It’s often that blockchain is about to transform the way we shop online. Phrases like “instant payments”, “fraud resistance”, and “zero-fee transactions” are thrown around freely. But is blockchain really a perfect match for e-commerce? In this article, I take apart some common myths and explain why accepting payments in crypto is a better choice than building a blockchain marketplace.
Two fast-growing industries collide
Electronic commerce and distributed ledgers may seem like a match made in heaven. Paying for purchases instantly, anonymously, spending only a couple of cents on fees – wouldn't that be great? Add to it complete control over the supply chain, tracking the provenance of goods, and protection from user-side fraud like chargebacks – and you get a perfect recipe for disrupting one of the world's largest industries. Indeed, e-commerce is a $25 trillion business that grows by over 4% a year. If blockchain-driven stores could capture even 5% of that, it would still create a market worth over a trillion dollars a year.
Is this a far-fetched forecast? Not at all. The blockchain market as a whole – currently valued at almost $1.6 billion – is expected to grow at an annual rate of 69% in the next few years. Distributed ledgers are being implemented in just about any industry, from renewable energy to banking. In many countries of the world, including Turkey, Brazil, Argentina, South Africa and Mexico, between 10% and 20% of the population own and use cryptocurrency. Vendors on Shopify can freely accept payments in Bitcoin, Ethereum, Lightcoin, and over 300 altcoins. And about 10% of people in Eastern Europe already pay for goods and services in crypto on a daily basis.
Things are not as perfect as they seem
However, there is a very important distinction that needs to be made. One the one hand, there are e-commerce businesses that accept payments in crypto via special third-party services (gateways), such as CoinsPaid. On the other hand, there are e-commerce projects built on blockchain from the start, which accept almost exclusively crypto – and not just any tokens and altcoins, but those issued on a specific blockchain.
As of July 2019, State of the dApps lists over 60 marketplaces built on various blockchains. But only 10 of them show any real sales volumes; the rest are dormant or dead. Does this mean that blockchain-driven e-commerce is somewhat less than what it's touted to be? No. It just means that fully decentralized online stores are still in their early stage. Below is a list of 5 ways that ways in which blockchain can really change e-commerce – and as you’ll see, it has more to do with accepting payments in cryptocurrencies than with anything else.
Half-truth no. 1: Instant and free payments
A payment system like Stripe, BrainTree, or PayPal will charge a fee of several percent one very payment. What’s worse - customers who live in a country where such systems aren't popular, or who don't have a credit card, won't be able to shop in such a store. By contrast, a transaction on Ethereum costs just $0.02 – and $0.00002 on Stellar.
What this means for e-commerce: this is probably the single most important advantage of blockchain for e-commerce business. Many global corporations, such as IBM and Caixabank, are already testing money transfer systems on blockchain. Nevertheless, it's important to understand that the speed and fees depend on the network. For example, a Bitcoin transaction can take up to an hour to confirm, while one on Stellar takes from 3 to 5 seconds. And there's almost always a fee, though it's usually negligible.
The good news is that one doesn't need to implement a full-scale blockchain marketplace to take advantage of crypto payments. There is a whole range of services on the market that can serve as a connecting link between a store and the customers who want to pay in crypto. CoinPaid is one of such solutions – it provides an easy-to-use API that supports over 50 cryptocurrencies, as well as euro.
Half-truth no. 2: Privacy vs transparency
“Transparency”is a popular word in blockchain circles – but so is “privacy”. How can the two be reconciled?
A record of any transaction on blockchain includes only the wallet addresses of both sender and recipient, but not the names of the parties. These records are freely available on sites like Etherscan. So as long as one knows the blockchain address of a person, it’s possible to see all their incoming and outgoing transactions, but without learning anything about the wallet's owner. In this sense, blockchain does give privacy – that is, unless someone links a user’s identity to their wallet. Alternatively, there are wallets that allow one to keep their real address hidden.
What this means for e-commerce: if a store sells digital goods that are delivered electronically, it'll likely need the buyer's email. And if goods need to be physically delivered, the store will need their residential address. These data will have to be stored on a server somewhere. For the vast majority of online stores, true customer anonymity isn't possible.
Half-truth no. 3: Prevention of user fraud
Chargebacks are a huge pain point for e-commerce businesses. Experts predict that by 2020, they will cost the industry more than $25 billion a year. 30% of chargebacks are initiated someone makes a purchase with a stolen card; 26% - because an item never arrives; and 15% - because a wrong item is shipped. The frustrating part for e-stores is that customers often request a chargeback instead of contacting the store directly to ask for a refund.
By contrast, payments in cryptocurrency are irreversible. So a chargeback simply won't be possible if you have a fully blockchain-driven online store.
What this means for e-commerce: irreversibility is a double-edged sword. Of course, losing access to one's crypto wallet is harder than losing a credit card, but it's totally possible. A hacker who gains access to a wallet through phishing will be able to spend it freely without ever getting caught. And what about all those cases when the purchased good fails to arrive? Or when a store ships the wrong item? Such mishaps will happen to blockchain marketplaces, too. Thus, an e-commerce business will still need to have a system in place to provide refunds - and advanced gateways like CoinsPaid make it possible.
Half-truth no. 4: Complete supply chain management
Enthusiasts will argue that in a proper blockchain ecosystem, it will be impossible to lose an item en route or send the wrong thing. This is because all stages of the process will be integrated into the same system of smart contracts. From the point of manufacture to the store's warehouse and on to the customer's house – the purchased item will be tracked all the way using an RFID chip, and every time it changes hands, a record will be made on the blockchain.
What this means for e-commerce: Supply chain management on blockchain can be revolutionary. Yes, it's possible to control the provenance of a good and send a transaction to the blockchain every time it changes hands. However, there are two problems with this:
1) A separate blockchain asset (non-fungible token) is required for each kind of item – for every book, every model of shoes, and so on. Otherwise how will one know from the blockchain record if the correct good was shipped? In this sense, distributed ledgers work better for homogenous assets, such as grain or oil.
2) All the parties involved in the process must agree to use the same blockchain network. This includes the manufacturer, the transportation company, the warehouse, the store, and the courier who delivers the purchase to the customer. We are still a few years away from such integration.
Half-truth no. 5: Real reviews
Fake reviews pose a serious problem for Amazon and other e-commerce giants. Over 80% of all reviews are unverified, and merchants keep finding new ways to get five-star ratings. Many blockchain marketplace projects claim that in a decentralized system, fake reviews are impossible due to transparency and irreversibility.
What this means for e-commerce: most people don't realize that one can't really store reviews themselves on the blockchain. Or rather, it’s theoretically possible, but it would be too expensive. On a distributed ledger, one pays for every kilobyte of data. That's why it's only used to store very tiny files, such as transaction records that include only two wallet addresses and the amount.
If a store really wanted to record reviews on a blockchain, it could come up with a system where users have to pay tiny amounts every time they submit a review. For example, it could cost $0.0001 to post a five-star review or $0.0003 for a bad review. Matching sender addresses would allow anyone to check that the person who submitted a review really made a purchase. But the text of the review would still be stored on a server – meaning that a hacker could change it.
Conclusions
Both blockchain and e-commerce are growing extremely fast, and it's only natural that innovative entrepreneurs want to combine the two. However, a true blockchain revolution in the industry of online shopping is at least several years in the future. Luckily, some of the world's brightest IT minds are working to make blockchains faster, cheaper, and more user-friendly.
Meanwhile, the best way to leverage blockchain in an e-commerce business is to accept payments in crypto – without building a whole decentralized system. This allows stores to attract the attention of the most tech-savvy customers at a minimal cost. Transparency and privacy might prove to be important in a few years – but implementing a crypto-fiat payment gateway can provide a competitive advantage right now.