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What Role Could NFTs Play In E-Commerce?

Last updated: | 4 min read

Justin Banon is the Co-Founder of Boson Protocol, a dCommerce ecosystem using non-fungible tokens (NFTs) encoded with game theory.

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At the advent of Web 2.0, the now ubiquitous e-commerce platforms were presented and sold as a fairer alternative to how business was done up to that point. The premise seemed simple: connect buyers and sellers and automate the process as much as possible by using cutting edge software to create a fair and competitive sharing economy that would benefit all parties. However, it didn’t play out quite like that.

As we know, their ability to control every stage of every transaction meant that these platforms found themselves with a huge amount of market power. As centralized business models, they fuelled a self-perpetuating imperative to extract maximum value from each cog in the wheel.

Cue the snowball effect and nearly 20 years later, we now have a global commercial ecosystem completely dominated by Amazons and Alibabas, each extracting maximum value from all participants at a rate they are free to determine. It is clear to many that these systems of commerce are anti-competitive, monopolistic, hyper-extractionary, and unsustainable.

Thankfully, non-fungible tokens (NFTs) have provided a solution.

Much of the hype surrounding NFTs in recent months has been focused on the digital art space, however, their value proposition extends far beyond their representation of a digital image.

When encoded with game theory, NFTs allow for the automation of the redemption of digital rights for physical assets by tokenizing future trade commitments. This enables enterprises, organizations, and customers to bridge the divide between digital decentralized technologies and the transfer and trade of physical goods.

Take, for example, a new jacket. By tokenizing a future trade commitment to exchange a jacket, a seller can sell this NFT to a buyer, making the buyer the owner of the rights to receive the jacket. By redeeming the NFT, the buyer receives the jacket as they would in any other transaction.

The game-changer here, however, is that NFTs can be used to escrow the buyer’s payment and introduce a two-sided deposits scheme upon both parties’, which ensures that the trade proceeds as intended due to the fact that both parties have skin in the game. This, in itself, is revolutionary, as it minimizes arbitration, cost, and trust, allowing for the automation of seamless transactions between parties.

While non-fungible tokens can represent many different objects, from houses to in-game assets, they can be divided into two broad categories: tokens that represent real-life objects and those that are purely digital. One of the main advantages of tokenizing an asset in this way is that it can bring liquidity to markets that are otherwise quite illiquid, and the new trend towards fractionalizing NFTs with platforms such as NIFTEX makes this even more the case.

Traditionally, for example, the art market has been very illiquid and dominated by a small number of incumbents and collectors. The convergence of NFTs and decentralized finance (DeFi) will ultimately lead to the creation of liquidity pools for assets – digital and physical – for which markets do not even exist at the moment.

Of course, there are some NFTs that are not designed explicitly to be traded but which have another purpose – such as identity tokens and, for example, those that represent a kind of futures contract for a physical asset, rather than a token that represents the physical asset itself.

By enabling parties to exchange with minimized arbitration by intermediaries, there are significant cost reduction ramifications for both the seller and the buyer. This is incredibly important, because in the traditional form of centralized e-commerce, the intermediaries are practically held hostage by the seller, meaning that the buyer has far less power in any given dispute. To that end, you are also placing the onus on conflict resolution on both the buyer and the seller, as both have something to lose should a transaction not go ahead as planned.

By encoding smart contracts with a set of rules that govern the transfer of payment and the commitment to transfer the item as described, NFTs can release the deposits on behalf of the buyer and seller which incentivizes good behavior.

The potential societal implications of this technology are astounding. As an industry, we must balance caution with the need to seize these opportunities and transform the commerce landscape. The power of e-commerce monopolies is growing to such an extent that the harms they bring with them are becoming nearly irreversible.

The technological alternative is already upon us, and by embracing it, we can create a more equitable, fair, and innovative system of commerce.


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