Blockchain Comes to Rescue
In our previous posts (see The Fault In Our Paper Receipts by Ali Shazal, and Why a Distributed System for the Trading Industry instead of a Centralised One by Samridha Shrestha), we analyzed the dilemma that the trading industry is faced with: the existing paper receipt system is wildly inefficient and highly vulnerable to fraud. On the other hand, a digitized system based on centralized servers and databases is hard to establish due to the need for a trusted middleman (the innate difficulty also potentially leading to monopoly and high fees), and also suffers the technical vulnerability of having a central point of failure. If only there is a technology that allows us to digitize the receipt system without resorting to a central middleman…
Fortunately, the technology that we dream of already exists, and its name is blockchain. Blockchain is a decentralized and distributed digital ledger system, used to record and share information in an immutable and incorruptible manner. In contrast to conventional centralized databases, blockchain can run on a network of different nodes. A special consensus algorithm is used to keep every node in “consensus”, so all nodes agree upon one single version of the records. Moreover, cryptography is applied to guarantee that it is computationally impossible for anyone in the network to tamper with the records, which means that different nodes in the network do not need to trust each other. Essentially, blockchain eliminates the need for a central middleman trusted by all participants. Instead, the trust is placed purely on the maths behind the technology.
These virtues of blockchain makes it the perfect fit for solving the trading industry’s receipt dilemma. All issuance and transactions involving receipts can be digitized and put on a blockchain, freeing the industry from the antiquated paper receipts. Moreover, all participants (warehouses, shipping companies, banks, etc.) will run their own node of the blockchain, without involving a centralized middleman. The benefits are obvious: this removes the barrier of finding/establishing a trusted third body; and unlike a centralized organization that can change rules and raise prices at its will, the decentralized blockchain will always run exactly as it’s programmed, and will never abuse its market power to charge higher fees. Moreover, this system will also be technologically robust, as there is no central point of failure. Even if a few nodes goes down or gets attacked by hackers, the whole network can still function without a hiccup.
And that leads us to our project — a blockchain-based trade receipt system. The backend of the system will run on smart contracts — computer programs that run on the Ethereum blockchain. Receipt issuers, such as warehouses and shipping companies, will be able to publish the electronic receipts on the blockchain. When banks receive receipts from loan applicants, they can easily verify the validity and time-stamp of the receipts on the blockchain. Once verified, they can claim temporary ownership of the receipts, which prevents borrowers from double using the same receipt on multiple banks.
Once adopted, this system will greatly increase the speed and efficiency of the trade finance process, and also lower the costs of fraud losses for banks. In the end, this translates in faster, cheaper and easier financing for traders and producers, which goes a long way towards helping agricultural producers in developing countries that rely heavily on agricultural exports, such as India and Ghana.