Ecommerce and blockchain in 2021: opportunities and challenges
If you are an eCommerce operator, it’s impossible to miss the hype around blockchain, and associated technologies like cryptocurrencies.
So you may ask, is it one of those shiny new things that will blow over?
Or would it impact your business significantly and change how you run your operations, acquire your customers and sell your products?
Should you even care about blockchain when your business is dealing with more pressing matters?
Strap in for a quick overview: your business will be better served at the end of it.
Blockchain: what is the hullaballoo?
If you are still in the dark about blockchain, here’s a quick video explaining how it works.
While blockchain is essentially a database, the biggest difference from conventional databases is that it’s distributed.
As this video explains, blockchain is designed to be tamper-proof, secure, and cannot be deleted or corrupted because it’s distributed across multiple devices.
This is not so with centralized databases that your eCommerce store, your payment solution, or help desk uses. They can be taken down, hacked, or corrupted.
Depending on the design, blockchain solutions can struggle to balance between speed and scalability and might be too complex for simpler tasks.
So where can blockchain be used, and in what form can it make your store, or your entire eCommerce operation more efficient than before?
To answer that question, you need to understand a few concepts associated with blockchain that are relevant to eCommerce.
Blockchain + eCommerce: Some Foundational Concepts
Here is a quick rundown:
- Smart contract: A smart contract is a computer program built on blockchain that’s executed when certain conditions, like delivery of products, issuing a ticket, etc are met.
These conditions are encoded in the code of the contract and can be verified programmatically.
Smart contracts don’t require any human intervention and guarantee trust and transparency by their very design.
However, smart contracts, like other blockchain technologies, can’t be modified after they are deployed on the blockchain.
- Public and permissionless blockchain: A public blockchain’s contents are visible to anyone. Anyone can join, write or read the transactions of a public blockchain (which also makes it permissionless). Bitcoin is an example of a public, permissionless blockchain.
However, some public blockchains can be permissioned, where only authorized users are allowed to write transactions.
- Private blockchain: A private blockchain can be accessed and controlled only by authorized users who can read, write and submit transactions. They are, by definition, permissioned.
Private blockchains are important in the context of eCommerce where you might want to keep some data private and secure, but they are less resilient and more prone to tampering than public blockchains.
- DAO: A Decentralized Autonomous Organization is a self-governing entity that uses smart contracts to manage itself, without any human oversight or interference.
Bitcoin is an example of a DAO in action, and in the future, eCommerce brands can organize themselves as DAOs, as opposed to corporations or LLCs.
- dApp: Apps that live and function on a blockchain are called dApps. Unlike your mobile or web apps, they have no single point of failure and are designed to be as resilient as the underlying blockchain they are built on.
The operating logic of dApps is encoded in smart contracts. They are not just a theoretical concept: BAT (Basic Attention Token) is a blockchain-based digital advertising platform built as a dApp.
- NFT: Non-Fungible Token is blockchain-based code that allows uses to claim ownership of something unique, whether it is digital art or a block of advertising time on a podcast.
NFTs are in the midst of a massive hype cycle right now and while the real-world applications are still being explored, they have the potential to help eCommerce brands build and sustain vibrant communities.
- Gas: Gas, on the Etherum blockchain, is the cost of carrying out a single transaction. Gas fees are dynamic, based on the supply and demand of computing resources and the number of transactions that need to be validated.
Low gas rates are one of the prerequisites for the widespread adoption of blockchain in eCommerce.
- DeFi: Decentralized Finance is a blockchain-based system that allows anyone to invest in projects or raise capital without third parties like brokerages, exchanges, banks, etc.
DeFi systems depend on smart contracts, and most of them are built on the Ethereum base.
Now that you have an idea of the foundational concepts of blockchain as relevant to eCommerce, here’s how the brave new world of eCommerce is likely going to look like.
Blockchain’s impact on eCommerce
Blockchain and other “Web 3.0” technologies are as mature as the Web was in the late 90s.
In the coming years, there’s going to be an explosion of technologies, and the current tech stack powering eCommerce stores will look as technologically advanced as a fax machine in 2021.
Blockchain can radically reshape eCommerce in the following ways:
- Traceable supply chains
Traceability and provenance are major selling points for many DTC brands in the food, fashion, and accessories sector.
While consumers are increasingly wary of greenwashing, tracing the provenance of products through complex, multinational supply chains- can be frustratingly inefficient and glitchy.
Blockchain solutions might just be what the doctor ordered because of their tamper-proof and transparent characteristics.
Here’s how efficient they are: Walmart used a blockchain solution to track the provenance of food in its supply chain in 2.2 secs vs 7 days using traditional methods. Now, it asks its suppliers to jump in on the blockchain bandwagon.
- Secure and always online stores
eCommerce stores need to have 99.999% uptime: if your eCommerce platform goes down during major sales days, you could be facing irreparable damage.
But your store might go offline for no fault of the hosting provider.
You might go dark if your site is battered with a DDoS attack, ransomware or malware infection, SQL injection, etc.
The 2020 Trustwave Global Security Report found that retail is the most vulnerable sector to be targeted in security breaches.
Blockchain-driven eCommerce platforms have the potential to solve both problems of uptime and security owing to their distributed and tamper-proof architecture.
- An anonymous shopping option
A blockchain-based eCommerce experience has the potential to offer consumers an anonymous (or a pseudo-anonymous) shopping option for increased privacy.
In a world where privacy is a valuable commodity, that can be a store’s primary selling point.
Customers just need a reputation score with 3rd party blockchain-based reputation systems as highlighted in this IEEE paper: they would not have to give any private data to the brand.
- An automated organizational structure
A typical eCommerce brand deals with a lot of overhead in administration involving contracts, regulations, and other paperwork. These costs are included in the cost of doing business.
Depending on the jurisdiction and the type of product, these costs can easily eat up 10-15% of sales revenues.
If a brand is set up in the form of a DAO, these costs can be minuscule. That will give companies higher profit margins while simplifying much of the routine operations.
For small businesses, that can be a massive win.
- Easier access to capital
Accessing capital through blockchain can turn out to be extremely simple compared to normal raises (including through crowdfunding).
Now, brands can go the DeFi route to raise capital from anyone, anywhere in the world without any third-party fees or onerous regulations.
This usually works with people buying tokens that can be redeemed against future purchases, subscriptions, or loyalty points.
Turn them into NFTs, and these points can be traded, held on like shares until their value increases.
It’s a win-win for both consumers and businesses.
Examples of blockchain-driven eCommerce projects
Now that you have an idea of blockchain’s impact on eCommerce, here are a few examples of real-world projects:
MetaFactory calls itself a “marketplace for digiphysical apparel created by community-owned brands.”
It’s structured in the form of a DAO and gives a platform to artists to create products that are then manufactured, shipped, and sold by the platform’s partners.
It seeks to connect designers, brands, and customers into one single community and iron out pricing inefficiencies.
Given how much impact storytelling has on fashion sales these days, MetaFactory would be an interesting experiment to watch.
The platform is still in a very nascent stage, but they can potentially challenge Shopify in the future if they play their cards right.
- Honeywell Aerospace
Honeywell Aerospace runs an aircraft resale unit that carries 25000 parts worth over $1bn.
Selling refurbished airplane parts online involves filing complex paperwork with the FAA and time-consuming documentation.
Blockchain has eased the process considerably and saved the company millions of dollars in document processing costs.
Blockchain can be an ace up the sleeve for B2B eCommerce, given how reliant that sector is on complicated supply chains that are also horribly inefficient
- Shopify and NFTs
Shopify is taking cautious steps in adopting blockchain by allowing some stores to sell NFTs.
The NFT market continues to be scalding hot, though much of the activity has been limited to digital collectibles and art.
If Shopify’s experiment is successful, merchants might be able to use NFTs to monetize limited product drops, offer loyalty points, and give VIP customers a piece of the business.
This isn’t a blockchain project per se, but there is speculation that Amazon might accept Bitcoin and other cryptocurrencies by the end of 2021.
AWS already offers enterprise customers managed blockchains based on widely used platforms like Ethereum, Hyperledger, etc. It’s used by the likes of Nestle.
So it’s not a stretch to imagine that Amazon would start accepting some form of crypto in its online store, which would be a pivotal moment for eCommerce.
- Crypto for Shopify
Shopify has been accepting crypto since last year, by partnering with the likes of Coinbase, Binance, and Bitpay.
The integration is as simple as using any other Shopify add-on, and right now, it serves a niche market.
However, 50 million Americans are likely to buy crypto in 2022 (and some would want to use it as currency), and Shopify wants to get in on the ground floor.
Blockchain for eCommerce is slowly coming of age, as kinks get ironed out and technologies start to mature.
You don’t need to be a soothsayer to predict that crypto is going to be increasingly adopted by different platforms, and there would be more emphasis on using blockchain-based solutions in stores.
But growth would not depend on adopting blockchain right now.
The biggest problem in eCommerce is the gutting of Facebook as a cost-efficient and reliable customer acquisition source following iOS14 updates while dealing with sky-high shipping costs and unprecedented congestion in ports.
But blockchain will never be on the back burner, and it may fix many issues bedeviling eCom businesses.
Our recommendation regarding blockchain: wait and watch.