shopify and tokengated commerce
June 2022
You may have seen Shopify is making waves in web3. This piqued my interest, so I dug deeper.
Luckily Alex Danco, Head of Blockchain and all-around big brain thinker, has been on a spree recently, doing a Not Boring collab and a handful of podcasts, including with Patrick O’Shaughnessy and Delphi Digital.
I’m super excited about Shopify’s plans. Here, I’ll bring together what they’re up to. Credit for all ideas goes to Alex (D) - I’m just summarising.
Crypto cynics have been on a field trip talking about web3’s lack of use cases. Shopify’s moves are a good antidote.
So, what’s Shopify doing? Well, in a sentence, building infrastructure for developers to create tools for tokengated commerce.
Shopify is the platform for commerce. And they’re betting that with web3, more commerce will happen through crypto-wallets. Wallets hold tokens, and now storefronts can offer shopping experiences that respond to their customers’ wallet token inventories.
Tokengated commerce, then, means putting products (here I’ll use “products” as a catch-all for actual products, as well as experiences, events, discounts, collections, airdrops, and anything else you can think of) behind a gate that can only be accessed when a customer proves they own a particular token in their wallet. In short, customers must own a certain token to get a product, and they prove it by connecting their wallet and signing a transaction with their private key to demonstrate it’s theirs.
There are two parts to this: tokens and gating.
Gating is deliberately introducing friction to the shopping experience. At first, this might sound barmy, but it’s an old idea. Challenge creates meaning in life, and commerce is no different. Anything that comes easy never feels rewarding. The best shopping experiences are where the buyer and merchant solve a challenge together. This is still part of real-life shopping: the customer enters a store, the salesperson tries to tease out what they’re looking for and presents a product that fits those wants. Online shopping is too easy, too seamless - there’s nothing for either side to overcome.
“The most meaningful kind of commerce is a challenge you do together [...] Tokengating is about adding challenge to certain products”
Blockchains and tokens give the primitives to create challenges in online commerce. The beauty of blockchains is all data gets stored in an open, decentralised, and neutral location. Because it’s a shared space, stores can interoperate. With the customer’s consent, anyone can see their token inventory and authenticate they own the wallet those tokens are linked to. There’s no need for independent systems because there’s a shared, trustless infrastructure everyone can rely on.
Currently, merchants can easily establish gating systems for their existing customers. They do this with customer accounts and loyalty systems. But doing this for new customers and people from other brands and communities is a coordination nightmare.
Would you look at that: blockchains are social coordination technologies. All brands and communities can use the same distributed public ledger for tracking wallet addresses and the tokens they own in a single place. With all brands using the same blockchain ledger, they can each build shopping experiences for all tokens, not just ones originating in their system, because the tokengating building blocks are interoperable.
The fundamental innovation of blockchains was enabling provable digital scarcity and solving the double-spend problem. Both are critical to a gated system. It must be possible to track and authenticate the instruments that give access to the products.
Onto the second part: tokens. These tokens will be mostly NFTs, not ERC20s. NFTs can be inputs and outputs of commerce. Customers can bring their NFTs to a storefront and let them shape their shopping experience. Later, customers can receive new NFTs at the end of their transaction. Tokengated commerce will be recursive as NFTs received from one transaction can be the input for another.
In Alex’s words: “NFTs aren’t a kind of product. They’re a kind of buyer, a non-fungible buyer.”
Because of their nonfungibility, NFTs are a tool for expressing identity. People can at once fit into a community by owning part of an NFT collection and stand out within it through their unique version. Tokengated commerce builds shopping experiences around this identity. There’s no current comparable for this in the digital world - nobody considers a brand account part of their identity.
NFTs enable merchants to convert latent demand for their products into active purchasing. Consumers need a catalyst to get them from an abstract desire for a product to a purchase action. NFTs can be an activation agent by introducing the vital “challenge” ingredient we saw above. The challenge for consumers is matching the acceptability criteria for passing the gate - holding a specific NFT in their wallet.
Since blockchains are open, decentralised systems, tokens can become the universal mechanism for accessing commerce. NFTs are standardised file formats. While the information they represent and the products they unlock may change, NFTs as a tool can remain the same. Shopify can create a generic token-gating infrastructure compatible with the NFT file format. Developers can confidently build on top and know how their applications will interact with NFTs because they adhere to a single standard.
“If you want many, many things to be able to interoperate with many, many other things, there needs to be a narrow waist that’s as constrained as possible between them”
The constrained, standardised requirements for NFTs mean token-gating can become a “narrow waist” that all brands and communities coalesce around for online commerce. Tokens will be used and recognised by all merchants. Downstream of this architecture is composability and interoperability, where all pieces of tokengating will be mutually compatible and symbiotic, and shoppers can port their identity between different merchants.
A universal tokengating infrastructure creates huge opportunities for collaborative commerce based on partnerships between brands and communities. Collaborations are mutually beneficial, so there's a huge appetite for them, but without all parties using a common infrastructure - as blockchain-based tokengated commerce offers - it’s practically impossible.
With tokengating, they become easy. Brands can partner by tokengating products for each other’s community members. Imagine OldIncumbent Ltd wants to attract customers from NewHotshot Ltd. With tokengating, they could permit holders of the NewHotShot NFT access to exclusive products. OldIncumbent gets exposure to a new segment of customers, and NewHotShot looks good to its fans.
Brands can expand their markets and grow revenue by expanding to casual fans and non-fans in other communities. Alex distils this to collaborative tokengating flipping “exclusivity into reciprocal inclusivity” between merchants.
Sounds cool, right?
Let’s get into how Shopify is supporting all this.
Back to where we started: Shopify is a commerce platform connecting merchants and customers. They provide an ecosystem for both sides of the market to connect. Now, Shopify is creating a base layer for application developers to create tokengating mechanics on top. Merchants can offer tokengated experiences to their customers across any “selling surface” - web, mobile, or retail point of sale. Shopify’s focused on enabling customers to display their token inventory to merchants and third-party applications. The applications will house the tokengating tools and run the tokengating process on behalf of merchants.
Any Shopify store can use one of the Shopify partner applications to add tokengating to their online store. At the same time, there’s an early access beta for merchants to create a gm (“gated merch”) shop natively in the Shop mobile app and a retail point of sale product for in-person tokengating.
Adjacent to tokengated commerce, Shopify is running an NFT beta programme for stores to issue NFTs to customers through partnered applications. Customers can purchase them through Shopify payments or a crypto payment processor. After completing their order, they’re redirected to a claim page to mint the NFT.
It’ll be interesting to see how this interplays with tokengated commerce. Merchants could issue their own NFTs to loyal customers and offer tokengated experiences to reward loyalty, foster community, and drive retention. Meanwhile, partnerships with other brands, tokengating products for their NFTs, will be a new tool in the acquisition toolkit.
I hope that was fun! I think tokengating is the future of shopping, and the Shopify team is approaching it very thoughtfully. I’m excited to see what comes next.
Thanks for reading :)
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To go deeper, check out the source material: