I began my career working for companies that profited from the long and complex supply chain that comes with building, maintaining, and operating flying machines. With strict and extensive safety regulations, each part must be certified before it touches an aircraft, making paper certificates fundamental to the logistics network. Often, a certificate is required every time the part changes hands, creating a growing trail of paperwork which is transferred from organization to organization and is seriously prone to logistical error, representing a huge drain on company resources. In an audit of a large U.S. airline carrier, Deloitte research discovered that “greater than 60 percent of the issues with part receiving were due to poor or missing paperwork, and on average it took 34 days to correct the problem.”
One of the most obvious ways to improve any supply chain is through the use of a shared digital database that can track the movements of a part or product from its creation to its current owner, automatically recording each and every step. This distributed ledger is defined by having multiple stakeholders maintaining and sharing the same history, which increases the security and trustworthiness of the ledger, since it would be very difficult for one party to manipulate the ledger’s history without the other parties noticing. The result is a historical record agreed by all participants to be true and more reliable than paper.
We are already seeing food producers and retailers, along with aerospace companies and other industries, such as mining trying to adopt the use of Distributed Ledger Technology or Blockchain to improve their supply chains. The distributed ledger is only one aspect of blockchain technology, however, and its true potential lies in the more novel solutions involving tokens. Tokens allow people to represent value on a network and design specific mechanisms for how those tokens function. If we then take these tokens and program in modes of automation which negate the need for human intervention, we can unlock new ways for businesses and people to interact and we can come to see where the true disruptive potential of blockchain technology lies.
Every industry has both mandatory standards, which are regulated and enforced by government authorities, as well as voluntary shared standards which facilitate the interaction between different companies in the same industry. The U.S. commercial aerospace industry, for example, is regulated and enforced by the Federal Aviation Administration (FAA), but nearly every government has their own regulatory authority. There also exist transnational authorities, international industry standards, as well as various technical specifications that nearly all companies in the industry conform to because these shared standards make the entire industry better and more efficient. Each standard has an accompanying certificate meant to signify conformity and each standard has a system of auditing meant to guarantee that conformity, so placing trust in certificates also means placing trust in auditors. In our network, we will not only be able to eliminate paperwork, but also incentivize auditors and certificate issuers to be maximally reliable by creating a network in which all parties are responsible for the quality of goods and services offered by their members.
What makes blockchain more than simply a distributed ledger or shared database is the underlying design and use of tokens. By having tokens represent different types of value and setting up rules for actors to exchange and interact with each other through the use of tokens, an entirely new range of business possibilities open up. The CERT network would be based on two types of tokens which are interconnected: a non-fungible token and a utility token.
Cert, a Non-Fungible Token
The CERT Network is based on having certificates represented by tokens on the blockchain . Conceptually, certificates are representations of an item’s validity and tokens are representations of the certificates, which would in turn be indirect representations of the item’s validity. Unlike paper or other forms of digital certificates, the token on the blockchain is provably unique and cannot be duplicated or forged. Since there is only one true certificate, there can only be one token that represents it, so that token cannot be divided into smaller values. This is a non-fungible token. Other tokens are fungible, meaning that they are interchangeable (your bitcoin is the same as my bitcoin) or divisible (I can transfer 1.34 bitcoins or 0.091 bitcoins).
If the main function of the CERT Network is to create, exchange, and track Cert tokens (certificate representations), then Cert Templates are meant to define the specific type of Certs that are issued on the network. They are essentially a general pattern in which specific Certs can be created from with standardized information specific to that pattern. In aerospace, an example of a Cert Template could be a specific type of aircraft screw that adheres to the National Aerospace Standards (NAS), while the Cert token represents a batch of screws created by the manufacturer. In organic farming, an example of a Cert Template could be for apples recognized as organic according to standards of the United States Department of Agriculture (USDA), while the Cert token represents a crop of Apples picked at a certain date in time at a certain farm.
If certificates represent an item’s validity, then auditors are meant to guarantee the validity of the certificate by objectively evaluating certificate issuers. In commercial aerospace, even the Federal Aviation Administration (FAA) gets audited by the Inspector General’s Office, who found that the “FAA’s process for monitoring and investigating SUPs [Suspected Unapproved Parts] is not as effective as it could be, because of record keeping weaknesses and the lack of a management control to capture and accurately report the number of SUPs.”
The CERT network is an open protocol in which anyone can participate or view what is happening on the network. Therefore, anyone who uses the system is able to issue their own certificates, but a certificate has no real value unless it is trusted or believed to represent some level of quality or standard. To support the trustworthiness of the items created by Cert issuers, outside parties (Auditors) must step in to inspect and verify that these producers are meeting the standards that they are claiming. These Auditors may be governmental or private, but they all oversee industry-wide agreements, specifications, or practices. With a seal of approval from an Auditor, a Cert Template and the Certs issued from that template become s much more valuable because it has the additional weight of the Auditor’s reputation attached. Auditors are meant to give certificates reliability, but in this open system where anyone can join, how do we make sure that Auditors themselves are reliable?
Merit Token, a Utility Token
A utility token is a token that is used in order to access or pay for services on a network. Merit Tokens in the CERT network allows users to access Cert Templates and their corresponding Certs. This is done by depositing or staking Merit Tokens in the Cert Templates that users find valuable and want to use. By depositing or staking Merit Tokens in Cert Templates created by particular Auditors, users signal that they trust those Auditors and in return will receive access to exchange the Certs that are derived from those Cert Templates. However, in order to issue Certs of their own, item producers will have to be verified by the Auditors.
The point of certifications is to guarantee conformity to a specific standard, which means that certifications require some level of trust in the issuer. In the aerospace industry, these would most commonly be manufacturers who produce the original parts for aircraft, but they could also be repair shops who overhaul used parts for resale. In organic farming, the issuers would be the organic farmers who want to certify each batch of produce that they bring to market. Users who want to be issuers of certificates would need to stake Merit Tokens in the Cert Templates in which they want to derive their own original Certs from. The Auditors would then review and assess if these potential issuers meet the standards that have been set for their Cert Templates. If approved, Issuers would be granted the ability to create that Auditor’s particular type of Cert.
Resellers buy and sell items that are accompanied by certificates, which change the value of the items because they signal a certain level of quality or standard. In aerospace, these would be broker dealers who buy and sell parts for profit. In organic farming, these would be organic shops, which sell organic products. In most cases, Resellers would need to receive certificates from the Issuers to verify that they are buying or have bought the correct item. In order to receive the Certs on the blockchain, resellers would have to stake a certain amount of Merit Tokens in the Cert Template giving them access to exchange, but not issue, the Certs on the network. Resellers who do not need to issue Certs would not need to receive any approval from the Auditors; they just have to make the deposit.
The quality that certificates represent is most highly valued by the end users who will actually consume or use the certified items. In aerospace, these would be the airlines who must install parts to operate or maintain their aircraft and need certificates in order to prove airworthiness. Airlines are not able to legally operate an aircraft with parts that are not certified, so effectively the part has no practical use unless it is accompanied by a valid certificate, meaning End Users in the aerospace industry would have to stake tokens in the Cert Templates in order to possess the Cert on the network. In organic farming, End Users would be the customers who actually consume the organic produce. These customers would mostly not need to possess the Cert so would not have to be involved in the CERT network at all other than potentially viewing the Certs on the blockchain, which anyone can do for free.
Items are able to flow smoothly through supply chains because there is trust on some level that the items exchanged are being represented truthfully. However, there will always be attempts at fraud, simply because it may pay off. In California, massive amounts of produce were fraudulently relabeled as USDA organic in order to increase their price. Even in an industry like commercial aerospace where safety is absolutely paramount because mistakes mean loss of life, there was an FAA estimate that about 520,000 counterfeit or unapproved parts, which accounted for 2% of the overall active parts, were making it into planes annually. Since auditors act as a final source of validity in the supply chain, they are a key source for ensuring authenticity and supply chain vulnerability. This vulnerability comes from:
- Disparity of Quality between auditors who may be from different countries with different regulations or have varying assessment processes that differ in robustness and reliability
- Conflict of Interest because auditors tend to be paid by and have close relationships with certificate issuers and thus be biased toward them
- Predictable Inspections means that certificate issuers may only have to conform to quality standards at certain review periods, which they usually know of in advance
The CERT network seeks to improve the reliability of any supply chain by creating a system where Auditors and all parties involved in handling certified items are incentivized to keep their standards high on a continuous basis and remain accountable to each other. The Merit Token would be used as a down payment or stake for the price of Certs and the fees for the Auditor’s service and portions of that down payment or stake eventually go to the Auditor every time the Cert gets issued or transferred. This would happen automatically by tying the Merit Token stakes to the Cert Templates, which are linked to the Auditor’s accounts. The Auditor sets the price for issuing and transferring the Certs created from their Cert Templates and this price would include their service, quality assurance, or any other fee they wish to include. However, instead of being paid for in one lump sum each time they perform an audit by one party, usually the certificate issuer, it would be paid in iterations throughout the entire lifecycle of an item. Besides the consistent revenue given to Auditors, the costs of audits become spread through the entire supply chain of Issuers, Resellers, and End Users in a completely transparent, direct, and automated manner, which will hopefully also improve the consistency and reliability of certificates and audits.
Besides signifying trust in and giving payment to Auditors, the other function of the Merit Token is to keep all users in the system accountable. If a Cert has become invalidated due to a defect or mistake or general wrongdoing such as a Reseller pairing a Cert with the wrong item, the Auditor is able to burn the Cert, but must also burn the associated stake or deposit at the same time. The Auditor loses their fee and the user loses their Cert, which represents an irrational choice, unless the Auditor decides that their reputation in the long run is more important than the short term benefits of keeping that small fee. This mechanism incentivizes Auditors, helping to ensure high standards and quality assurance over a long period of time. The stake also keeps those in the supply chain accountable for their practices because they will lose their Cert and their stake if they do not meet the required standards.
Merit Token Price
The Merit Token is an indicator of trust in both the Auditors and the system itself. If the system is useful, then more users would want to join the network and will thus create more demand for the Merit Token because Merit Tokens are necessary to create Certs, which are the whole point of the system. The staking system also means that there will be less total Merit Tokens in circulation so that the supply of exchangeable tokens will become more limited as the system is used more. Users of the system especially Issuers and Auditors, who will hold the most tokens, are incentivized to maintain the most useful and highest quality network so that more people enter, and thus the token value continues to rise. Since the Auditors set their own prices, it also creates a market mechanism in which other Auditors are able to come and offer services for different prices and the market can decide the optimal price for each Cert.
Limiting Wild Speculation
Extreme price fluctuations limit the usefulness of the network because people will be less likely to spend tokens or will simply try to speculate on the tokens instead of using them according to their intended purpose. In order to limit wild and rampant speculation, the initial tokens generated will have to be seeded with organizations that would have to already be highly involved in the industry. These initial token holders should derive as much or more value from actually using the services of the network than in speculating on the token price. Seeding the initial and majority of coins this way creates a stronger community with real industry understanding and lessens the impact of speculators. There will also be a reserve of tokens designated for “ideal” users who are believed to be important contributors, but may not be willing to participate in in an untested network. These actors would have to be agreed by the community as being beneficial to the long term health of the network . New tokens would be generated via pre-set inflationary mechanisms that will increase the overall token supply at different rates further limiting price volatility .
At its core, blockchain technology disrupts the concept of centralization, of only one winner and a single rule-setter. Instead, it creates open and shared protocols on which unchangeable sets of rules are based on advance mathematics called cryptography that must be agreed by all participants. Therefore, the strength of a blockchain network is measured by the strength of the community that governs it. Each CERT network will be created for a specific industry such as the aerospace industry, organic produce, or any other industry that has a need for certificates and has enough key Auditors, Issuers, Resellers, and End users willing to participate to create a strong network that provides useful services. The network can be replicated again and again for a new industry once enough key contributors have agreed that it is worth starting.
User Interfaces/ Decentralized Applications
The idea of this network is to operate as an open protocol in which anyone can join and participate. The trust and incentive layer of the token mechanisms help guarantee that the system runs as expected with trusted Auditors being backed by Resellers and End Users and Issuers who are in turn trusted by the Auditors. User interfaces, which allow anyone to use the system can be built on top of this basic layer of rules. Furthermore, new applications and mechanisms can also be built on top of the protocol like escrow services, insurance or guarantees for items, digital payments, market places, and market matching systems. The tokens can also be programmed to act in specific ways through the use of smart contracts, which allow parties to create agreements that execute automatically when the conditions of the agreement are reached. Like blockchains in general, the objective of the Cert network is to create a basic web of trust in which many players can build on top of.
For a more sequential and visual representation of this concept, please see the link here.
I believe that the best way to construct this network is through the various Cryptoeconomic mechanisms that are available using Ethereum, the Blockchain platform with the most active projects. If you would like to discuss how to make this system a reality, please email firstname.lastname@example.org.
 Paper Certificates
At first the non-fungible tokens will have to coincide with the physical paper certificate because of regulatory restrictions, but in time regulations may change so that the blockchain Cert has just as much authority and trustworthiness as the paper version. It is already quite common to sign documents and send money through the internet, something met with skepticism not long ago. In the meantime, the original paper Cert should be held by the Auditors who will be contractually obligate to turn over the original paper certificate to whoever can prove that they hold the blockchain Cert. This would create a reserve of trust in which the blockchain Cert is guaranteed or backed by the paper one in the Auditor’s reserves. The blockchain Cert would be burned as soon as the paper certificate is exchanged for it.
Changes to the protocol and other system-wide decisions should be voted upon by the Auditors, since they are already a source of trust. The stakes that they hold at the time of the vote will represent the weight of their vote so all token holders would be able to vote indirectly via Auditors as their representatives. This represents a third usage of the Merit Token: in addition to staking trust in Auditors, representing the value of trust in the system, it is also used as a governance mechanism.
 Price Control Mechanisms
- A fixed rate increase that allows the current actors to allocate the newly generated supply of tokens to a new actor to join the system roughly once every month. This steady and predictable increase to the money supply will not only spread out the token holders, which increases the decentralization and resiliency of the system, but also allow new actors to come in who are agreed to bring about a positive benefit to the network. For example, every month the total token supply will increase by 0.1% and that newly created supply will go to one or more new actors that are approved by the Auditors.
- A flexible rate increase that is only activated if the price moves too quickly, for example if the price increases by over 10% in a month, then the flexible rate increase is activated and an extra 0.1% of total token supply is added for the fixed rate increase for new actors. In this example, where there is a month of rapid price increases, the token supply would increase by 0.2%.
The numbers that I am using here are arbitrary to highlight the concept of the increases. The actual implementation of the system will have better thought out and researched inflation numbers and mechanisms.