IT Systems: Blockchain in Retail and Logistics

Will blockchain cause a revolution in SCM, or is it a blind alley? The field of cryptocurrencies and blockchain was created less than a decade ago with the arrival of Bitcoin. What was once considered a toy for hackers and anarchists is now becoming a subject of interest for corporations and politicians. Could the foundational technology of Bitcoin, blockchain cause a revolution in supply chain management, or is it just hype?

 

Logistics is a field in which each increase in the effectiveness of processes and reduction in bureaucracy can deliver a perceptible savings in costs, which can subsequently be projected into lower prices for end customers or the faster and more flexible delivery of goods. According to a study by Maersk, the delivery of a shipment of goods from East Africa to Europe can require up to 200 different interactions among 30 different organizations. These interactions, often conducted across incompatible systems, represent the bottlenecks of logistics and can lead to unnecessary losses of time and money. It is therefore understandable that major logistics firms like Maersk are researching different approaches to improving the secure sharing of logistics data across organizations and enabling access to the logistics process for the end user. For this reason, in recent years Maersk has begun collaborating with IBM and testing the implementation of blockchain in the logistics process (IBM calls its solution Hyperledger). These two companies are however not the only ones. Major companies like DHL, UPS, FedEx and De Beers are also working on the implementation of blockchain in supply chains. Associations such as BiTA (Blockchain in Transport Alliance) have also been established (www.bita.studio).

 

De Beers and Problematic Diamonds

The case of De Beers, the largest global producer of diamonds, which has been struggling with counterfeit diamonds and diamonds originating in countries in conflict over the long term, is illustrative in this respect. In May of this year, within the scope of the campaign against these afflictions, the company announced the launch of the Tracr platform (tracr.com), which should ensure the transparent monitoring of the path of each individual diamond from the mine through processing to the store and the end customer. According to representatives of De Beers, it is the implementation of blockchain, which will finally enable transparency in this controversial field, which is often accused of trading in so-called „blood diamonds “, diamonds originating in countries with military conflicts, where the profits from sales tend to be used for the further financing of ongoing conflicts. The Tracr tool is supposed to make use of the fact that blockchain as an additive decentralized database should in principle be irreversible and therefore credible. Nevertheless, the problem with counterfeits and a lack of transparency in the mining and trading of diamonds cannot be solved with a database, which can only transfer inputs that however can already be incorrect when entered. In other words, blockchain technology will not ensure that the supplier of raw materials is not lying about the first inputs into the blockchain database. Transparency of data does not ensure their veracity.

 

The nature of blockchain

Consideration of the application of blockchain in various industries are often marked by „hype“, the overenthusiasm that accompanies every new technology. In order to cool heads and objectively evaluate the advantages of blockchain, it is useful to clarify what blockchain is and where it has actually already been functioning for years. To this end, let’s examine the first and longest running blockchain in the world: The Bitcoin blockchain. The Bitcoin blockchain is a decentralized, distributed, additive and transparent database. It does not have a central administrator, who would have the exclusive right to make entries into the database and grant users rights to read and make entries. The Bitcoin blockchain can be downloaded into their computer by anyone in the world (typically with the client Bitcoin core), theoretically everyone can participate in making entries into the blockchain (practically these are miners, who operated specialized mining rigs, ASIC). Entries into the blockchain in the form of new transactions are additive in nature – data cannot be changed back, or rather their change is prohibitively expensive (in the millions of dollars). The Bitcoin blockchain is also fully transparent. In addition to downloading the full client, everyone can take a look inside with the use of the so-called blockchain explorer (for example, blockchain.com). The reason behind this architecture is simple – otherwise Bitcoin as a stateless digital currency without a central issuer would not function. Bitcoin was preceded by a whole range of projects, which also strove to attain the status of a non-governmental internet currency – for example, Liberty Reserve, e-gold and e-bullion. All these projects failed after they were „cursed“ by one of the American regulatory bodies, whose operators were usually locked up in jail and all assets confiscated. The creator of Bitcoin, known only by the pseudonym Satoshi Nakamoto, therefore realized very well that the only way is to create a monetary system without a central point for failure. For this reason, they also developed blockchain. The Bitcoin blockchain is secure and unalterable due to a network of miners, who receive renumeration in the form of new bitcoins and transaction fees for the operation of a node and registering new transactions. Other cryptocurrencies also function in a similar way  – their continuous operation is ensured b y a community of economically motivated participants, who expend real resources to secure the network and obtain their remuneration in cryptocurrency that can be exchanged on specialized exchanges. In the case of cryptocurrencies, blockchain makes sense since it serves to coordinate a network without a central administrator and a general agreement on „one version of the truth“. Cryptocurrency blockchains do not depend on the honorableness of the participants, but on their economic motivation. Without tokens, which operators obtain for the operation of nodes and can subsequently exchange on an exchange, such blockchains would not have any purpose and value. Blockchain is an accounting book and the tradeable token is the accounting unit.

 

Where Does Blockchain Make Sense?

The idea that technology, which until now had only one useful application in the form of non-governmental money, should help global corporations is thus possibly erroneous. It is perhaps not possible to „eviscerate“ blockchain, rid it of tradeable tokens and expect an improvement in the effectiveness of processes. Blockchain without tokens stands only upon the mutual trust and honorableness of its administrators and users with the right to register, which must be centrally granted and revoked. Such a blockchain is then only an ineffective and expensive database, lacking the advantage of cryptocurrency blockchains. Does this then mean that blockchain is totally useless for companies? This doesn’t have to be the case. It is however necessary to free ourselves of the idea of a tokenless blockchain, which is evidently a blind alley. Current trends rather indicate that in the future in addition to cryptocurrencies, one other category of crypto-assets (so-called security tokens) will gain ground. Unlike cryptocurrencies, these are tokens, which have the nature of investment instruments or securities. Security tokens can represent various company assets  – ownership stakes, shares of cash flows, and other claims or contractual relationships of the token holder with the particular company. It is thus possible that in the future blockchain will be used rather to unlock a new set of instruments for the entry of investors, than for the administration of data. If appropriate platforms in accordance with regulatory requirements are created, in the future in addition to the current stocks or bonds, firms will be able to offer investors company tokens as well. Such a concept could give access to capital even to firms, which until now did not have sufficient funds or an appropriate structure for the public emission of stock. At the same time, it could provide investors investment liquidity in the form of a secondary market on cryptocurrency exchanges. Several entities (the German Neufund, Swiss SmartValor, and our own Czech XIXOIO) are currently striving to build platforms through which firms could emit their own security tokens. In any case, it will be interesting to watch which concept of blockchain adoption will win in the future, the „boring“ administration of data or the more interesting token securitization. 

 

This article was published in IT Systems 10/2018

Author: Richard Watzke