The consumer behavior shift from offline to digital created a boom in the already fast-growing ecommerce market.
While global ecommerce sales accounted for only $1.34 trillion in 2014, Statista expects the market to reach $4.2 trillion by 2020’s end with further growth to over $6.5 trillion by 2023.
According to another study, online shoppers are anticipated to account for 95% of all purchases by 2040.
However, the ecommerce industry faces multiple issues that decrease its efficiency and contribute to the slowing of its growth.
Fortunately, blockchain technology can provide an effective solution for many problems encountered by ecommerce platforms.
In this article, we will explore blockchain ecommerce, as well as the use-cases and benefits that distributed ledger technology (DLT) can provide to the online shopping industry.
Blockchain 101: The Benefits of Distributed Ledger Technology
Before we deep-dive into blockchain ecommerce, let’s first take a look at the most important features of distributed ledger technology.
Real-Time Data Distribution
With its first major use-case pioneered with Bitcoin’s launch in 2009, the blockchain is a digital ledger that duplicates and distributes all recorded data across an entire network of computers.
How data is shared in blockchain networks is similar to how contributors see a Google Doc’s content. Instead of copying or transferring the document, it is distributed to all participants who we shared the file with.
Every participant has access to the document, while all changes to the Google Doc are recorded in real-time and in a transparent way.
Decentralized Network Infrastructure
However, unlike Google, blockchain solutions do not use central servers for data storage.
Instead, it operates in a decentralized way where miners (or validators) maintain the network. In exchange for validating transactions and adding new blocks to the chain, they receive a share of transaction fees and block rewards.
Since data is stored on thousands (if not millions) of servers across the whole network, blockchain platforms feature a much higher security level than record-keeping systems based on a centralized infrastructure.
51% Attacks and Public-Key Cryptography
A consensus is needed among validators to add new blocks and confirm transfers while each transaction is encrypted and linked to the previous one after approval. As a result, malicious parties have to control the network’s majority (called the 51% attack) to alter a single transaction on a blockchain.
Since the attack requires a significant upfront investment from hackers – and is almost impossible to carry out for large networks like Bitcoin’s –, it discourages cybercriminals from initiating it.
Blockchain networks use public-key (asymmetric-key) cryptography and digital signatures to encrypt and verify transactions. Unless a user’s private key is compromised, it’s nearly impossible to break the cryptographic encryption cryptocurrencies and DLT solutions use.
Transparency and Traceability
As a result of blockchain technology’s immutable nature, the data uploaded on the distributed ledger is accurate, transparent, and consistent.
On public blockchains, all information on the chain is available for anyone to inspect and analyze.
Therefore, unless the solution uses a privacy-based architecture to achieve (semi-)anonymous transactions (e.g., Dash, Monero, Zcash), users can track their transfers and get an insight into where a digital asset is at in its journey.
Smart Contracts and the Lack of Third-Parties
One of the best features of blockchain technology is the lack of middlemen.
Transactions are executed in a peer-to-peer (P2P) nature without third-party involvement. This limits the risks of human error and increases the efficiency of the network, speeds up transactions, and significantly decreases the costs of transfers.
To facilitate automation, multiple blockchain networks (e.g., Ethereum, EOS, NEO) feature smart contracts that allow a digital agreement between parties to be executed automatically upon its conditions being met.
DLT + Online Shopping = Blockchain Ecommerce
Due to distributed ledger technology’s benefits, companies are increasingly experimenting with blockchain solutions in multiple industries.
As a result, the blockchain market’s size is estimated to expand rapidly from 2018’s $1.2 billion to $39.7 billion by 2025 with a compound annual growth rate (CAGR) of nearly 65%.
Therefore, it makes sense for businesses to implement distributed ledger technology with online stores to create blockchain ecommerce platforms.
However, most existing blockchain-based ecommerce platforms are rather immature, featuring only basic implementations of the technology.
A good example is OpenBazaar, a decentralized, P2P ecommerce marketplace where users can buy and sell products via cryptocurrency without any fees or restrictions.
Instead of a centralized, company-managed structure, OpenBazaar is maintained by its users, contributing their computing power to support the marketplace. On the other hand, many of the platform’s activities take place off the chain (e.g., user feedback, shipment tracking).
With that said, multiple cryptocurrency projects and traditional companies (such as IBM, Microsoft, and Visa) are developing blockchain solutions to integrate with ecommerce platforms.
Top 6 Blockchain Benefits and Use-Cases for Ecommerce
Below, we have collected the top benefits and use-cases of blockchain technology for ecommerce.
Let’s see them!
1. Fast and Cheap Transactions
As blockchain technology eliminates the middlemen, cryptocurrency transactions are processed quickly while featuring very low costs.
Contrary to digital currency transactions, merchants pay anywhere between 2-6% for processing payments on ecommerce platforms.
In addition to the percentage-based fees, some payment gateways charge a fixed price for online purchases, while others feature monthly account maintenance costs.
On top of this, payment gateways often impose foreign exchange fees or use a spread on the conversion rates for transactions other than the merchant’s base currency.
These high fees hurt the profitability of ecommerce businesses that operate on small margins.
Despite the hefty costs, most payment gateways don’t immediately credit the sum on the ecommerce store’s account upon successful purchase. Card transactions go through multiple parties before they get processed, which can take anywhere from 24 hours to three days.
However, even after processing them, many payment gateways still put the transactions on hold, taking several days, a few weeks, or even a month for the merchant to receive. Service providers usually do this due to security reasons (e.g., for high-risk industries), while others use payment cycles to mass-distribute merchants’ transactions.
Holding merchant funds for longer periods decreases ecommerce businesses’ working capital to cover inventory purchases and operational costs, reducing companies’ potential for growth.
Integrating cryptocurrencies into a blockchain ecommerce platform is a good solution to decrease merchant fees and speed up the process in which stores receive transactions from customers.
Compared to payment gateways, it takes up to one hour for Bitcoin (BTC) transactions to be confirmed with an average fee of $2.27.
However, ecommerce stores can further limit their fees and cut transaction processing times by accepting a digital asset like Ripple (XRP) that takes around 4-5 seconds to be received with transfer fees under $0.0001 on average.
In addition to benefiting from faster and cheaper transactions, ecommerce stores can implement cryptocurrencies to expand the payment methods they offer to their customers.
However, digital assets often feature high volatility levels. In fear that the value of the coins decreases before they can convert them to fiat currency, businesses are often hesitant to adopt cryptocurrencies.
Fortunately, there are multiple cryptocurrency payment gateways on the market – including BitPay and Coinbase Commerce – that use stablecoins (e.g., DAI or USDT) or instantly convert a customer’s digital assets to the merchant’s fiat currency of choice to eliminate volatility risks.
2. Chargeback Fraud Protection
Since the dawn of online shopping, chargeback fraud has been a major issue for ecommerce businesses.
While there are a wide variety of reasons why customers request chargebacks from banks, a study revealed that as much as 81% of shoppers file chargebacks out of convenience instead of contacting the merchant for a refund.
Even if the reason is legitimate, filing a chargeback before contacting the merchant is called friendly fraud, which cost ecommerce businesses $4.8 billion in 2016.
On top of this, another share of fraudulent chargebacks originates from customers who never had the intention to spend money on a product. They buy the item and request a chargeback soon after the ecommerce store has shipped it.
Another popular reason why customers request chargebacks are due to actual fraud. Here, cybercriminals acquire a person’s credit card details and use it fraudulently to purchase a product from the merchant.
Whatever the reason, chargebacks are expensive for ecommerce businesses. Many businesses spend a significant part of their budget to combat fraud and reduce the risks of illegitimate refunds.
However, ecommerce businesses that integrate cryptocurrencies can eliminate chargebacks entirely.
Since there’s no payment reversal for digital assets, once a customer pays for a product, he can’t file a chargeback or circumvent the merchant via an external service to get a refund.
Shoppers can still contact ecommerce businesses to get a refund for the products they didn’t like or receive (or for any other reasons).
3. Cybersecurity and Data Privacy
While cybersecurity is one of the top challenges for ecommerce businesses, trust, and privacy are among the top pain points of online shoppers.
As they don’t possess the necessary resources or have other priorities, ecommerce businesses often fail to set up proper security measures against potential cyber attacks.
Upon a successful hack, malicious parties can easily launch a Distributed Denial of Service (DDoS) attack against an ecommerce business. This causes severe downtimes and generates significant losses for the company.
The lack of proper cybersecurity measures can also put user data at risk. At the same time, ransomware attacks can threaten the deletion of an ecommerce business’s data unless a ransom is paid to the hackers.
As stolen financial information can cause significant losses for consumers, many online shoppers refuse to trust ecommerce businesses.
Furthermore, even if an online store features state-of-the-art security and efficiently protects customers against cybercriminals, the business can still decide to sell consumer data to advertisers and other third parties to generate extra profits.
Implementing blockchain technology could restore consumer trust in ecommerce businesses as DLT’s transparent nature reveals whether a company has misused its customers’ data.
Moreover, with public-key cryptography and decentralized network infrastructure, a blockchain-based ecommerce store would significantly decrease the risks of a successful cyber attack against the platform.
Permission.io takes data management to the next level.
As part of a blockchain-based, next-generation advertising platform, Permission.io users are in full control over their data. Consumers decide whether a company can use their personal information and how.
In exchange for permission to target a user based on that user’s data, Permission.io users are rewarded in ASK, the platform’s native cryptocurrency.
Consumers can choose to hold the ASK they earned, exchange it, or spend the digital asset directly on products in the Permission.io Store.
4. Supply Chain Management
A supply chain refers to the network in which an organization and its suppliers work together to manufacture a product and distribute it to the end customer.
With multiple participants, supply chains allow companies to cut their costs while increasing their competitiveness. Therefore, effective supply chain management is crucial for every ecommerce business.
Supply chains include multiple stages – from producing the item and distributing it to the consumer. Due to this reason, if only a single-phase gets compromised, it could result in grave consequences and jeopardize the entire supply chain.
A problem can be as little as a delay in transportation to cause an ecommerce business (and the customer) big headaches.
Traditional supply chains struggle with increasing costs as well as the lack of transparency, traceability, and proper communication between parties.
As a result, ecommerce businesses are unable to get an insight into a product’s origins, ensure that it is manufactured using high-quality materials, or maintain reliable delivery times.
Moreover, there is a surging demand for traceability among consumers.
Fortunately, with the rise of blockchain technology and the availability of cheap and effective tracking equipment – like radio-frequency identification (RFID) tags and QR codes – ecommerce businesses can finally achieve effective supply chain management at a cost-efficient price.
With DLT tech, each participant of the supply chain adds data about a product to the blockchain.
Even if a company uses a permissioned blockchain platform, all the supply chain’s members are able to see at which stage an item is currently at in its journey while monitoring data points to detect dishonesties.
Furthermore, the blockchain’s immutability makes it impossible to upload fake data or tamper with the information in any other way.
Unlike traditional solutions, blockchain-based supply chains don’t require hiring third-party service providers for contract negotiations. Instead, businesses can decrease their costs by uploading all data about the agreements on the blockchain while enforcing them with smart contracts.
As a result, ecommerce businesses can allow their customers to trace the products they purchase in the supply chain, greatly increasing their services’ transparency.
VeChain is among the most popular blockchain projects working on enterprise supply chain solutions.
Using the Proof-of-Authority (PoA) consensus model, smart chips, and its high-performance blockchain network, VeChain seeks to add transparency and traceability to every stage of supply chains.
5. Enhanced Loyalty Programs
Loyalty programs are a great way for ecommerce businesses to motivate existing customers to stay devoted to their brand, encouraging them to shop more often and in larger quantities.
In addition to providing deals on items, efficient ecommerce loyalty programs reward consumer engagement beyond placing orders (e.g., social contests, active participation on different company channels).
While offering points after each purchase as a reward can work great for ecommerce loyalty programs, customers won’t be able to redeem them until they accumulate a certain amount. And this can discourage some consumers from joining the program.
On the other hand, with blockchain technology, ecommerce brands can introduce enhanced loyalty programs where consumers receive the project’s native cryptocurrency as a reward for active participation.
Since the token can be exchanged to fiat currency or other digital assets, customers will be able to turn the rewards they earned via blockchain ecommerce loyalty programs instantly into cash or other cryptocurrencies.
Or, even better, the ecommerce business can allow customers to spend their rewards directly on products in the company’s store.
A good example of the latter is the Permission.io Store, where consumers can shop with the ASK they earned.
Offering rewards that can be (near-)instantly converted into cash after receiving them can help ecommerce businesses turn their existing customers into loyal shoppers.
Moreover, since consumers are always looking to earn extra income, ecommerce stores can also use blockchain-based loyalty programs to attract new prospects.
6. Eliminating Fake Reviews
Fake reviews have always been a major issue ecommerce businesses have been facing.
According to a Bazaarvoice study, 43% of consumers lose trust in a brand if it features fake or fraudulent reviews about its platform.
At first glance, one would think this issue only affects dishonest ecommerce businesses and their past customers.
However, that’s not the case here. After identifying multiple fake reviews, consumers will lose confidence in online feedback systems.
As a result, they will take the product feedback they read with a grain of salt while becoming increasingly hesitant to purchase even an honest ecommerce store’s top-rated items.
This alone can hurt business. But to make things worse, competitors can use deceitful tactics and techniques to post fake negative reviews about rival ecommerce stores.
Since 82% of consumers read feedback on a product before making a purchase online, it’s crucial for ecommerce businesses to combat fake reviews.
A good solution to the problem is to adopt blockchain technology where all data points can be traced back to its origins without the ability to alter them.
For example, by tracking transactions, an ecommerce business will be able to verify whether a customer has ordered the product he sought to post a review on.
Also, service providers can incentivize their customers via cryptocurrency rewards to post comprehensive, honest, and helpful reviews on the products they purchased.
Revain, a blockchain-based review platform, provides incentives in tokens to users for doing just that.
Furthermore, the solution utilizes IBM Watson’s Tone Analyzer and Natural Language Understanding for accurate feedback filtering while continuously verifying reviews on the platform.
Blockchain: The Future of Ecommerce
Since Bitcoin’s birth in 2009, blockchain technology has disrupted multiple industries, such as the payments, finance, and digital identity sectors.
Now, distributed ledger tech is coming to a new market: ecommerce.
By facilitating fast and cost-efficient transactions, featuring increased security, combatting chargeback fraud and fake reviews, as well as creating next-generation supply chains and enhanced loyalty programs, blockchain-based ecommerce provides benefits to both merchants and consumers.
Leveraging DLT’s advantages, businesses can create next-generation ecommerce platforms that feature lower costs and increased transparency while eliminating the need for third parties.
Therefore, companies can increase their competitiveness and attract loyal customers to their brand.
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