According to Alibaba founder Jack Ma, “Blockchain technology could change our world more than people imagine.”
Michael Casey from MIT Digital Currency Initiative explains blockchain as a new method of record-keeping.
It is a decentralized system of many computers around the globe, that work in concert to produce a distributed ledger to keep a record of the blockchain marketplace transactions.
Transactions are verified through consensus — participants confirm changes with one another — and cryptography ensures the security of the information.
Blockchain helps to avoid the risks of relying on a single entity: potential breakdowns and hacking attacks.
Decentralization is a key to the technology and facilitates peer-to-peer exchange on the blockchain online platforms, which are also called decentralized marketplaces.
1. How Blockchain Technology Enables Online Marketplaces
There are two ways blockchain can empower online multi vendor eCommerce marketplace platforms:
- as the main marketplace technology;
- enhancing traditional marketplaces with blockchain-powered tools.
While OpenBazaar is an example of an eCommerce marketplace system that is built on the basis of blockchain, there are many ways to add the technology to a traditional online multi store shopping mall.
Blockchain-powered currencies — cryptocurrencies — are commonly used as blockchain-based alternative payment methods, which are transparent, provide instant payouts, are convenient for sellers, and help to avoid an additional fee for foreign payments.
The online multi-seller mall is using blockchain to help sellers share their product journey from production to purchasing with the customers:
1.1 Blockchain Marketplace Structure
Blockchain is literally a chain of blocks.
Blocks contain the digital information about all the marketplace transactions which is represented by any new data entries: purchasing, payment, ordering.
A single block can store a few thousand transactions and consists of the following:
- transactions’ data: the purchase time, the money amount, and the participants, recorded without personal data, but through a unique “digital signature”;
- hash, a unique code that distinguishes each block from other blocks, and provides security; once all of the block’s transactions have been verified, it must be given a hash. The block is also given the hash of the most recent block added to the blockchain:
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Blocks contain identical copies of the same blockchain and can’t be modified once they’re created.
The chain is a public database where the blocks are stored.
Every transaction is verified by a network of computers: the network participants validate transactions and the transactions’ details are stored on a public ledger.
Other network participants host nodes that run the blockchain and validate transactions as well.
Once hashed, the block is added to the blockchain and becomes publicly available to view.
Transaction flow in a blockchain marketplace:
Usually, these networks consist of thousands of computers spread across the globe.
2. Key Blockchain Marketplace Differentiators
2.1 Smart Contracts
Smart contracts are digitally signed agreements that prevent any kind of fraud and eliminate the third-party payment processor fees. They are:
- executed automatically (no intermediaries needed);
- unbreakable (written into lines of code within the blockchain network);
- publicly stored.
Smart contracts operate under a set of conditions that users agree to. When those conditions are met, the terms of the agreement are automatically carried out.
Thus, they allow for automated transactions based on predetermined conditions or triggering events.
Canya, a service multi vendor ecommerce marketplace platform, implements smart contracts to track transactions, monthly subscriptions, and agreements between platform users.
Smart contracts help to resolve possible disputes in the online multi store shopping mall:
Besides the payment, the set of conditions in a smart contract can be anything.
The decentralized nature of blockchain implies the following features on an eCommerce marketplace system:
- nothing is stored at a central location;
- all transaction data is copied and spread across a network of computers;
- whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change;
- in case of a hacker attack, only a single copy of information would be compromised.
Thus, marketplace management and control is limited: you can’t set any rules or conditions, like pricing control for example.
OpenBazaar is letting sellers set their own conditions:
However, since the blockchain provides the ability to trace every transaction, it enables improved order fulfillment traceability: each step in the order fulfilling process adds a new block to the chain with the time when the action was performed.
In addition, decentralization means that there are no intermediaries between sellers and consumers.
Thus, if a dispute arises, a trusted third party is needed:
- the platform customers agree on a mediator in advance, it can be the blockchain marketplace owners or any individual in the network;
- a mediator receives keys to decrypt messages between the consumer and the seller;
- if a dispute arises, a mediator decrypts the contract and works with both parties to resolve the situation.
OpenBazaar recommendations on choosing a moderator:
2.3 Payments and Fees
Decentralized marketplaces offer direct payment by cryptocurrency (tokens), which can be exchanged for Bitcoin:
- payments are instant and don’t require any third-party financial services;
- personal information and credit-card details are not required.
Such multi-store marketplace centers offer low fees or no fees, and sellers don’t pay for listings; only when a product is sold.
3. Blockchain Marketplace Benefits and Pitfalls
The highlighted differences are often the foundation of the blockchain marketplace’s pros and cons.
3.1 Decentralized Marketplace Advantages
PricewaterhouseCoopers highlights the advantages that blockchain technology brings:
Indeed, transactions can be completed quickly since the blockchain marketplace enables instant transaction validation.
Besides, a real-time clearing and settlement process enable transparency: anyone can view the content of the blockchain and get their own copy of it that is updated automatically whenever a new block is added, like in a Facebook News Feed.
Personal information about users is limited to their digital signature to enable privacy and confidentiality.
When a user makes public transactions, their unique code, called a public key, is recorded on the blockchain, not their personal information. This prevents hackers from obtaining it.
Viola.AI, a dating platform, is requesting the users’ personal data:
However, after the data validation process, it is encrypted and stored by using blockchain technology and distributed ledger, so the other users cannot access it.
Blockchain enables security and trust through the following measures:
- hash code prevents altering the content of the block: if the transaction data in the block is edited, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block too, in order to cover their tracks. However, doing so would change that block’s hash, and so on;
- each transaction is verified and synced with every node of the blockchain before it is written to the system, no single “master record” that can be hacked;
- consensus models usage: those are the tests for computers that want to join the blockchain marketplace network and add blocks to the chain, like Bitcoin’s proof of work.
Besides this, blockchain marketplaces work on a peer-to-peer basis, meaning that it’s hosted by its users and supported by their computing power. This enables distributed hosting and lower hosting costs.
A blockchain-based multi vendor ecommerce marketplace platform, Sia, even made the decentralized hosting its main business model:
Due to its decentralized nature, blockchain-based marketplaces are global by default, so it is easier to work at your target geos.
3.2 Difficulties with the Blockchain Marketplace Running
Despite the high level of security, decentralized marketplaces have their vulnerabilities, like double-spending: a hacker attack a platform in order to spend the online multi store shopping mall coins twice.
It is possible through a 51% attack: in order to achieve a majority on the blockchain computers’ network, a hacker would need to control at least 51% of them.
Such an attack is extremely difficult to execute for a blockchain of a big scale, but if users numbered in the dozens, it would be easier to do.
Thus, newer blockchain marketplaces are more susceptible to 51% attacks.
The throughput of some blockchains are quite low, that decreases the number of transactions that can be created during a certain time period and doesn’t allow to scale a online multi-seller mall.
Another point is that the large portion of the user’s data is confidential, thus some sorts of promotion are impossible to use — like product recommendations, bundling and personalization algorithms as well as target future promotions.
There are the technical implementation problems as well, connected to the applications and wallets that are built on top of the blockchain ledger.
Refunds can potentially become one of the main issues of decentralized marketplaces due to the fact that the transactions written in a block are irreversible.
Also, PricewaterhouseCoopers survey highlights the lack of trust among users as one of the main barriers to blockchain adoption:
4. Blockchain Marketplace Business Model
In decentralized eCommerce marketplace systems, owners and administrators don’t act as middlemen.
Thus they usually don’t set up rules, conditions or fees for customers.
The most popular blockchain marketplace business model is a token fee: buyers pay by cryptocurrency and the marketplaces charge a fee for that.
In addition, there can be value-added services and advertisements.
OpenBazaar enables its users to trade without any fees:
The online multi store shopping mall is going to monetize by introducing value-added services to help their users better scale and manage their businesses.
All users have a personal key pair that can be used to sign transactions and to anonymize all their data, since OpenBazaar focuses on providing a completely anonymous marketplace and the product search that is unaltered by the online multi-seller mall.
Also, the marketplace’s quality of service is assured by independent, third-party brokerage services.
Global trade often involves a letter of credit — a very costly operation.
ModulTrade is replacing this letter of credit with a smart contract version that can be applied to each transaction on the platform cutting time and costs for the multi vendor ecommerce marketplace platform customers.
The blockchain-based platform Lazooz business model is a decentralized alternative of Uber: distributed ride-sharing network, where the community collectively decides about the reward in zooz for each contribution via sophisticated protocols.
In this platform, the multi-store marketplace center produces a “Zooz” token used to compensate drivers.
Thus, blockchain-based marketplaces can thrive through both: a completely new business model or by adopting the traditional marketplace monetization approach.
While blockchain technology brings growing opportunities and new tools to the traditional online multi-store shopping malls, the unique feature of the technology is the ability to create a pure-player: a decentralized marketplace that will become a self-governing ecosystem of vendors and customers.