How to Automate Drop-Shipping with Smart Contracts: 2 Challenges and Solutions

By Irene Kimutu
17 Min Read

Smart contracts and blockchain technology have the potential to automate and revolutionize the drop-shipping process in e-commerce thus enhancing efficiency and customer satisfaction. Dropshipping automation helps to simplify the e-Commerce companies’ activity and make them more profitable and successful.

The idea of Smart Contract Automation for Drop-Shipping involves the ability to sell products directly from the supplier and with no need to keep your own warehouse or handle the shipping. The droshipping model uses a third party to handle tasks like inventory management making it be considered a low-cost and low-risk way of leading business.

On the other hand ,smart contracts are typically used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss.

The union of smart contracts and blockchain technology has become revolutionary in this age of digitization. This is because Blockchain technology has  promoted trust by offering a decentralized and transparent system for record-keeping and verifying transactions.

Read this article to learn more about why Blockchain is seen as a trust-building protocol, Blockchain Technology: Fostering Trust in a Digital World

In the case of drop-shipping, smart contracts can automate transactions and potentially transform online shopping thus enganging in one particular intersection.

Understanding Drop-Shipping

Dropshipping is a business model in the field of e-commerce that allows online stores to sell products without the need to maintain physical inventory. Instead of stocking and managing a wide range of products, a dropshipper sells products and fulfills orders by buying items from a third party that ships them directly to the customer.

Drop-shipping  has become increasingly popular in the retail industry. This is due to the low overhead entry costs and simplicity of starting a dropshipping business. This makes it become a convenient business model for e-commerce retailers who can run profitable stores with easy setup and very little risk. 

Advantages of Drop-Shipping

  1. Diversity– Dropshipping suppliers exist for almost every type of product, so retailers can expand their product offerings to include a diverse offering.
  2. Low Investment– Once a supplier is found and a website is created, dropshipping business can start selling immediately. The cost of opening a dropshipping business on e-commerce platforms is quite affordable since these costs are quickly covered when the business begins to grow.
  3. Avoid storage and shipping complications– Dropshipping can be a worthwhile option for retailers seeking profitable sales in geographic areas far from warehouses. This is because Suppliers can be contacted anywhere thus avoiding incurring long-distance shipping cost.
  4. Scalability– With dropshipping, the majority of the work falls on the suppliers thus as a matter of fact, you don’t hold inventory or ship it yoursef.

We suggest reading this article for an in-depth insight into Scalability in Blockchains: Solutions and Best Practices.

5. Saves time– Organizing your stock and preparing it for delivery can often be a time- consuming nightmare. Using a third party to ship items saves handling, packing and shipping leaving you with the time to focus on growing your business in different areas.

Disadvantages of Drop-Shipping

  1. High competition– Finding great dropshipping products will often mean you will face competition from fellow retailers in your sector. The origin of drop shipping products can be quite low. This is because manufacturers charge for the fulfillment service, so you only have a small amount of room to maneuver your prices in order to beat your competitors.
  2. Less control over brand and customer experience– Suppliers do not typically allow retailers to control details in the packaging and presentation of the product. This is because they sell products they don’t see since they are stored somewhere in supplier’s warehouses.
  3. Difficulties in processing orders– This is because many companies that use drop shipping as their sales strategy work with multiple wholesalers. This means each one of them will come with different requirements for processing order,billing and shipping. This results in making things complicated.
  4. Lack of branding– By branding means adding all the landing pages, product descriptions ,taglines and links. So to do all these ,one needs to create a personalized customer journey and without that ,the items will be sent without specialized branding giving them a low brand impact.
  5. Low returns– Profit for new dropshipping businesses is low because of a small customer base. Typically,new businesses are building their traffic stream from ground going up and because traffic and profit are directly related in dropshipping, it means profits tend to start small.

How Does Drop-shipping Work?

  1. The company signs an agreement with a wholesaler,manufacturers and other retailers to provide advertised goods.
  2. Then the customers place orders online.
  3. The company receives the order.
  4. Customer receives an order confirmation.
  5. Later the company forwards the order to the wholesaler or manufacturers.
  6. The company then ships the order. 
  7. And finally customers  receive their product.

Smart contract

A smart contract is a type of an agreement between two entities that is encoded and stored on a blockchain. The primary purpose of a smart contract is to automate the execution of the agreement. This allows all parties involved to instantly verify its completion. By doing this,it  helps eliminate the need for intermediaries and ensuring the immutability and irreversibility of the contracts.

Executed contract in the case of a smart contracts ,refers to the successful fulfillment of the agreement as programmed within the smart contract. Once all the conditions specified in the smart contract’s code are met and the required actions are performed, the contract is considered executed.Smart contracts can  be programmed to trigger other smart contracts into action or create new events when they are executed. They can as well hold assets, cryptocurrencies and NFTs within them.

To know more about NFTs, we recommend reading this article: NFTs Made Easy: A Simple Guide to Non-Fungible Tokens.

The concept of smart contracts has  gained popularity with the introduction of the Ethereum blockchain, which has enabled the development of decentralized applications (DApps) and other innovative use cases.

Smart contracts without blockchain

In the modern business landscape, you can leverage smart contracts without blockchain to achieve the following:

a. Automate processes such as sending invoices to clients for the services rendered.

b. Execute service level agreements using smart contracts,this ensures that both parties adhere to the predefined terms.

c. Create legal contracts, this is by  automating workflows and structuring data to incorporate smart contracts into a comprehensive process.

d. Efficiently deliver SaaS services across different tiers.

The Connection between Drop-Shipping and Smart Contracts.

By incorporating smart contracts into the operational framework of drop shipping, businesses stand to gain substantially in terms of efficiency, transparency, and security.

Drop-shipping is a retail fulfillment method where retailers partner with manufacturers or wholesalers to fulfill customer orders without maintaining a physical inventory. On the other hand, smart contracts are self-executing contracts with predefined conditions written into lines of code and stored on a blockchain.

Contrasting the traditional drop-shipping model with a blockchain-powered variant reveals stark differences in operational efficiency and reliability. Thus, in collaboration with specialized technology providers the blockchain network serves as the foundation for implementing smart contracts. 

Developing and programming the smart contracts for drop-shipping. The smart contracts should encompass the entire order fulfillment process from triggering the supplier to fulfill orders and managing payment transfers. This will help in reducing the need for manual intervention and minimizing the chances of errors and delays.

Integration of the smart contracts into the retailer’s e-commerce platform is crucial to automate the drop-shipping process. By integration, it means facilitating real-time data exchange, order tracking, and communication between the platform, the smart contracts, and the blockchain network. This enables customers, retailers, and suppliers to access transaction details and track the progress of orders hence ensuring transparency throughout the entire transaction process.

Furthermore, Smart Contracts offer an innovative solution to inventory management, which is one of the most prominent challenges in drop shipping. With the smart contracts integrated, the order fulfillment process becomes automated thus eliminating the need for manual intervention. This reduces the chances of errors and delays, ultimately enhancing efficiency and customer satisfaction.

Real-World Implementation of Smart Contract Automation for Drop-shipping

The integration of Smart Contract Automation for Drop-shipping model is not merely a theoretical concept but a practical solution. It has already been adopted by several pioneering businesses. These early adopters have demonstrated the transformative potential of this technology fusion, offering valuable insights and learning experiences.

The drop-shipping platform embarked on integrating smart contracts into their drop-shipping model in early 2023. Through recognizing the need for improved supplier reliability, timely delivery, and efficient inventory management, the impact of the implementation was profound and addressed key points and thus delivering tangible benefits.

One of the most significant advantages experienced by the Dropping-shipping platform was the automation of their order fulfillment and payment processes. This was through  predefined conditions encoded within the smart contracts where the entire transaction lifecycle became streamlined and optimized. The automation of order fulfillment and payment processes reduced manual intervention, thereby minimizing errors and improving efficiency.

The retailer also benefited from enhanced transparency where both parties had access to real-time updates on transactions and inventory levels. With every transaction recorded on the blockchain, both drop-shipping platform and its suppliers gained real-time visibility into the status and progress of orders. The transparency fostered trust and accountability between all parties involved. Thus, the ability to access reliable, up-to-date information has greatly enhanced operational efficiency and customer satisfaction.

In another instance, a renowned e-commerce platform integrated Smart Contracts into its operations to resolve disputes related to product returns and refunds.

By incorporating predefined conditions within the contracts, Smart contract platform  automated the return and refund processes, ensuring fairness, transparency, and efficiency. This is because the smart contract automatically processed the refund, reducing friction and enabling a smoother experience for both customers and retailers.

The success story of implementation of smart contract Automation for drop-shipping models has demonstrated the transformative potential of this technology. This is basically through automation, transparency, and efficient dispute resolution. They have elevated their operations to new heights, offering a seamless and reliable experience to customers and suppliers alike.

Challenges and Solutions in Smart Contract Automation for Dropshipping

The incorporation of Smart Contract Automation for Drop-shipping into this model,holds immense potential. It comes with its fair share of challenges which ranges from complicated technological requirements to regulatory uncertainties.


  1. The initial challenge lies in the technological complexity of setting up a Blockchain network and programming Smart Contracts. For businesses without a strong technical background, this can seem overwhelming. However, the solution lies in forming strategic partnerships with reputable technology providers specializing in Blockchain solutions.
  2. Regulatory concerns are another significant challenge. Blockchain technology and Smart Contracts are relatively new phenomena and they often fall into regulatory gray areas. The rapidly evolving nature of Blockchain technology often means that it falls into regulatory areas, leaving businesses uncertain about compliance requirements.

To navigate this challenge, seeking professional legal advice is essential and engaging with legal experts well-versed in Blockchain and Smart Contract. Regulations ensure that businesses can adhere to relevant laws and regulations which safeguard their operations and mitigate potential risks.


  1. Businesses must address these obstacles to unlock the full benefits of automation. They can do this by adopting thoughtful strategies and implementing effective solutions hence these challenges can be overcome successfully. These experts possess the necessary knowledge and experience to guide businesses through the confusion of building a tailored solution that aligns with their specific operational requirements and objectives.
  2. Interoperability issues may also arise when integrating Smart Contracts into existing systems, particularly when connecting with e-commerce platforms and other Blockchain business applications. To address this, businesses should ensure that their technology provider has the necessary experience and capabilities to integrate Blockchain solutions with existing systems.

To know more how interoperability is linking businesses, we recommend reading this: How is Blockchain Interoperability Linking Networks Together?

Bottom Line

The integration of smart contract Automation for Drop-shipping model ,holds immense potential for revolutionizing the efficiency and effectiveness of online retail. The real-world implementation of smart contracts in drop-shipping platforms has showcased their transformative capabilities, overcoming traditional challenges and delivering tangible benefits. Automated dropshipping is entirely possible and can extend into your marketing effort.

By forming strategic partnerships, seeking legal advice, and selecting experienced technology providers, these challenges can be overcome by unlocking the full potential of drop-shipping automation through smart contracts. As we navigate the era of digitization, smart contracts present an exciting future for e-commerce, where efficiency and effectiveness rule supreme.