Blockchain in the Chemical Industry

Philipp Sandner
Sep 10, 2018 · 14 min read

With this paper, we motivate to re-think the impact of blockchain technology on the chemical industry as a case study for many other industries with high capital expenditures. We provide a systematic approach, the value-driven Blockchain in Chemicals (VDBC) framework, to identify and evaluate possible use cases. To demonstrate the application of the framework, we have exemplarily identified seven disruptive blockchain use cases for chemicals. — Authors: Lukas Samuel Maxeiner, Jan-Philipp Martini, Philipp Sandner

Download the article as PDF file.

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The original motivation of the blockchain technology

At the same time, inherently digital processes can empower near real-time transactions at marginal cost, which sparks entirely new ways of how value and ownership are transferred between humans or corporations but even down to plants, units, equipment, and machines. This article will not only enable you to think beyond store of value but enable you to come up with ideas that exploit the far greater potential of the blockchain technology to optimize your business processes.

Blockchain beyond digital store of value

Essential features of blockchain for industrial applications

1) Distributed Ledger

2) Trustlessness

3) Tokenization of value

4) Smart Contracts

Distributed ledger: A distributed ledger offers the following advantages over other technologies that support data storage and use: Records are stored in an inherently distributed and truly immutable way, which lowers risk of data losses or manipulation and enables a complete audit trail of necessary properties, production steps, transactions, etc.

Trustlessness: Once in place, ownership of a blockchain can be distributed among the public or consortia, such that no single party can set the rules. Combined with authentication and the ability to provide different levels of access to data, the technology is suitable for sharing a platform or information even between non-trusting entities.

Tokenization of value: Blockchain technology can be used to replicate physical assets in the digital world. Tokens allow for automated governance and enable a seamless distribution of assets across shareholders.

Smart contracts: Smart contracts are code that can be executed on blockchains. Once pre-programmed conditions are met, smart contracts automatically make deterministic changes within the distributed ledger without intermediaries. For instance, consider an automated transaction where the value is transferred once a shipment has been delivered to the buyer.

Even though these concepts may sound rather abstract, in the following it is shown how these essential blockchain features can tear down barriers to market and enable disruption from rearranging processes to the generation of new business models.

Industrial relevance of blockchain technology

What is indicated by aforementioned metrics and expert predictions also becomes prominent in tangible use cases from across industries, with few examples given in Table 1.

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Table 1: Blockchain applications in various sectors

Facing the disruptive potential of blockchain as well as successful pilots in industries edging the chemical industry, leaders in the chemical industry can no longer stand still.

Building on extensive literature providing an introduction on blockchain technology[5], this working paper guides leaders in the chemical industry through the complicated blockchain world from a business value perspective. We will introduce you to the questions you need to ask, in order to create real value by applying blockchain technologies. Thereafter, exemplary, we will share seven concrete blockchain use cases with the potential to disrupt the chemical industry.

Extended digital transformation in the chemical industry

So far, only little scientific research has been conducted on applications close to chemical industry (Sikorski, 2017; Mengelkamp, 2017, SAMPL project[6]). However, there are already companies that stand out in their effort to innovate, one of which is the German chemical company BASF, who is running supply chain pilot projects in cooperation with the startup QuantoZ already since the midst of 2017[7]. Edging the chemicals sector is the field of 3D printing where there are many projects investigating how printing licenses can be efficiently handled[8].

A shift from a technology-oriented to a value-driven approach for blockchain implementation is required

This is driven by blockchain being a hyped technology topic (that most large companies try to apply/sell) as well as a lack of technological understanding among organizational leaders. In the early adopter phase, the application of blockchain for the sake of blockchain is not expedient if not combined with a strong vision and courage for creativeness. The latter two should be the foundation of blockchain projects to reap maximum business value.

The benefits of using blockchain technology are rather of the form of using enterprise resource planning (ERP) software than of big data that can be applied to problems of all scales.

This is because the most significant economic benefits arise when this technology is implemented not as a direct substitution of existing processes but with the goal of rethinking the status quo at a large scale.

Leaders should launch blockchain pilots where the three technologies enable the highest returns

To identify business value oriented blockchain use cases we recommend the three-step approach shown in Figure 1.

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Figure 1: Three-step process for economically efficient application of blockchain

I. First, leverage the following four questions of Dr. Adrian McCullagh’s FITS model[9] to identify areas with potential for Blockchain application:

1) Fraud: What kind of business is impossible today due to the lack of trust? Which borders (regional, financial, sectorial) cannot be overcome without guarantees?

2) Intermediaries: Where do you currently need trusted third parties or other forms of intermediaries and where is it possible to eliminate them?

3) Throughput: Which limits that are caused mainly by (necessary) human action should be overcome?

4) Stable data: What kind of recordkeeping would improve from security, immutability, and resilience? How could this be financially rewarding?

The matrix given in Figure 2 can be used as an inspiration of how two areas can be systematically detected.

II. Second, consider the potential to value creation of those application areas. Analyze the capital and operating costs at stake in the identified area of your value chain.

III. Select a blockchain use case and launch the pilot.

When going through this three-step process, scrutinize even the most basic workflows at your company. Try to find use cases that match at least two of the FITS categories.

Once use cases are identified, always keep in mind preferring technologies that best fit to the use case, even if it is not a blockchain technology.

Being an early stage technology topic, quantifying the costs of implementing blockchain use cases along the chemical value chain is rather difficult. Instead of investing in cost estimations, leaders should choose high-value use cases derive a pilot that provides a minimum value and take an agile and experimental approach to implement the first pilot in a sandbox, i.e., run the full application in a limited environment. After having initial prototypes ready, cost estimations are becoming more predictable and a business case for further developments can be derived.

Seven blockchain use cases for the chemical industry provide a starting ground

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Figure 2: Value-driven Blockchain in Chemicals (VDBC) matrix

Use Case 1: Industrial symbiosis — automated contracts for chemical parks

Use Case 2: Cross boarder payments using digital currencies

Use Case 3: Supply chain organization — end-to-end serialization

Use Case 4: Distributed direct sales platform

Use Case 5: Tokenization of plants/units — shared financing and ownership

Use Case 6: Internet-of-Things data integrity

Use Case 7: Corruption free tendering processes

1. Industrial symbiosis [Procurement, Operation/Maintenance, Marketing/Sales]

To balance the benefits of scale and specialized production, current practice is to settle access to the networks via long-term contracts with external service providers (Intermediaries) or neighboring companies. This gives certainty for long-term planning but prevents flexible operation and a dynamic adaptation to the significant market changes we are facing today. Long-term contracts without sufficiently dynamic pricing lead to suboptimal operating points of the whole site.

Privacy concerns are the main reason that obstructs a joint optimization of the whole chemical park or at least of the interconnecting networks (compare to ‘Fraud’ in the aforementioned FITS framework).

The time span between different contracts could be much shorter even when keeping the current practice, but negotiating contracts takes up a lot of time and consumes a lot of money. Not only could the significant costs associated with this inefficiency and complexity of the contract negotiations be saved, but also the margin of the service provider could be distributed between the different companies (Intermediaries, Throughput).

We propose to use the agility of smaller organizations and combine it with the theoretical resource efficiency of whole chemical parks by the use of smart contracts that optimize the whole park in a distributed manner by adjusting the prices for the interconnecting streams dynamically. The secure storage of all price calculations makes this process suitable for auditing (Stable data).

2. Cross border payments using digital currencies [Logistics, Controlling/Finance]

Handling all internal transactions in a company own currency that is recorded on a distributed ledger does not only give high traceability, which can significantly simplify work for accountants, auditors, and managers but also makes services at different locations across the world more transparent (Stable data). If you look at R&D units, many companies have several of them spread across the globe in order to use local talent and be closer to where the results are used. Having a currency that makes the price for services comparable helps to distribute the work efficiently.

3. Supply chain organization [Logistics, Procurement, Marketing/Sales]

4. Distributed direct sales platform [Procurement, Marketing/Sales]

Since a decentralized sales platform does not necessarily need to make profits, chemical companies can save the margins that the oligopolic platform operators can take. Automating procurement and sales via such smart contracts has the additional benefit that parties of different scales can do business: Managing relationships, pricing, and sales is automated. In combination with suitable logistic partners, large chemical companies can sell their product not only to large buyers and resellers but also to smaller businesses, thus making the market even more efficient (Throughput).

5. Tokenization of plants/units [Controlling/Finance, R&D]

6. Internet-of-Things data integrity [Operation/Maintenance, R&D]

One way to ensure a safe and untampered data flow could be using blockchain technology that is built on authentication, encryption, and immutability of data (Fraud).

7. Corruption free tendering processes [Logistics, Operation/Maintenance]

These seven examples are some of our expert hypotheses and research areas. It’s allowed, and we encourage you, to think even bigger. Since financial impact and peculiarity are different in every company, of course, we cannot quantify the impact for you nor select by value.

Leaders can start the blockchain transformation tomorrow by engaging in four steps

1) Get inspired by blockchain applications in edging areas like, e.g., energy, manufacturing, automation (e.g., meet the industry partners of successful blockchain projects)

2) Identify your own ‘blockchain champions’! Allow them to think freely and build blockchain knowledge (you won’t find blockchain talents on the market right now, especially not with the necessary understanding of your business)

3) Think through our “Value-driven Blockchain in Chemicals” framework and identify core value pools and new business models

4) Get your hands dirty focusing clearly on improving the business, even if it is in a sandbox (bounded environment for deployment) at first to really know what all the turmoil is about.

Remarks

Do you want to learn more about how blockchain will change our world?

  • Blockchain knowledge: We wrote a Medium article on how to acquire the necessary blockchain knowledge within a workload of 10 working days.
  • Our two blockchain books: We have edited two books on how blockchain will change our society (Amazon link) in general and the everything related to finance (Amazon link) in particular. Both books are available in print and for Kindle — currently in German and soon in English. The authors have been more than 20 well-known blockchain experts in startups, corporations and the government from Germany, Austria, Switzerland and Liechtenstein — all contributing their expertise to these two books.
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Our two books: the first one on blockchain and the society and the second one on blockchain and finance

Authors

Jan-Philipp Martini is a management consultant at the Boston Consulting Group. This article is not affiliated with his employer. You can contact hem via mail (janphilippmartini@gmail.com) or on LinkedIn (https://www.linkedin.com/in/jan-philipp-martini-8a5623a5/).

Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). In 2018 and in 2019, he was ranked as one of the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. Since 2017, he is member of the FinTech Council of the Federal Ministry of Finance in Germany. The expertise of Prof. Sandner includes blockchain technology in general, crypto assets such as Bitcoin and Ethereum, the digital programmable Euro, tokenization of assets and rights and digital identity. You can contact him via mail (email@philipp-sandner.de) via LinkedIn or follow him on Twitter (@philippsandner).

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Endnotes

[2] https://www2.deloitte.com/insights/us/en/focus/signals-for-strategists/emergence-of-blockchain-consortia.html

[3] http://www.finextra.com/finextra-downloads/newsdocs/The%20Fintech%202%200%20Paper.PDF

[4] https://www.gartner.com/doc/3627117/forecast-blockchain-business-value-worldwide

[5] We recommend the books at the end of the article. A visual introduction into a public blockchain protocol can be found here: https://hackernoon.com/wtf-is-the-blockchain-1da89ba19348

[6] https://sampl.fks.tuhh.de/fileadmin/user_upload/projects/sampl/publications/SAMPL_Flyer_A4_Lay12_EN_WEB.PDF

[7] https://www.basf.com/en/company/news-and-media/news-releases/2017/07/p-17-277.html

[8] See https://blogs.sap.com/2017/06/12/footprints-in-the-sand-blockchain-in-the-chemicals-industry-pt-1/ and http://www.digitalistmag.com/digital-economy/2018/03/06/6-ways-blockchain-impacts-chemical-industry-05922047.

[9] https://www.linkedin.com/pulse/blockchain-technology-commercial-panacea-every-dr-phd-dr-adrian

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