional financial settlement systems that ensure the release of payments after goods or services delivery depend on time-consuming, expensive, manual processes prone to inaccuracy. While for consumers it appears that a credit card transaction is completed at the time of a sale, back office financial employees know that it can take weeks for final settlement before a merchant receives the money.
Blockchain-based currencies like Bitcoin, do not require third-party validation to make a transaction. A customer can send bitcoin or other accepted crypto coin to a merchant directly. After receiving confirmation from the blockchain’s network nodes, the transaction is complete, and the merchant receives the payment. The time it takes to complete a transaction is in the minutes, not weeks because verification is automated and secured through multiple confirmations.
Companies looking to reduce costs for back-end settlements and purchases using credit cards, PayPal or other third-parties can accept blockchain-based currency or credit.
Automating contract enforcement
Blockchains can also create “programmable” money, using a smart contract. A smart contract can be a simple agreement to pay for a good or service once certain conditions are met. They can facilitate the exchange of money, property, shares, or anything of value in a transparent, conflict-free way that circumvents the services of a middleman.
Smart contracts not only define the rules and penalties around an agreement in the same way that a traditional contract does, but they can also automatically enforce those obligations.
For example, suppose you buy a car direct from a manufacturer and that you can do this by paying a deposit through a blockchain based currency. You get a receipt from the manufacturer held in a virtual contract. The manufacturer sends you the car and a digital entry key by a specified date. If neither the key nor the car arrives by a specified time, then the blockchain releases a refund of the deposit you paid. If you do receive the car and unlock it by the specified time, then the blockchain releases full payment to the manufacturer.
The system works on if-then-else statements observable by hundreds of observers so you can expect a faultless delivery. If the manufacturer gives you the key, they are sure to be paid. Both conditions must be met for the contract to go through. If you send a certain amount in bitcoins, you receive the key. The contract automatically cancels after its expiration date and the code in the chain cannot be interfered with by you or the manufacturer without the other knowing since all participants are simultaneously alerted.
According to the October 2017 Global Fraud Index, account takeover replaced stolen financials as the fastest growing fraud threat for ecommerce websites in 2017. Companies in just eight industries lost more than $57.8 B through fraud. Fraudsters impersonate legitimate account holders, take over their accounts, and use them to make purchases because usernames and passwords are notoriously easy to obtain.
To combat fraud, blockchain companies are using the idea of the distributed ledger to create trusted identities. In this system, multiple trusted parties must be able to verify another party. On an ecommerce site, verification could take place when a customer wants to use their account to purchase. Other start-ups are leveraging the cryptographic capabilities of blockchains to protect biometrics used for account access, making it extremely difficult for external parties to gain access to another’s account. Identity systems based on a blockchain would extend to all parties in an ecommerce ecosystem: suppliers, partners, distributors and any other players. Similarly, legitimate merchants will use blockchain technology to assure the authenticity of goods and guarantee their quality.
Supply chain gains
Tracking, reconciling and verifying inventory, purchases, invoices, bills of lading, shipments and receipts is a big problem in larger enterprises with sophisticated supply chains. Companies can eliminate all the paperwork (even if the paper is now all digital) using blockchain to create tamper-proof master ledgers between trading parties.
Blockchain solutions offer a single system of record for all parties to all transactions related to products. In this scenario, there is single entry, no duplication and transparency along the entire chain. Every time a product changes hands, the transaction is documented in the blockchain, creating a complete and permanent history from manufacture to sale.
Assuming companies are honest about their goods in the beginning, or there is some way to verify provenance as products enter the supply chain, then blockchains have the potential to reduce inaccuracy.
Using smart contracts, blockchain can facilitate neutral supply chain contract enforcement as well.
Disrupting advertising models and protecting personal information
Traditional media aggregates people with like interests and companies pay the media outlets to target audiences with advertising. Even the newer social media platforms do the same thing. Companies spend vast amounts of money on Facebook, Google and YouTube ads. The model whereby a third-party aggregates targets and sells their attention to advertisers is set to change using blockchain technology.
Imagine if an individual were paid to receive ads, but that they could not just sign up for any old ad? Companies exploring how to use blockchain technology have come up with some new strategies to do just that.
One uses a new decentralized search engine. Consumers earn ad dollars by adding their personal data to a blockchain. When they perform searches through the search engine, businesses that want to reach them can pay directly for access to advertise to them. The record of the transaction is observable by all players, increasing transparency for advertisers and allowing them to understand better where to allocate their budgets.
Another is using blockchain in conjunction with a browser that masks personal information from both advertisers and publishers, allowing consumers to remain anonymous. Consumers can opt-in to receive ads from specific sources. Publishers are rewarded with digital tokens from advertisers for attracting consumers with content. Consumers receive ads that are more relevant to them. The system increases transparency and efficiency in the digital advertising market. Publishers receive more revenue because middlemen and fraud are reduced. Users, who opt-in, receive fewer but more relevant ads. Advertisers earn higher ROI.
Just a fad?
Blockchain technology is not likely a passing fad.
Serious players like IBM, Accenture, Amazon, Microsoft, central and private banks, as well as large corporations are investing time and money exploring hundreds of different blockchain-based use cases. Many of these result in API-based systems that can plug and play with other systems. Looking forward, we expect open, API-based ecommerce systems to more easily incorporate blockchain-based identity verification, payments, smart contracts and new forms of loyalty and advertising than closed commerce systems.