In many ways, the rise of decentralized finance (defi) — the branch of crypto devoted to liquidity pools, lending protocols and high-yield savings accounts — calls to mind the ecommerce sector in the late 90s and early 00s.
In both instances, a novel new paradigm captured the interest of consumers around the world, including those that had been underserved by the old system. All of a sudden, here was a fresh alternative to what had gone before, one that put customers’ needs first by tackling pain points and introducing efficiencies.
Interestingly, ecommerce is increasingly being touted as a use case for defi. But what do web3 wallets have to do with online shopping? And does defi really have the potential to engender benefits for both merchants and consumers?
Why Ecommerce Will Benefit From Defi
On the face of it, ecommerce doesn’t need defi. Every year, global ecommerce transactions (B2B and B2C) generate tens of trillions of dollars. Digital natives are entirely at ease with buying everything from groceries to clothing in the online space, with bank accounts linked up to endless platforms and services. What’s more, the UX of ecommerce platforms has improved massively in recent times.
And yet, many would have argued — indeed, continue to argue — that the world had no need for a parallel financial system. An argument easily dismantled by the fact that millions have flocked to defi, whether to stake and earn yield, acquire crypto-collateralized loans or trade. The total value locked in defi protocols is now over $58 billion — and rising.
Defi has conclusively shaken up the financial space, catching many banks by surprise. Might it conceivably do the same to the payment giants who currently dominate the ecommerce space? We are referring, of course, to the likes of Visa and Mastercard, as well as to banks themselves. Because defi cuts the middleman out of the picture, its appeal from an ecommerce perspective is obvious.
Imagine, if you will, that a customer with some Ether (ETH) to burn wants to pay for goods or services online using their crypto. Providing a web store supports digital assets, payment would simply mean connecting one’s wallet and signing the transaction. No need to custody funds, sign up for an account or type in your card details.
As for the merchant, they would save themselves the risk of chargebacks — a risk that cost retailers $32 billion through card fraud in 2019 alone. If shops can cater to customers without having to set up on a platform like Amazon or Shopify, they could also save themselves commission fees of up to 20%.
Speaking of Shopify, the company’s CEO Tobi Lutke recently reached out to Defi Twitter to solicit opinions on “commerce related opportunities.” One reply suggested earning a 20% yield on the settlement buffer as it waits to be distributed to merchant partners, with earnings split between merchants and Shopify to align incentives. In theory, this would result in lower prices for consumers, too.
Another reply touted working capital loans, orchestrated via Shopify and existing defi loan providers like Aave. This would “empower productive loans in a non-fully collateralized manner but narrow focus.”
Another benefit of closer integration might be loyalty schemes, with the current process ripe for change. Through the usage of smart contracts, defi could streamline the rewards system, enabling users to “earn” loyalty points and receive them directly into their compatible crypto wallet. Thus, one might receive loyalty points from one vendor and have the ability to spend them elsewhere, whether by swapping the tokens on a decentralized exchange (DEX) or using the selfsame tokens (a US-pegged stablecoin, for instance).
Building Bridges Between Ecommerce and Defi
A number of innovative projects are already seeking to level up ecommerce via defi. Splyt is one of them; the startup is currently building a model for a “decentralized e-commerce ecosystem.” A plug-and-play option, it allows merchants to upload products into a global inventory and package them as eNFTs, which can then be listed on multiple markets. Affiliates are incentivized to sell the eNFTs, with a smart contract automatically distributing commission following the conclusion of a sale. The vendor, meanwhile, collects payment and handles dropshipping.
Another intriguing project is 8Pay. A multi-chain defi platform for trustless crypto payments, it enables users to set up single, fixed-recurring (i.e. subscription) and on-demand digital payments at the touch of a button. In essence, 8Pay gives a cryptocurrency wallet the functionality of a bank account without sacrificing decentralization or transparency. Defi enters the equation via the native 8PAY token, which users can stake in order to receive a share of fees from the network.
PayWithTerra is yet another venture making waves in this area, enabling merchants to accept payment in stablecoins — meaning no transaction fees or volatility risk.
With the arrival of PayPal into the crypto space, the usage of digital assets in ecommerce is only going to increase. The question is, which products and platforms will rise to the fore and deliver the benefits which we have come to associate with defi and ecommerce? Time will tell. In the meantime, brick-and-mortar retail is starting to feel rather anachronistic.