Blockchain is a disruptive technology that every smart-thinking business person should know about.
Its potential is enormous, with far-reaching impacts on banking, law, government, and especially on global supply chains. Perhaps its biggest opportunities lie in the many intractable problems at the heart of global supply chains.
In the first of a two-part series on Blockchain, we consider how this technology operates and some of the benefits that flow from the utilisation of this cutting-edge technology.
What is blockchain?
‘Blockchain’ refers to a distributed or shared ledger that can store the history of transactions conducted between organisations, and which can potentially be viewed by all the parties involved in the transaction.
The naming of this technology is a perfect visual metaphor for its technical operation. As each transaction occurs, it becomes a ‘block’. Each ‘block’ is connected to the one before in an irreversible chain over time – hence ‘blockchain’. A key strength of the blockchain is its trustworthiness. The blocks are simultaneously recorded on many servers. This wide distribution of information is more secure than single instances of data.
Blockchain technology is based on the same concept of security and validity underpinning Bitcoin, the cryptocurrency, where distributed computers capture identical information.
Blockchain in the supply chain – the game changer
In supply chain terms, relationships traditionally occur between each adjacent party in the chain, while banks have arrangements with specific parties. The key game changer is in Blockchain’s enablement of many parties in a chain to access all information embodied in the transactions without the need for a trusted third party while existing relationships remain unchanged.
Blockchain also supports other supply chain functions, such as improved work flows and ‘smart contracts’. A smart contract has been described as a digital mechanism for self-executing and self-enforceable contracts.
The developments that allow smart contracts have progressed in parallel to the technology that enables blockchain. Nick Szabo, a legal scholar and computer scientist, first coined the term ‘smart contract’ in 1993. Since then he has been working on structuring the logic and language that would allow an actual or implied legal contract to be converted to a set of rules. The rules are then programmed into a ‘machine’ for recording and monitoring performance. Another way of thinking about this is that smart contracts are a set of ‘if’/ ‘then’ statements.
A smart contract, thus, not only defines the rules and penalties associated with an agreement, but enforces those conditions. When a container is delivered to the customer in Singapore, payment from customer to supplier is automatically triggered through the specified bank. If the order is delivered one day late, this payment, according to the terms of the contract, could be discounted by 5%.
Key benefits stemming from smart contracts and blockchain are efficiency gains and reduced costs of conducting transactions, particularly those associated with the transfer of ownership of goods or assets. For importers and exporters, faster and easier cross-border movements are envisaged by replacing manual documentation flows and slow, cumbersome international payments practices such as letters of credit.
Another key benefit is traceability – the ability to capture real-time information about the origin of a product or material, and its physical condition and location at any time along the supply chain. Once captured, a record cannot be altered by any one party. This secure history and record-keeping aspect is known as the ‘immutable record’ feature. Blockchain could also capture ‘certification’ of the origin of sensitive materials e.g. palm oil.
Traceability is a benefit attracting considerable attention from agricultural businesses. Assuring retail customers and consumers of the source or ‘provenance’ of their beef, canola, fish or infant formula, has considerable appeal. This is expected to provide early adopters of the technology with tangible commercial advantage, especially in premium markets and in markets such as China where food safety has been a concern.
Whenever a quality problem does occur, fast and targeted recalls can be initiated. This is one of the key drivers for Wal-Mart’s interest in blockchain. They are currently tracking pork shipments within China, and produce from Latin America to US markets.
In Part 2 of our Blockchain series, we will consider how this technology is backed up by parallel developments in the Internet of Things, how Blockchain can enhance End-to-End visibility, and why it is gaining global momentum.