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Beyond cryptocurrencies: E-commerce value chain and the blockchain (Part Two)

When we dig deeper into blockchain technology, we find that there are several solutions out there competing to become the standard. Not all blockchains do the same things, and they share some common problems, like scalability and interoperability. But we can also say that there are several common features to the technology that everybody agrees are fundamental for any blockchain (aka ‘distributed ledger technology’ (DLT), or a shared database stored on multiple devices at the same time):

  1. Distributed ledgers store information and transactions in digital ‘blocks’, each with a unique ID that cannot be altered retrospectively without also altering all subsequent blocks — something that is almost impossible. This feature of the blockchain brings one of its most significant advantages: immutability. If a hacker wants to change data stored in the blockchain, they need to change it on the majority of the nodes on which it is held.
  2. The whole ledger is fully available for all users, resulting in total transparency.
  3. Because every block is unique and almost impossible to falsify, we can create digital assets within the blockchain that are impossible to copy or counterfeit. These assets are called tokens. The shared and immutable nature of the blockchain prevents the double spending problem, where the same digital asset can be used for two separate payments.
  4. Tokens, as unique units of information, can also represent ownership of any form of value or asset, which can easily and safely be exchanged over the Internet.
  5. Each user on the blockchain is identified by a unique 30-plus-character alphanumeric address. Transactions occur between blockchain addresses. This feature gives another advantage to users: pseudonymity or disguised identity. This is not the same as anonymity, but brings better control and protection of personal data. Anyone can use the network, since all it takes is an address, and no personal information is required to perform transactions on the blockchain.
  6. Recent developments, such as the Ethereum network, have added another layer of functionality to the blockchain: smart contracts. These are small programs that can be activated fully or partially without human interaction, executing a given action once particular conditions are met, and registering these operations in the blockchain. Interactions between nodes can thereby be automated.

The basic advantages for any blockchain can therefore be summarised as immutability (permanence or irreversibility), transparency, prevention of double spending problem for payments, safe value transfer and storage, pseudonymity, and for those using smart contracts, automation of interactions between nodes.

Blockchain technology opens whole new horizons for e-commerce

These features of blockchains bring numerous advantages, with great potential for many steps of the e-commerce value chain. Without being systematic, we believe that the main fields in which blockchain will prove revolutionary will include logistics, platform operations, identity and data protection, and customer support.

Logistics

E-commerce logistics its a field with huge potential for blockchain applications.

Let’s start with logistics. Transparency and immutability are a great combination for any supply chain. Nowadays, the biggest risk for any supply operation is the ‘bullwhip effect’, when fluctuations in demand become magnified in impact along the supply chain, rocketing the cost of moving and storing any kind of physical goods. This bullwhip effect comes from the lack of transparency between siloed databases. The blockchain solves this problem from the very beginning, since everybody is able to check the level of stock at any point along the supply chain. In fact, these features are already being explored by many companies. The results bring the promise of greater efficiency, and applied to e-commerce could improve both stocking and fulfillment activities.

E-commerce platform operations

The blockchain technology might help to improve the efficiency and trustworthiness of digital platforms.

The second element of the e-commerce value chain where blockchain will bring big value is operations. A key element of every e-commerce business is the platforms where transactions take place. How can the blockchain improve e-commerce platforms? Basically, this is a matter of both trust and efficiency. The blockchain has been called a ‘trust machine’. As we noted last time, e-commerce is based on trust, so there’s a perfect match here! But how does it work? Through the blockchain’s immutability, transparency, and payments mechanism.

The transparency and immutability of any blockchain record will be enormously useful to bring trust to e-commerce without a middleman. Up to this point, trustworthy transactions always required a third party (in the case of marketplaces), or certifications (in the case of individual shops). Both are supposed to ensure that sellers are trustworthy and transactions are conducted properly.

But the blockchain changes all that. You simply have to check the network, and the records of transactions, to determine whether a seller is reliable or not. And you can easily build on these basic network features further automated escrow systems to guarantee customer funds stay safe.

Smart contracts can therefore bring greater efficiency to many operations that otherwise would be handled manually, or would require significant expense. For instance, arbitration of disputes can be partially automated, or even outsourced, with substantial savings to e-commerce operators (keep in mind that complaints and product returns represent a high proportion of the costs of this business).

This can also apply to payments. The blockchain allows value transfer in a digital network in a safe and reliable fashion, preventing double spending, and without any costs for middlemen (although there are some small fees arising from the hardware and energy costs of those who maintain the network). Because of that, the blockchain brings a new world of cheap and more efficient digital payments, saving all the costs that arise from companies handling payments, as is the case with PayPal or Visa. This is probably the feature of the blockchain that has been tested most thoroughly since the technology itself began as a means of payment, with bitcoin.

Finally, since regular operations like listings, payments, and interactions between seller and buyer, are conducted via the blockchain, e-commerce businesses won’t need to run big, complicated and expensive servers. Distributed computing essentially takes on the costs of that, which would usually be imposed on sellers.

Digital identity and customer support.

Digital ID will be better due to the blockchain technology, improving e-commerce convenience for both sellers and buyers.

The third element where the blockchain can disrupt e-commerce is digital identity. The privacy rights of customers is a hot topic today. There is a growing concern about data control and spam-free digital experiences (just check the evolution of ad-blockers for a sense of this movement). This issue is mostly solved by the pseudonymous nature of blockchain addresses. Every user will retain ownership of their personal data, disclosing whatever s/he wants when needed, consciously and always in control of their personal information.

Additionally, we can build another feature on top of this: customer support and loyalty. As every customer is identified by a single address, and its record of transactions is transparent and unerasable, it is trivial to build more efficient and trustworthy customer support services, including promotions, dispute management, and customer loyalty programs. And because the blockchain offers pseudo-anonymity, we can do this without disclosing or storing customer information.

All of these features, and the value they bring, work together to offer people an experience in which it is easier to track down items, transactions can be verified automatically, costs are lower, defending customer rights is easier, and personal data is always under the control of each individual user. The result is a more convenient and trustworthy experience, which is consequently more attractive to everybody.

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