What trade-oriented blockchains can enable

by Dana Critchlow via StockSnap
by Dana Critchlow via StockSnap

More thoughts on blockchain and trade:

Continuing from yesterday’s post, one aspect I find particularly intriguing about the potential role of the blockchain in international trade is the possibility of linking up the different parts, and what that implies for the future of commerce.

In the shipping trial mentioned yesterday, goods from Schneider Electric were transported on a Maersk Line container vessel from the Port of Rotterdam to the Port of Newark. The Customs Administration of the Netherlands, the US Department of Homeland Security and the US Customs and Border Protection also participated.

And that’s just scratching the surface. Maersk discovered in 2014 that a simple shipment of refrigerated goods from East Africa to Europe can go through 30 different stages, involving more than 200 separate interactions and ‘messages’.

Even if not all of the 30 participants are distinct entities (maybe some work for the same organization but in different departments), that’s a lot of different systems interacting. Setting up a database for all to share is possible on a programming level, but virtually impossible on a governance level. Who decides the format and function? Who controls it? Do all the participants trust that entity?

With a blockchain-based platform, the trust issue becomes less relevant, as all participants will be able to see the information they need and verify that it has not been altered. While the system will need to trust that the data entered is correct (for instance, that the amount in the container coincides with what’s in the document), checks at each stage will pick up errors or attempts at fraud.

Beyond the trust issue, a system that allows verified sharing of information can significantly reduce redundancies. The shipment process consists largely of a sequence of documents, each relying on part of what was in the previous one, and adding new information. This implies a lot of duplicated data. Convert that data into bits and parse it into a shareable format, and duplication – if necessary – is no longer a time-consuming burden.

However, it’s not the added efficiency that most intrigues me.

This is about more than streamlining. It is the beginning of a rethinking of business structures.

We are accustomed to a vertical business world. Enterprises have vertical structures, with parent company at the top and subsidiaries underneath. And each are governed by a combination of rules from the parent domicile and the local jurisdiction.

A blockchain-based system for commerce, on the other hand, is horizontal. It unites not only different participants in different geographical locations, but also in different sectors. There needs to be someone deciding who gets to participate (after all, we are talking about ‘permissioned’ blockchains), but beyond that, it creates a new ‘entity’ with its own set of rules.

This ‘entity’ has a new type of boundary – not corporate, not sectorial, not geographical, and as such, difficult to regulate.

What we are witnessing could be the beginning of a new type of commercial structure, accompanied by a rethinking of legislation.

The result could be a reinforcement of the underlying principles of global commerce: the fair exchange of goods for mutual benefit. With horizontal structures and a changing attitude towards cooperation, emphasis could start to shift from “exchange” to “fair”.

Blockchain and supply chains

Almost everything you touch during your day is the result of a supply chain. The product originated somewhere. It then moved somewhere else, and after that somewhere else, and so on until it ended up in your life. Your toothbrush, your breakfast cereal, your clothes, your car or bus or bike… You get the picture… We hardly ever think about this, nor should we have to. Because we trust that its sourcing did no harm, that the quality is acceptable and that it’s going to do what it needs to do.

What if you could know so much more? That your toothbrush was made in Texas? That your T-shirt was made in Nepal? That your shoes were designed by someone in Turin but manufactured in Romania? Too much information, you might say. But think about how it would change our relationship to things. Which would change our attitude to consumption. Which could lead to a new commercial culture, one based on transparency, trust and process.

by Lewis Pratt for Unsplash
by Lewis Pratt for Unsplash

Now let’s stop for a second and zoom out. Let’s picture all those toothbrushes and T-shirts and shoes criss-crossing the world to reach their destination. Most by container-stacked ships, some by truck. And all with reams of paperwork to accompany them from one stage to the next. There’s the “pull” order from the end retailer, which probably gets passed to an international distribution agent, which probably gets passed to a local distribution agent before ending up with the actual manufacturer. Of course, there are new forms along the way. Then there’s the “push” paperwork, in which the manufacturer documents the exit from the factory, in which someone else documents the reception and the placing on in the container, in which the goods are expedited from one off-loading stage to another. In this day and age, still, much of that paperwork is physical, using paper, often in triplicate.

That hardly sounds efficient. Or safe, since paperwork can be falsified, mistakenly rerouted, or simply lost. Even most digital versions consist of pdfs or similar, which have the same potential vulnerabilities.

Surely there has to be a simpler way? Of course there is: blockchain-based supply chain management. Here’s how it could work:

The documentation could be digitized, and stored on a blockchain (if you’re not familiar with how they work, see here). This will make it impossible to change or tamper with, without everyone knowing. It would also make it easy to pass from one stage in the journey to the other. And each receipt can be programmed to trigger an action, such as a payment, or a message, or the emission of another document. This could be made even more secure if we include sensors in the containers that automatically inform that the container has physically arrived. Smart contracts could be written that say something like “when the container is loaded onto the distributor’s truck, issue payment and the corresponding documentation”. More automated, more verifiable, more transparent. Retailers and/or end clients could follow the merchandise’s progress, which reduces uncertainty. And the considerable manual work needed to process the transactions could be reduced considerably, which at the same time will lower costs and friction.

This will not only streamline the process of trade, potentially saving billions. It will also make the progression of the merchandise more transparent, allowing more trustworthy documentation and greater confidence in the end product. The manufacturer is happy because it costs much less to get the merchandise to the end user. The end user is happy because he or she feels better about the sourcing and quality.

And the middlemen? It’s easy to assume that they would be happier at having less paperwork to handle, which would require fewer employees, overheads and risk. But their very usefulness is called into question. Would we still need middlemen in a blockchain-based supply chain world?

Yes, of course we would. No amount of automation can replace the need for a flexible and agile supervisor, to make sure that the routing is taking place as planned, and to react when nature and/or man intervene. But less checking of documents, stamping of bills of trade and filing and/or sending the appropriate pieces of paper means not only lower costs, but fewer opportunities for human error.

The lowering of costs would improve distribution profits, as well as perhaps lower the costs for the final customer. Lower costs and smoother processes should lead to increased trade. Increased trade leads to economic growth. And economic growth leads to increased trade. A nice, mutually-reinforcing circular process, based on code, connections and confidence.

An increasing number of startups and established businesses are getting involved in this potentially very lucrative sector. Just last week IBM announced the launch of a new platform that allows businesses to experiment with the “blockchainization” of their supply chains, a sign that this is serious business and that the shift will happen sooner or later. The potential impact will transform sectors as diverse as electronics and agriculture, while spreading the efficiencies along the whole supply chain and benefitting a broad range of communities and economies.