How blockchain can lower prices for goods online and increase security for online purchases, explains Aleksey Alimov, Connectius Founder and CVO.
1 – Insufficient protection for financial transactions
The problem of fraud in trading arose the first time humans traded anything of value. In the present day, service providers lose up to 8% of their profits every year due to fraud (through chargebacks, cardless transactions, personal data theft, etc.). Blockchain allows for the use of smart contracts for processing transactions and settlements with buyers, which ensures a much higher level of security.
Smart contracts are digital algorithms that contain certain conditions. If the given conditions are met, the contract is executed and the parties that concluded it exchange assets. Smart contracts are stored in a distributed ledger, and they cannot be altered or destroyed. Using this technology makes it possible to return funds if an attempt at fraud is discovered.
The use of smart contracts gives access to a mathematically exact and completely transparent method for processing financial flows without human involvement (or with minimal human involvement). At the same time, the decentralized nature of blockchain lowers the risk of misuse of user data.
2 – Lack of publicly available ratings for transaction participants
Any trade assumes the exchange of valuables between participants. Under the existing system of processing transactions, the participants often find themselves without insurance against contracting parties acting in bad faith. The issue of trust is among the most central for e-commerce.
A blockchain-based, depersonified rating system can ensure the necessary level of trust. All participants in this multi-level, multi-factor system undergo additional verification and also track their own ratings. This could be seen as a kind of digital passport, which can confirm the good standing of service providers and customers.
3 – Expensive middlemen and exorbitant commissions
Every trading platform and every service acts as a middleman between transaction participants. As an example, escrow officers serve as a trusted third party in the transaction and guarantee that the buyer and seller will perform their obligations. On average, middlemen charge about 10% of the transaction amount for their services. Payment systems also take a cut, setting practically the maximum rates for transaction processing in e-commerce.
The surcharges increase the cost of goods for the end consumer.
Using blockchain and smart contracts makes it possible to exclude expensive middlemen from the process, automate the transaction process as much as possible, minimize operational fees, and make buyers more advantageous retail offers. The lack of forced middlemen within the platform positively impacts the prime cost of goods and services.
4 – Difficulty of implementing innovations
The development of proprietary innovative products requires an extraordinary amount of effort, time, and money. Not every trade platform can afford that. Traditional platforms have become hostages of their infrastructure, in which they had previously invested very heavily. New solutions that come on the market are significantly delayed in being integrated with the traditional model. Meanwhile, switching to new, more effective technologies could threaten the standard business model entirely. And yet remaining stuck in place at a time when new technologies are rapidly developing is also untenable, as it runs a high risk of falling hopelessly behind the competition.
It is much more advantageous for both new and existing businesses to use “out of the box” solutions to further their growth. Currently, the market offers a variety of ready-to-use blockchain services that allow companies to implement innovative and beneficial technologies. Integrating these services is cheap, fast, and easy.
5 – High operational costs
The cost of goods to the end consumer is made up of not just production, logistics, and distribution costs. The total cost also includes the seller’s expenses for ensuring security, compensating losses from fraud, paying for cash transport and bank operations, commissions for middlemen, and a variety of others. Sellers have to take these factors into account and cannot bring prices down, as much as they may like to.
A majority of processes can be automated through the distributed ledger technology. Blockchain and smart contracts make it possible to simplify or even eliminate many elements of trade relationships. This saves a great deal of money without decreasing the business’s throughput. Lowering operational costs provides an opportunity to lower the cost of goods and secure a hefty competitive advantage on the market.