In 2008 a new payment system was first mentioned, based on the idea of a cryptographic currency. Bitcoin (BTC), a global payment system or digital currency unit, has changed the way we look at financial transactions.
Here there was now a perfectly functioning currency that did not need a central bank or a central authority and that did not function in a commodity indexed manner. Users with an affinity for technology had already been using it for some years, albeit only moderately. By the end of 2018, however, its value is expected to reach $1.2 trillion. What is revolutionary about this currency is above all how it tracks transactions. Basically there are only records of transactions between different addresses with credit balances that have either increased or decreased. Every transaction ever made is stored in a huge public register (ledger) called Blockchain. The technology behind this has a huge impact on e-commerce.
What is a blockchain?
A block chain is a digital record that stores a list of transactions (“blocks”) supported by a cryptographic value. Each block contains a link to the previous block, a timestamp and data about the transactions it represents. Blocks are unchangeable. Once created, they cannot be changed. This creates trust between all parties in the block chain. Since no one can change a block after it has been created, all parties are sure that the data it contains is valid long after it has been created.
The concept of a block chain is not new as such and has existed since 1991. Block chains as we know them today were created by Bitcoin creator Satoshi Nakamoto and serve as the account book of the currency. Blockchains consist of proofs of work, which are data that verify the contents of a block. Proofs of work are generated content-based for each block. They are not easy to create and extremely difficult to modify. In essence, they guarantee that a block has not been duplicated or modified.
Through the block chain, Bitcoin operates in a decentralized way, while ensuring the integrity and truthfulness of each transaction. Since then, block chain technology has evolved to store, for example, medical records, events, traditional financial transactions and even election results.
Blockchain in eCommerce
Blockchains are a natural addition to eCommerce because they are designed to store transaction data. This does not necessarily have to be data from the financial sector. It can be any individual action that must be recorded unalterably, such as payment transactions and order processing.
1. alternative payment methods
Currencies that use block chain (so-called crypto currencies) have implemented modern block chain technology for the first time. Among crypto currencies, Bitcoin is the most popular and accepted worldwide. Today, crypto currencies are often used as an alternative to traditional currencies. Customers can pay with Bitcoin in the same way as via PayPal, Stripe or other payment processing services.
Bitcoin and other crypto currencies have several advantages over traditional currencies that benefit both customers and merchants. Besides the relatively simple implementation, sending or receiving money is as easy as sharing a QR code.
2. faster transactions
According to Monetha, a mobile payment platform based on the Ethereum block chain, traditional payment processing systems include up to 16 different steps with total fees of 2 to 6%. A number of parties are involved in this process, from payment processors to credit card providers. It stands to reason that both merchants and customers benefit from simplified transactions.
Block chain transactions take place within a single network. This means that fewer intermediaries are needed or can even be dispensed with altogether. Transaction speeds are limited only by the speed of the network and the speed at which new blocks are generated. While Bitcoin used to struggle with 7 transactions per second, platforms like the Lightning network promise millions of transactions in the same time.
3. more secure payments
Another advantage for customers: Block-chain-based currencies do not reveal any personal data. Credit and debit cards were used in over 100 billion transactions worth $5.72 trillion in 2015. However, only one year earlier, 31.8 million US consumers were also victims of credit card fraud.
At this point, Bitcoin works like cash. The customer does not have to provide sensitive data such as credit card numbers. Instead, the customer authorizes a transfer from his personal “wallet” to that of a recipient. The only difference between the data is a randomly generated unique identifier that is bound to the wallet of the user in question.
Blockchains work so well for payment processing because they balance speed, privacy and integrity. For customers and merchants, secure transactions are now possible much faster and the risk of fraud is much lower.
4. better order processing
One of the main advantages for eCommerce platforms is that each block in the block chain is linked to the previous block. This creates a visible chain of events that accurately reflects the order processing process.
For example, imagine a customer orders online on an eCommerce website that uses block chains. Each step in the order process (placing an order, processing payment, executing and shipping) adds a new block to the chain, along with the time at which the action was executed. The process would look something like this:
The customer places an order by selecting one or more items and entering their delivery details. The marketplace generates a block and a proof of work for the order. The customer pays for the product by credit card. This generates another block supported by another proof of work that verifies the payment to the seller.
The seller receives the block for order and payment and ships the product. This creates a third block indicating that the product has been shipped and the order has been completed.
You can also extend the process to other parties, such as the shipping company. In this example, a fourth block would be created by the shipping service provider after the product has been shipped.
The block chain technology creates trust between all parties involved. Due to the decentralized, tamper-proof nature of the block chain, there are fewer disputes about payment or order details and fewer complaints. Only 1-3% of eCommerce transactions conducted worldwide lead to disputes. The Blockchain is a transparent and public journal of all transactions. It is therefore quite possible that these figures will decrease even further in the future.
It is currently assumed that by 2025 10% of the world’s gross domestic product (GDP) will be generated on the block chain. Financial institutions around the world are experimenting with block chains as a platform for future trading.
Mastercard has already introduced its own blockchain technology for payment processing. Justin Pinkham, who leads Mastercard’s Blockchain initiatives, sees Blockchain as a solution that monitors the transport of pharmaceuticals, luxury goods and even diamonds.
The block chain technology behind crypto-currencies such as Bitcoin will change not only e-commerce but hundreds of other industries as well.
Ved PrakashVed Prakash is a content marketing expert and copywriter specializing in technology, business, marketing and financial niches. Ved is a marketing expert specializing in IT sales and distribution management. He is passionate about process improvement and has contributed to several news sites that have broadened his view of current events.