How the blockchain model can be applied to online shopping and e-retailing

Can online shopping be modeled on a Blockchain system? This is probably a question on many a mind. For those who are new to Blockchain – it’s the technology that underpins Bitcoin. In the last 2 years there has been significant BlogImage_0000_Layer 10 copy 10market interest in re-using this technology paradigm in other areas. The key features of Blockchain are: cryptography based user-identification, immutable transaction log/ledger, federated transaction approval mechanism (mining), distributed & replicated database (ledger) and peer to peer software on computer nodes which sync-up with each other.

In a more simplistic view, Blockchain is about a peer-2-peer model of doing things without the need of a central authority. This means lower costs for the participating “peers” and a democratized model to determine the rules of operation. The rules of running and participation are self-governed without any central authority.
In the online shopping model of Amazon, Flipkart or eBay the web sites are an online marketplace connecting sellers with buyers. The variations in this are auctioning, selling used goods, etc. The various entities are:

  • Online marketplace (MO): Entity that lists product items and can provide overall governance (enrolling buyers and sellers)
  • Product manufacturer (PM): Entity that produces goods that are sold in the marketplace. The manufacturer manages details of the product description and specifications. The role of the manufacturer could be delegated to distributors
  • Buyer: The person/entity who visits the marketplace to purchase a product for cash/money
  • Seller: The person/entity who is selling the product. The entity can be the manufacturer when it’s direct selling or can be a dealer or shop owner
  • Bank/payment entity: Entity through which money enters the Blockchain. An issuer can be a bank that issues existing currency like USD, INR, GBP or even a digital currency. Buyers get their money initially from the bank
  • Shipper: The entity who will ship the goods from the seller to the buyer. The entity gets paid by the seller or buyer for the delivery
  • Ombudsman: An entity that monitors transactions on the Blockchain and can help in dispute resolution between buyers and sellers

The entities can be pre-screened (e.g. passport, registration certificate) for authenticity before being issued a public-key. A verified public-key can be made mandatory to transact on the Blockchain

Online shopping on the Blockchain model

A high-level view of online shopping on Blockchain:

  • The online marketplace (MO) like Amazon can govern the Blockchain and be the gatekeeper who administers access to the Blockchain. The MO lists the products that are sold in the marketplace
  • PM will issue the products that can be bought on the Blockchain and is listed by the MO. The products can be launched in periodic intervals and each product can have a unique serial number
  • PM can exchange the goods/products for money with the sellers/dealers. The payment can be immediate or a set of micro payments over a time-frame. This physical goods transfer and payment can be outside the Blockchain with only digital transfer of products to seller/dealer’s wallet made online (e.g. ‘Cool Mobile’ a mobile manufacturer transfers 1 million mobile inventory to dealer ‘Smartseller’)
  • In a similar way the bank/payment entity can transfer cash to the buyer’s wallet after receiving money in an offline channel
  • When a buyer places an order all the relevant sellers can mine (or participate in) in this transaction. Every seller can participate but only one of them will be able to fulfill it based on a proof-of-work (mining) algorithm. Fulfilling it will result in a new “block” or sale transaction being added to the Blockchain and the buyer will receive his/her goods from the seller
  • When the buyer places the order the purchase amount is locked in the buyer’s wallet and is not available for spend elsewhere unless the transaction is cancelled
  • A similar mining transaction can be fulfilled by a ‘Shipper’ entity to deliver the product
  • When the product is delivered the Seller gets their payment and the Shipper their delivery charges

Mining – the heart of the model

Mining is an integral feature to migrate to the Blockchain. The algorithm (that decides the seller) can be agreed by the entities of the Blockchain in a consensus model. The parameters that can be applied for deciding the seller are lowest selling price (in a range), delivery time, past rating, specialization in a particular product (product sales percentage of overall sales), distance between buyer and seller and seller diversity (a mechanism to ensure that orders don’t get monopolized by the same seller). There are variations in Blockchain usage so that the buyer only completes payment on delivery of the product/goods. The mining process will also ensure the buyer is credible and has the required balance. A safety mechanism also needs to be created to ensure that all orders aren’t getting spammed/sent to a single seller.

Why Blockchain?

  • Direct selling is a not a new concept, but executing it on a large scale in a many-to-many peer model without the need for a central system/authority is a big leap
  • The Blockchain brings in a high-level of transparency and openness to the online shopping model. This will encourage fair competition among the entities and lower costs
  • The mining algorithm will evolve over time and will be determined by the entities in the market place and not by a central authority or some vested third party
  • Buyer doesn’t have the problem of deciding the seller and system decides the best one
  • Directly connecting the buyer and seller reduces the transaction costs
  • When used or refurbished large sized goods are sold its easier to trace the history of the product through its previous owners. Transaction validity to claim warranty and return of goods is easier to establish
  • The model can transcend national borders to give buyers a better choice of products at the lowest price and seller’s access to more buyers. Many government restrictions which apply on a typical MO organizations may no longer be applicable

Are there downsides or alternative perspectives in moving to Blockchain?

  • Blockchain is still evolving and its ability to service the high volumes of retail sales is uncertain
  • While transparency is a great concept, it may not be agreeable to the participating entities and the concept may never take off
  • If the buyer has a preference for a specific seller that transaction can be done directly between the parties outside the Blockchain

The article tries to re-look at online shopping in a peer-2-peer model using Blockchain without going into all nitty-grit-ties of retail shopping technology. Online marketplaces have been around for about 15 years and has dramatically altered the shopping experience. It’s about time to revisit this in the new Blockchain world.

Senthil Radhakrishnan

Vice President and Head of Capital Market Solutions Group, Virtusa. Senthil has 16+ years’ experience focused in capital markets technology with top tier Investment banks such as UBS, JPMC, Barclays, etc. Broad front to back experience in the securities industry across the various asset classes and in compliance.

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