JD.com (NASDAQ:JD), the second largest e-commerce player in China, recently launched the JD Blockchain Open Platform, a blockchain-as-a-service platform that helps companies develop their own blockchain-based applications. A blockchain is a decentralized ledger of data that is spread out across various locations. That data is secured in encrypted blocks, which are accessed through peer-to-peer networks. The first blockchain was a distributed ledger for bitcoin transactions, but the technology can also significantly improve supply chain and financial records with easily tracked, tamper-proof transactions.
China Pacific Insurance, one of China's biggest publicly traded insurers, is JD's first partner to use its new platform. The insurer will use JD's blockchain infrastructure to "deploy a traceable system for e-invoices" by "applying unique blockchain IDs to each document." JD states that the app will help the insurer improve its overall efficiency by "streamlining the accounting process."
Tracking JD's blockchain efforts
This isn't JD's first blockchain initiative. Last year, it launched a blockchain tracing platform that helps customers track the origins of food products. JD subsequently implemented blockchain tracing for over 400 brands and 11,000 SKUs (stock keeping units) across its own marketplace.
This March, an Australian beef producer used JD's blockchain tracing to track its beef imports, and in June, JD's fintech affiliate JD Finance announced that it would issue asset-backed securities on a blockchain network through partnerships with Xingye Bank and Huatai Securities.
By launching a blockchain-as-a-service platform, JD could generate a fresh stream of cloud-based revenues by letting companies create their own blockchain-powered applications. Further, it could increase the stickiness of JD's e-commerce ecosystem as customers become more dependent on JD's service offerings. That growth could add diversify to JD's revenues outside of its core online marketplace business, which faces intense competition from Alibaba's (NYSE:BABA) Tmall.
Understanding blockchain's logistics applications
Last year, Walmart food safety chief Frank Yiannas demonstrated that the condition and origin of any food product across the retailer's network could be tracked in two seconds via blockchain -- a process which would have taken nearly a week with older tracking methods.
That's why it's smart for JD to use blockchain tracing on food sold on its marketplace. China has been plagued with food safety issues, and the implementation of blockchain-tracked food gives customers a higher level of assurance, which complements JD's corporate mantra of "authentic products, delivered today."
Meanwhile, corporate invoices (known as "fapiao" in Chinese) are tightly regulated in China, where they're issued for all financial transactions to discourage tax fraud. Keeping track of all corporate invoices can be a time-consuming and error-prone process, so digitizing all those invoices on a blockchain network where transactions can be quickly tracked could save companies like China Pacific Insurance lots of time and money.
But JD's already late to the party
JD's blockchain platform sounds revolutionary, but plenty of other companies have already entered the blockchain-as-a-service market. Tech giants like IBM, Microsoft, and Amazon all offer blockchain-as-a-service solutions as extensions of their cloud businesses.
In China, Baidu launched a blockchain-as-a-service platform in January. Alibaba already uses blockchain to track purchases, and its fintech affiliate Ant Financial uses blockchain to let Alipay users track charitable donations. Alibaba and Ant Financial also hold the highest number of blockchain-related patents in the entire world.
Tencent launched a blockchain-as-a-service platform last year, applied that technology to its fintech transactions and logistics, and even used it to help consumers track medical prescriptions.
JD could struggle to grow its blockchain platform against these rivals because it lacks a major cloud infrastructure platform. It could eventually expand the service, but that could be a costly effort for a company that is already struggling with high expenses. JD's tech and content expenses surged 80% annually last quarter, and contributed heavily to its net loss.
It's not a game changer
Blockchain-related news attracts plenty of attention these days, but few of these projects will actually move the needle for their companies. JD's investments in blockchain should improve quality control standards in its own marketplace -- which could boost customer loyalty and widen its moat against Alibaba.
However, the blockchain platform probably won't become a meaningful source of revenue because there are simply too many competitors in the market, and unlike JD, those competitors can bundle their blockchain solutions with other cloud services.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Amazon, Baidu, JD.com, and Tencent Holdings. The Motley Fool owns shares of and recommends Amazon, Baidu, JD.com, and Tencent Holdings. The Motley Fool has a disclosure policy.