The way to build confidence with consumers is not through hackable technologies or middlemen. It’s transparency.
Note: This article first appeared in Ecommerce Brasil magazine and was co-authored by Phil Gomes, one of the country’s leading thinkers on the impact of blockchain. And one of the country’s most discerning metalheads.
For centuries we, as buyers, sellers, loaners, borrowers, voters, and citizens have been trained to place our trust in centralized authorities, which serve as the foundation upon which various types of transactions can occur.
Keep in mind the notions of “trust” and “central authority” as we chase this topic. Because we’re going to dive into the proper role of blockchain in e-commerce. Blockchain takes these two cornerstones of commerce and turns them on their respective heads, replacing the presumptive need for “trust” with cryptographic, indelible proof.
For perhaps the clearest starting point for understanding blockchain, we turn to The Economist’s 2015 cover article entitled, “The Trust Machine”:
The blockchain is a shared, trusted, public ledger that everyone can inspect, but which no single user controls. The participants in a blockchain system collectively keep the ledger up to date: it can be amended only according to strict rules and by general agreement. Bitcoin’s blockchain ledger prevents double-spending and keeps track of transactions continuously. It is what makes possible a currency without a central bank.
The notion of “central bank” is one that people don’t think too much about on a day-to-day basis, but it is a vitally important concept. A “Central Bank” is, in effect, your government, and we have become accustomed to the notion that only a government can manage a monetary system. However, that system is vulnerable to the whims of any given political climate. Financial institutions such as banks are “approved” in some way by governments. Conventionally, an organization can set itself up as a financial resource to citizens. To do so, the organization meet or exceed government standards for stability so they don’t, basically, run off with your money. These financial service providers (i.e., banks) compete in the marketplace for our business by providing different levels of service. Nevertheless, as we’ve seen in any number of global financial crises, even these well-established processes and norms are opaque “black boxes” — it’s difficult to fully understand how they really work.
We, the citizens, who need to buy eggs and diapers and cachaça, use government-issued paper and bank-issued cards to manage our everyday lives. But let’s go back to The Economist’s description of blockchain and pull out one key phrase:
ledger that everyone can inspect, but which no single user controls
The notion of currency — largely unchanged from when it was first issued up to today — places the trust that supports the value of currency solely with the government. This is why some currencies are “worth more” than others: some governments are deemed more “trustworthy” than others. Thus, everything relies on the government’s honesty and transparency.
Now we can start talking about blockchain.
From Me-commerce to E-commerce to Re-commerce to We-commerce
Blockchain transfers your trust from a central authority — the government, bank, payment facilitator — to the actual participants in any given transaction. This is a relationship conventionally known as “peer-to-peer” in that no one party controls the system. The ledger a blockchain represents relies on consensus and proof rather than trust. That consensus relies upon open and agreed-upon business rules; if the blockchain’s intent is to commit fraud or steal from you, participants would have to be quite open in their desire to do so.
With a blockchain-based marketplace, everyone who has engaged with the medium of exchange is clearly represented for having done so. Think about it like this: when you get a physical 100 real note you don’t know where it’s been, who has used it or what for. You just trust that the banknote with 100 reais printed on it will buy you 100 reais worth of goods or services. If that 100 real note was a part of a blockchain system, you could know the whole history of those 100 reais, where that note has been and what it has been used for.
Blockchain emerges as a vital part of the continued growth of today’s widely distributed shopping environment because it solves many of the problems that plague e-commerce: the lack of direct connection between a buyer, a seller, and the thing being bought. As shopping has increasingly involved intermediaries like credit card companies, loyalty program facilitators, and delivery services, the placement of trust in a transaction has shifted from being directly between the buyer and seller to being spread out among a handful of indirect participants.
Spreading out the risk doesn’t prevent or even reduce the opportunity for fraud. Everyone in digital commerce has heard stories of dishonest players in some of the world’s biggest marketplaces who take content from a legitimate manufacturer, open up their own store advertising that item for sale at an attractive discount, take money from unsuspecting shoppers, and either fail to ship or ship a different, lower-quality product.
For digital commerce to continue to grow not only in financial terms, but to truly cross borders and offer consumers a truly global choice of items, a system needs to be put in place that can deliver that direct 1:1 level of trust that used to exist between a buyer and seller in physical contact with each other. Blockchain offers this potential.
Don’t Take My Word For It, Ask Everyone
The advent of blockchain technology started with the need to create a provably scarce, uncopyable digital object. Money absolutely requires this feature since you need to know how much is in the system to know how much it is worth. (Certainly, Brazil has had a decades-long relationship with inflation.) This feature turns out to be helpful in e-commerce in that brands can “tokenize” products and commodities, linking them to unique digital representations on a blockchain.
Two immediate applications of a blockchain-based system in both brick-and-mortar and online shopping contexts has to do with product authenticity and proof of origin/source/handling. Basically this means, “Am I really getting what I think I’m getting?” and “Did this really come from the source that is being advertised?” These are two very basic but very important steps forward in bridging the trust gap in online shopping. Having a verifiable way to know that one is getting what one is paying for allows a buyer to more confidently part with cash in those markets where the use of intermediary forms of payment — such as credit cards — is not widely used.
In developing markets, a blockchain system would establish a chain of title which would reduce fraud in commerce. This is especially important when it comes to nutrition and medicines, where trust in the origin and seeing the various points of transfer helps reassure a new parent that the formula they are giving their baby really is as it is labeled.
Granted, there are a number of challenges here. Just because something is recorded on a blockchain doesn’t necessarily make it “true.” The important concept to bear in mind is the notion of consensus: How many attestations to a product’s authenticity or qualities (e.g., all-organic, cruelty-free) would it take to assure the reasonable consumer that collusion has not taken place? It may be three or four attestations for, say, a garment, but maybe eight to twelve for food, beverages, or even pharmaceuticals.
In Kantar’s list of the top 50 retailers in the world, you won’t find the likes of Alibaba, eBay, Mercado Libre, or Jumia because they are marketplaces and not pure retailers. What separates a marketplace from a pure retailer is, among other structural reasons, trust. Because a marketplace is composed many different sellers the implication is that a marketplace has no true central authority and is somehow less trustworthy. In developed markets the presence of financial intermediaries like MercadoPago or Paypal helps, as we discussed above, share some of the risk without really eliminating it. A blockchain system could enable the creation of many more, smaller, focused marketplaces because the element of verifiability of the goods exchanged in the transaction would be present.
On the luxury goods side of the market, the presence of counterfeit products has been an age-old problem. Global trade in counterfeit goods tops USD $450 billion; in the European Union alone, the clothing, footwear and accessories industry loses approximately €26.3 billion euros (about $27.7 billion) of revenue annually from counterfeit goods. The reason these numbers matter is because this is how we could finance the creation of a universally available, free blockchain system. Converting this lost revenue into a new source of trust will help energize global commerce, protecting shoppers, manufacturers and merchants equally.
Further, according to a report by the US-based online thrift store ThredUp the fashion resale market is set to hit $33 billion by 2021, up from $18 billion just last year. The presence of a blockchain system in the already big re-commerce channel would help free it to balloon up to the size that it naturally should be, based on consumer activity. Put another way, growth of the re-commerce channel is constrained by the lack of a universally accepted system of transparency, verification, and assurance.
The Blue Sky of Blockchain in E-commerce
As retail evolved from the personal relationship between a shopkeeper and a customer all the way to the promise of borderless e-commerce today, so too has the notion of transparency evolved. The idea that consumers prefer buying a trusted brand through a trusted channel is being challenged. Today consumers place arguably more trust in the opinions of complete strangers, delivered through product ratings and reviews.
Being a trusted brand is valuable, and selling through a trusted channel adds more value. But, in a world of mobile-driven consumer choice, these are no longer insurmountable. Blockchain’s foundational ability to provide transparency and permanence in the product’s provenance, as well as the legitimacy of the product’s manufacture opens up a wide range of new shopping formats. It offers established retailers a toolset to make their own operations more efficient, and can enable new entrants — regardless of the sophistication of their financial systems — to participate and thrive in a growing global marketplace.
Systems developed to solve for one inefficiency often create and benefit from other inefficiencies. The notions of a central, trusted authority being the foundation of a trade system works well when there are defined, recognized boundaries for that system. When it comes to shopping, the Internet presents a serious challenge to the notion of borders, and the flow of capital, and trust. This is because data can move quite independently of a central authority if it is allowed to do so, and often does even if that permission has been revoked. Further, emerging products in this space aim to rewrite the data relationship between customer and advertiser, putting control of personally identifiable data in the hands of the consumer rather than an e-commerce store, social network, or market-maker.
Blockchain doesn’t solve all the world’s problems, and, while its exact place in our lives as shoppers is still up in the air, a blockchain system can immediately be leveraged to establish trust between participants in a given “B2B2C” transaction. This itself is significant because it solves many of the barriers to e-commerce becoming the norm for how people of any society shop. Having a single, recognized way of providing assurance that the people you’re dealing with are transparent about what they’re selling and the terms they work under will pave the way for the growth of a much more widely distributed marketplace that we have today. That means greater choice, more variety, and a better shopping experience.