As blockchain technology is gaining lots of attention across different industries, appliances like smart contracts will also bring fundamental change in the way online retail markets work.
Blockchain works through a system of consensus building, where multiple computers all participate in the management of the blockchain ledger, a digital document that keeps track of all the payments. As the data in the blockchain is distributed among all users, it eliminates dependency on third parties which decreases costs and increases reliability of transactions. Transactions are anonymous and immutable as data cannot be changed after it has been written.
A smart contract is defined as a set of promises, including protocols within which the parties perform on the other promises. Electronic protocols are usually implemented with programs on computer networks or other digital electronics, making them smarter than their paper-based ancestors. The execution of these smart contract is done by the entire blockchain, which means trusted third parties are redundant, violation of the contract is impossible and peer-to-peer transactions are forever traceable (Szabo, 1997).
The implementation of smart contracts is expected to disrupt the online retail industry. Currently, major players like Amazon and Alibaba operate mainly as a third-party platform, allowing buyers and sellers to connect and gaining profit by charging services fees. With blockchain technology, consumers will not need these third-party platforms anymore, which means no costs and other advantages. The smart contracts will only be executed upon fulfillment of specified agreements, tackling problems considering product and seller uncertainty, and also lessening the dependency on third party assurances (McMeekin, 2017).
Moreover, the appliance of smart contracts will improve both communication and coordination in the online retail industry. Firstly, the electronic communication effect is strengthened through smart contracts as these reduce the time and effort in communicating requirements as compared to conventional methods because there are no middlemen involved anymore. Secondly, the electronic integration effect is strengthened as smart contracts lead to tighter integration of business processes within value chains. Thirdly, the electronic brokerage effect will be strengthened after a larger base of entities have entered the buyer and seller positions. This will bring an increased quantity and quality in alternatives, and leads to overall decreased costs in time and effort in the product selection process (Malone et al., 1987).
A prominent innovator in the online retail industry is OpenBazaar, a decentralized electronic marketplace enabled by smart contracts. Unlike Amazon and eBay, there is no centralized ownership, no fees and no accounts to create. This approach may very well evolve the current electronic markets through the aforementioned advantages into an even more unbiased market. Additionally, the absence of corporate interests is expected to perpetuate the shift of online retailer markets to one with less restrictions.
References:
Szabo, N. (1997). Formalizing and securing relationships on public networks. First Monday, 2(9). Retrieved from: http://firstmonday.org/ojs/index.php/fm/article/view/548/469-publisher=First
Malone, T.W., Yates, J., and Benjamin, R.I. (1987). Electronic Markets and Electronic Hierarchies. Communications of the ACM, 30(6). 484-497.
McMeekin, P. (2017). Blockchain for Retailers: Producing Real Business Benefits. Retrieved from: https://www.aciworldwide.com/insights/expert-view/2017/march/blockchain-for-retailers-producing- real-business-benefits
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