In 2008, a new currency changed the way people viewed financial transactions. Here was a perfectly functional currency that had no central bank, no central authority, and was backed by no commodities. And while it saw moderate use among tech savvy users for years, its total value is expected to reach $1.2 trillion by the end of 2018.
But the truly revolutionary part of this currency is how it tracks transactions. Every single transaction that will ever take place using this currency is stored in one single, continuous, unchangeable record completely open to the public. This record is known as a blockchain, and the technology behind it has big implications for eCommerce.
What is a Blockchain?
A blockchain is a digital record that stores a list of transactions (called "blocks") backed by a cryptographic value. Each block contains a link to the previous block, a timestamp, and data about the transactions it represents. Blocks are immutable, meaning that they can't be modified once they're created. This creates a level of trust between each party in the blockchain. Since nobody can modify a block after it's been created, all parties can be assured that the data it contains is still valid long after its creation.
The concept of a blockchain has been around since 1991. However, blockchains as we know them today were created by Bitcoin creator Satoshi Nakamoto to serve as the currency's ledger. Blockchains consist of proofs of work, which are pieces of data verifying the contents of a block. Proofs of work are generated for each block based on the block's contents. Since they're difficult to create and extremely difficult to modify, they essentially guarantee that the block hasn't been duplicated or modified.
The blockchain is what allows Bitcoin to remain decentralized while ensuring the integrity and honesty of each transaction. Since then, blockchain technology has been adapted to store medical records, events, traditional financial transactions, and even voting records.
Blockchain in eCommerce
Blockchains are a natural fit for eCommerce, since they were designed for storing transactional data. However, this data doesn't need to be financial. It can be any distinct action that requires an immutable record, including actions related to payment and order fulfillment.
1. Alternative Payment Methods
Blockchain-powered currencies (called cryptocurrencies) were the first implementation of modern blockchain technology, with Bitcoin leading in popularity and global adoption. Today, cryptocurrencies are commonly used as alternatives to traditional currencies. Customers can choose to pay with Bitcoin in much the same way as they would choose to pay with PayPal, Stripe, or any other payment processor.
Bitcoin and other cryptocurrencies provide several advantages over traditional currencies that benefit both customers and merchants. In addition to being relatively easy to implement, sending or receiving money is often as simple as sharing a QR code.
2. Faster Transactions
According to Monetha, a payment processing company based on the Ethereum blockchain, traditional payment processing systems can involve up to 16 different steps with total fees ranging from 2 to 6%. And considering the number of parties involved, from payment processors to credit card vendors, simplifying the transaction process benefits both merchants and customers.
Blockchain transactions take place on a single network, reducing or outright eliminating the need for intermediaries. Transaction speeds are limited only by the speed of the network and by the speed at which new blocks can be generated. While Bitcoin once struggled to handle 7 transactions per second, platforms like the Lightning Network promise millions of transactions in the same amount of time.
3. More Secure Payments
Another advantage for customers is that blockchain-based currencies don't expose personally identifiable information. Credit and debit cards were used in over 100 billion transactions in 2015 for a value of $5.72 trillion dollars. However, 31.8 million US consumers were victims of credit card fraud just one year prior.
Currencies such as Bitcoin are like cash in that they don't require the customer to expose sensitive data such as a credit card number. Instead, the customer authorizes a transfer from his or her own personal "wallet" to that of a recipient. The only distinguishing bit of data tied to each user's wallet is a randomly generated unique identifier.
Blockchains work well for payment processing because they balance speed, privacy, and integrity. Customers and merchants can make secure transactions quickly without exposing themselves nearly as much to fraud.
4. Improved Order Fulfillment
One of the key benefits to eCommerce platforms is that each block in the blockchain links to the previous block. This creates a visible chain of events that closely mirrors the process of fulfilling an order.
For example, imagine a customer is placing an online order on a blockchain-powered eCommerce site. Each step in the ordering process (order placement, payment, fulfillment, and shipping) adds a new block to the chain with the time that the action was performed. The process would look similar to the following:
- The customer places an order by selecting her item(s) and entering her shipping information. The marketplace generates a block and a proof of work for the order.
- The customer pays for the product using her credit card. This generates another block backed by another proof of work that verifies payment to the seller.
- The seller receives the block for the order and payment, then ships the product. This generates a third block indicating the product was shipped and the order was fulfilled.
This can be extended to other parties in the process as well, such as the shipping provider. In this example, a fourth block could be generated by the shipping provider after delivery.
A key benefit of blockchain technology is that it establishes trust between all parties. Disputes regarding payment or order details are less likely to occur due to the decentralized, tamper-proof nature of the blockchain. Only 1-3% of global eCommerce transactions generate a dispute, but with the blockchain being a transparent and public record of all transactions, it's possible that this will decrease even further.
By 2025, 10% of the global GDP is expected to be generated on the blockchain. Financial institutions around the world are experimenting with blockchain as a platform for future trade. Mastercard has already deployed its own blockchain technology for processing payments. Justin Pinkham, who leads Mastercard's blockchain initiatives, foresees blockchain as a solution for tracking the movement of pharmaceuticals, luxury goods, and even diamonds.
Even if cryptocurrencies like Bitcoin don't take over the world, the blockchain technology that powers them is poised to transform eCommerce and hundreds of other industries.
Note: This blog article was written by a guest contributor for the purpose of offering a wider variety of content for our readers. The opinions expressed in this guest author article are solely those of the contributor and do not necessarily reflect those of GlobalSign.