You, me, and billions of other people all make purchases online. We search for a product or a service, choose among the countless variants, click on “purchase” button, and voila! we’re done. By doing this, we’re becoming a part of an industry called e-commerce.
E-commerce is the buying and selling of goods or services using the Internet, and the transfer of money and data to execute these transactions. Like many other Internet-related things, it’s deeply integrated into our lives and nobody really gives a thought that, since 1991 when e-commerce was introduced, very little has changed.
E-commerce today follows the same 30-year-old process when people buy something in a marketplace, sharing their personal data, paying with their credit card, and getting a product or a service delivered. Currently, we have a lot of technology that can drastically improve that process, specifically, blockchain technology can make it faster, more secure, and open for everyone. To understand the benefits of the blockchain, we must first look at the traditional e-commerce model.
We would like to thank the team at Winnest for their contributions to the design and implementation of the research and to the analysis of the result.
The business model of a traditional e-commerce website
There are various types of e-commerce models, but we will only concentrate on the most traditional one: the B2C model, business-to-customer. The B2C model revolves around the customer. The most obvious real-use example is Amazon. They sell their own products and allow authorized businesses or individuals to sell their good on their platform. The established platforms usually have a large stock of goods in the warehouses to quickly deliver an ordered product to the customer. Amazon warehouses cover more than 77 million square feet.
E-commerce is thriving today. In 2017, e-commerce was responsible for around $2.3 trillion in sales and is expected to hit $4.5 trillion in 2021. It slowly cuts out pieces of the retailers’ pie. In the US alone, e-commerce represents almost 10% of all retail sales and that number is expected to grow by nearly 15% each year! By having a profit margin of around 30%, e-commerce platforms make a fortune every year – for example, Amazon’s profit in 2017 was $3.03 billion.
So what’s bad about this model? Sure, it’s very stable and popular and it makes a lot of money for top e-commerce websites. Amazon is, after all, the second biggest company in the world by its capitalization, next to Apple.
The bad thing about this model is that not everyone benefits from it. It’s good for these platforms, sure; the more money retailers make, the more power they have. But the more power they have, the less power there is left to the ordinary customers! Also, there are some serious flaws in the centralized model, both for customers and retailers on the platforms:
- Centralized platforms know too much about you – When you buy something, they get your credit card number and they get your shipping address.
- The payment methods – This category is painful not for buyers, but for sellers. The most popular method is PayPal, and PayPal usually charges a high fee of 2-3%, reducing the overall profit for a business selling goods on a large platform.
- Delivery – Sometimes the goods can be lost or stolen during shipping.
- Unfair competition – Companies like Amazon have their own brands, and they show their own products in the search before other sellers, incentivizing them to spend a lot more on advertising.
Can we improve the e-commerce sector by implementing the blockchain? Let’s take a look.
Is it possible to have a decentralized e-commerce platform?
Blockchain technology has many benefits; immutability, security, anonymity, and it’s ripe to disrupt many industries. What innovation are we talking about, though? We talking about the possibility to sell all of these goods, stored in countless warehouses around the world, without a centralized entity that monitors sellers, decides who is worthy to be on the first page, or even displacing the worthy sellers with its own stuff. We’re also talking about a lack of big brother control and privacy for the buyer. A fully decentralized e-commerce platform could solve all the problems of centralized platforms that we were talking about a little earlier.
First of all, there’s a private data problem, but it is getting solved by such projects as Shopin. It offers a solution by creating user profiles that enables shoppers to own their complete purchase data, a wishlist, and a data of their shopping preferences. No more free data for the platform or for a retailer; it’s all encrypted and stored on the blockchain, and any third party can get it only by making a payment to its owner.
Another approach with a different outlook on the same problem is presented by Omnitude. The difference is that you shouldn’t share your purchase data or preferences with anyone, even for money. The only thing any seller needs is enough info to deliver the goods. That’s achieved by creating the identity (OID) and sharing it only during purchases. That identity can then be used on any websites that support this system.
The Omnitude team promises to counter such e-commerce problems as fraudulent transactions. In 2016, according to the Omnitude website, for every $100 spent through e-commerce, fraudsters stole 5.65 cents through fake identities. Blockchain-based identities are harder to steal, so this might be the solution. Also, there is a recurring problem of fake reviews for products with many reputation agencies working to build a positive image, so even a flawed product might get good reviews. It’s hard to underestimate how easily this could be solved if everybody had a digital identity on the Internet.
We’ve seen what’s been going on with data protection, but what about the problem with delivery and supply chains? Not only the e-commerce platforms care about their delivery. Big companies are already recognizing the power of the blockchain and moving in that direction. IBM is a famous blockchain pioneer, running a program that helps the well-established businesses of Walmart, Nestle, and Tyson Foods. Walmart said in June 2018 that blockchain trials had helped it narrow the time it took to trace the movement of mangoes to 2.2 seconds from about seven days. The location of any parcel can be written on the blockchain and tracked as needed. That would solve the problem of lost or stolen goods.
So, if data protection and improved supply chains are not enough, let’s think about payments. The profit margin for large platforms is around 30%, and most of it is taken from the sellers who sell their good on the platform. A decentralized platform would cut the middleman, leaving all the profits to the seller, thus allowing him or her to keep lower prices for the customers while keeping their business sustainable and profitable. It would benefit both the seller and the buyer. How would this be possible? Up to this point, we haven’t talked about cryptocurrencies yet. The fees in cryptocurrency are a lot cheaper, both for the buyer and the seller, both of whom don’t need to pay a 3% fee to PayPal.
You could ask: if we get rid of centralized platforms and their recommendation systems, how would the sellers list and promote their goods? There is a solution for this.
Getting rid of the middleman in product marketing
If we want to sell a lot of products online, we should care about advertising. The centralized platforms give advertisers the data of their users and tools for promotion. If we take away the data and such tools, how can the good products be promoted? In a decentralized model, users have the control of everything. So, basically, they can recommend the products they like by using social networks!
We’ve created an infographic to better explain this idea to you:
Such a model has been proposed by the Winnest project. Using the power of social media and affiliate marketing, they will allow users to sell the space on their social media pages and participate in product selling by sharing information about the products, bringing more followers into the network and receiving cash from companies when the product is sold through their network.
Winnest’s model benefits everyone:
- Consumers would buy the most popular and recommended products online – The power of the blockchain would help exclude poor-quality products from the market, leaving only those that are appropriate for consumers.
- Companies and brands would save a lot of money – Advertising online is a costly process. $97 billion was spent on digital ads in 2018 alone, and most of the profits from ads went to the pockets of the centralized platforms. Not everyone has enough money to compete with large companies, but some companies and brands have decent products or services that could be loved by their potential customers. Social media marketing via a platform such as Winnest could help them promote their business without spending too much.
- Influencers could receive money by recommending products to their followers – It’s important to note that such a model would force them to stake their reputation on it, because recommending a poor-quality product would result in a loss of reputation, so they are incentivized to choose carefully.
Of course, there should be a vehicle to reward users and influencers to pay for their shares. It comes in a form of the TWNC token, a token that serves as a bargaining chip in all these cases. If the token is highly valued, the sellers on a decentralized platform would get what they need: Sales.
Running the numbers
After reading all of these outlines, the only question that remains is: can these decentralized social media platforms compete with existing e-commerce websites in the future? It’s a good question, so let’s evaluate the numbers of the centralized platforms.
- Amazon’s revenue was $104 billion in the first half of 2018. Their users base is 310 million.
- The revenue of Alibaba is $36.11 billion in 2018, and their users base is 510 million.
- Walmart’s e-commerce revenue was $128 billion in Q2 2018 and its user base keeps growing, with an average of 127 million visitors on its site every month.
Still, by following the model of affiliate decentralized advertising, proposed by such projects as Winnest, the decentralized e-commerce marketplaces can generate enough sales for retailers. Here are some interesting statistics:
- 30% of online shoppers say they would be likely to make a purchase from a social media platform such as Facebook, Pinterest, Instagram, Twitter, or Snapchat.
- 84% of online shoppers in the United States review at least one social media site before making a purchase.
- 23% of online shoppers are influenced by social media recommendations.
- On average, there are 1.45 billion daily active social media users. 85.8% of these daily active users are from outside the US and Canada.
- The average order value for customers from Facebook is $55.
- The average order value for customers from Twitter is $46.29.
- The average order value for customers from Instagram is $65.00.
As we can see, there is a lot of money in social networks. There are more users in social networks than on centralized e-commerce platforms. A decentralized model could be more interesting for everyone, but it needs time to spread among users, nothing happens instantly. But in the end, when the benefits of decentralization are clear for everyone, users will make their choice. And they will choose what suits them the most.