The Future is Here, Almost
Blockchain Technology and the Spare Parts Marketplace
For most people, knowledge about blockchain begins and ends with Bitcoin, the cryptocurrency concept that has dominated the headlines for the last few years. But beyond the hype of Bitcoin, it is the blockchain technology that drives Bitcoin that has the potential to upend traditional business and disrupt whole industries.
Created in 2008, blockchain is a distributed database technology that creates a secure ledger using cryptography that only the holder of record can change. The ledger, like a record book, is stored in encrypted form on thousands of computers across the globe and is accessible by the record holder using a special code – a long password only known to the holder. Records are then stored in these computers, or “nodes”, with each node verifying its copy every seven to ten minutes. Combined with the cryptography requiring passkey access, this serves as a check on transactions as a majority of the storage nodes must accept or reject a transaction for it to be verified. If a transaction is accepted, a new line is written to the ledger and added to the chain. If the transaction is not verified, the transaction is rejected, providing security for the passkey holder regardless of location.
Benefits of Blockchain Technology for Parts Sales
There are several key attributes to this type of system. First, the passkey access can be given to someone else, securely transferring value transactions to a new owner. This concept is the heart of Bitcoin and other cryptocurrencies, but also applies to transactions outside the currency realm. It also eliminates or significantly reduces third-party transactional fees.
Since most transactions between buyers and sellers are done through bank wire transfers or checks, or through other database managers such as PayPal, fees for these services are high, adding cost to the transaction and affecting price. For many small and medium businesses (SMB), and especially for sole proprietors, these costs can make the difference in what parts they can sell and at what price. As most third-party systems set terms and rules for transactions, blockchain technology eliminates or reduces their role and puts terms into the hands of the buyer and seller. This reduces transaction costs and overhead for sole proprietorships and SMB’s.
Second, blockchain creates an immutable record for the provenance of parts sold. With the power of the internet, parts can be sold globally and shipped anywhere in the world. As a result, counterfeits and off quality parts are often introduced into the parts stream to the detriment of the buyer. With blockchain, parts provenance can be tracked through the life of a part and buyers have access to the entire history of the part and the chain of ownership, and even use, the part has endured. This is a powerful hedge against the proliferation of counterfeit or stolen parts.
And third, many OEM’s are using blockchain technology to mitigate risk and control product liability. The ability to track a part’s journey throughout its lifecycle can help OEM’s respond when a part has been recalled or to help prove authenticity when accidents or misuse occur. Already, US and European authorities require parts provenance for aerospace parts. And the automotive industry alone accounted for 47% of all spare parts logistics in 2017 with that number is expected to rise to 51% by 2022. With the ability to move these transactions from paper to lifetime visibility electronically, cost and risk are reduced.
Trends in Blockchain Technology
Already, large companies and international brand names are driving the use of blockchain to spur further advances and many are even building it into their business model. On the heels of product liability disasters such as Chipotle, many companies selling perishable goods are moving to prevent a similar occurrence. Walmart recently announced a Food Traceability Initiative requiring that producers who sell leaf vegetables to Walmart collect and upload data to the IBM Food Trust Network.
Suppliers have until September 2019 to opt into the initiative. And the implications for product safety are huge. Metrics such as condition and origin of product will now be accessible in 2.2 seconds as opposed to a week under older methods.
Other industries are following suit as well. Large brand names within fashion are also using blockchain for traceability and transparency and to protect and enhance their brand name through ethical fashion. By tracing the origin of product from farm to mill to cut and sew and on through shipping and retail, brands can ensure that certifications for organic or Fair Trade can’t be forged. And transparency of origin allows them to avoid using producers who have been identified as sweatshops or who have been singled out for human rights abuses.
Software providers such as Provenance and Sourcemap are using blockchain technology to provide full supply chain visibility and transparency for companies around the globe.
Obstacles for Online Parts Sellers and Platforms
While blockchain technology will inevitably come to parts marketplaces, there are obstacles for those involved in this industry:
Current parts marketplaces operate under an inherent assumption of trust. The seller trusts the buyer to pay them as agreed. The buyer trusts the seller to ship the product and that it meets the terms and conditions agreed upon during the negotiation. And the platforms used for the transactions trust both parties to act reputably and legally to avoid placing the platform in legal or regulatory jeopardy. Current marketplace systems have worked remarkably well despite a small percentage of players that have not always acted accordingly.
Blockchain applied to buyer/seller transactions could reduce the implied trust of the parent platform through which parts are sold. This would allow sellers and buyers to negotiate directly with one another to set their own terms while paying much less in transactional fees. But, it could increase opportunity for unscrupulous players to enter the system and undermine the trust that has guided transactions in the past.
For platforms that connect sellers and buyers, in a blockchain environment, there are ways to remain integrated in the maintenance of trust within the selling ecosystem while still providing value. One way to do this would be to offer escrow services to sellers and buyers. Money from the transaction is collected from the platform and held until the buyer receives the item. If the buyer and seller are satisfied the funds are then released to the seller. Two of the three parties must agree to trigger the fund release.
Alternately, platforms could leverage their reputation among sellers to become a “trusted third party”. In this scenario, buyer and seller agree that the platform would act as mediator to settle any disputes that arise during the transaction. The two parties utilize a blockchain smart contract and the trusted third party is given the keys to the contract. In any dispute that arises, the platform could open the contract and mediate the dispute to resolution.
As blockchain enabled marketplaces develop and mature, blockchain technology could allow seller’s reputations to be transferred from marketplace to marketplace as part of the blockchain. Currently, sellers take months, or even years, to build their reputation on sites such as eBay and Amazon as well as smaller niche sites. The process of building a seller reputation is time consuming. With blockchain, the reputation and ratings built in one marketplace would be transferable to others, establishing trust among buyers without the need to start from scratch.
With each new technological advance come adoption costs. And blockchain is no exception. One reason for the popularity of marketplace sites such as Amazon, eBay and Etsy are that these sites offer a turnkey experience for those wishing to sell. Though they charge expensive fees - Amazon’s Final Value Fee (FVF) is approximately 15% on each sale while eBay is 10% and Esty ranges from 2.5% to 3.5% - these fees fund the marketing, payment processing, dispute resolution and other services which sellers want.
Similarly, site costs themselves are high for individuals to maintain. The decentralizing effect of blockchain places the seller in direct negotiation with buyers. And while the removal of platforms is, in theory, a path to lower transaction costs and greater freedom to set terms, a seller would still need to spend money up front to set up a site to offer parts, collect payment, market the site’s goods and maintain any legal or regulatory licensing required for running a business. And they would incur costs to maintain these features regularly as well.
In many ways, the cost associated with the traditional marketplaces has been one willingly paid by sellers as a trade-off to not having to expend an equal or greater amount on associated overhead for their own site. It also serves as a “business skills buffer” for those wishing to concentrate on selling parts based on their experience and knowledge of an industry. Many sellers have never had to learn skills such as marketing, web design and regulatory licensing, not to mention the sourcing of blockchain software to embed into their site to bring their business to life.
Perhaps the biggest obstacle to utilizing blockchain for online parts marketplaces is that it is still too early in the game. The potential exists for blockchain to revitalize the role of sellers and disrupt traditional powerhouses such as eBay and Amazon. However, development of software required to make this possible – and accessible – to individual sellers or to platforms that wish to be a blockchain marketplace is still a work in progress.
Some development has begun to surface with marketplaces such as OpenBazaar. Founded as a replacement to Silk Road, OpenBazaar has embraced the format of a blockchain marketplace by offering escrow services to its sellers and buyers with fewer terms.
Specialty applications have also begun to appear in the areas of small business financing and seller reputation. Approximately 56% of all small and medium sized enterprise’s (SME) finance proposals for trade are rejected. And blockchain companies such as ModulTrade have stepped in to use smart contracts to bypass banks and the high fees they require for escrow. Other companies such as Ink Protocol have developed software based on blockchain to allow sellers to bring their reputation with them allowing them to sell in multiple marketplaces without having to go through the time-consuming process of building reputation on each platform.
While blockchain has the potential to open new frontiers to parts sellers and reduce transaction costs while providing a secure part history, more must be done to enable the technology to fully benefit the participants. Infrastructure must be built in terms of software to allow individuals and platforms to access the power of the technology. Platforms must assess what role they will play and how they can monetize their site and still provide value while allowing sellers and buyers the freedom that blockchain can offer. And sellers must decide on what new skills they need to acquire to take advantage of that freedom, or which software, once unavailable, will help them utilize it fully.