Leveraging Blockchain in Supply Chain
There is a lot of potential for the up-and-coming technologies and every technology goes through its ups and downs. Blockchain is one such technology which has tremendous potential. Presently we are in a blockchain winter, now that the euphoria of 2017–18 period has died down. If you look at what the neutral sources claim, 10% of the global GDP will be stored on blockchain, as per World Economic Forum. Another source Gartner says that the value add from blockchain will accelerate to $3.1 Tn by 2025. Now these numbers could be way off the mark, but the point is that we are talking about the kind of potential this technology comprises. Blockchain will not be a technology band-aid, it will actually replace the existing process in various industries. One in five banks have implemented a blockchain pilot, most of them been happening in US and China. That’s where India needs to catch up. The overall size of the blockchain market, as per ‘MarketsandMarkets’, a neutral market research firm, is just $23.3 Bn. These are very small numbers. Then why is this important? There is a concept called exponential technologies which states that for a few years, the growth is almost stagnant or zero and therefore, we believe that something doesn’t have potential because we don’t see it growing or expanding rapidly. And then suddenly when there is the movement from the early adopters to the early majority, called crossing the chasm, that’s where suddenly it gets into network effects and the technology starts getting to a critical mass. So that’s where we believe that maybe till 2023 the market will be in that phase where it’s stagnant growth but that’s a very small percentage of the market. But from early adopters to early majority, that is where the market will explode which will happen probably post 2025.
Most of us know what a blockchain is, but there is still a lot of confusion around distributed and decentralized systems. Blockchain is a distributed ledger which means that the ledger can be operated by multiple nodes anywhere they are located. It’s distributed computing by the nodes. It’s decentralized in the sense that each node can decide whether they have the ability to create a block. Both actually mean the same thing. It’s distributed computing and decentralization of decisions. What that means is essentially blockchain is a set of blocks, particular set of transactions creates a cryptographic hash, so it’s a hash created by the content. Any small digit or number we change, the hash changes. So, if we have to tamper with anything then the link to the previous block will get lost because the hash changes. That’s why the technology is powerful. There are few nodes, called Byzantine nodes, which are malicious nodes, trying to bring down the network. Let’s say some hacker somewhere is trying to bring down the network so he votes something which is not factual. Therefore, he basically creates a lack of consensus with 51% or more voting in our favor, so that the block will be accepted. It will be put onto the blockchain and then the next block will come up again after ten minutes. It’s a set of transactions which is part of the ledger and we’re presuming that these are all voted for by neutral nodes where people have an incentive to be honest.
Bitcoin was the first implementation of blockchain, and I think a lot of us compared blockchain with Bitcoin. They are two completely different things. Bitcoin is an application, Cryptocurrency, while blockchain is an underlying infrastructure which creates processes which are efficient. You might have heard of people who are trying to create the block through the process of mining. They get paid in bitcoins. At present if we crack a block, we get 1/4 of a Bitcoin which is huge money for someone who’s sitting and cracking code. This proof of work means that our computer is much more powerful. Of course, that is changing now and we have alternate consensus mechanisms like proof of stake and proof of elapsed time. Proof of stake is that I put a particular stake in terms of me voting as a node. Let’s say if I own 10% stake which I’ve put in there and I vote then I have 10% voting rights. So, it’s like a shareholding pattern. The risk is if I vote incorrectly and I’m proven wrong I lose that stake, which is why again we are trying to inculcate and promote honest behavior. So, there is a loss that that person will lose a stake which is why he will not vote for something which is false or malicious. For Proof of elapsed time, there’s a mechanism called Hyperledger Sawtooth which was originated by Intel, which is the consensus mechanism they are following. Finally, there is a smart contract. Essentially all the decisions in the process are coded into smart contracts which have nothing to do with legal contracts. In fact, it’s not legally tenable which is why now a lot of lawyers are trying to see how they can make this legally enforceable. Some countries like Estonia and Switzerland have started accepting these as legally tenable but not in India. This is a code which enables participants to get automatically paid if their part of the contract is done. For instance, if I’m supposed to deliver something and I put it in there, the smart contract recognizes that this item has been delivered, and thus it automatically releases my payment, subject to the vote of the neutral nodes. What that means is that I don’t have to go, chase up for payments and do the traditional stuff that small vendors have to do with big companies.
The structure of blockchain has a peer-to-peer network because most of the transactions happens between nodes, it might be individuals or companies. They enter into transactions which are loaded on and the miner, who cracks the block, creates a block which is the shortest set of transactions which are linked together. That block is actually a series of blocks, called the blockchain. Then we have the state machines, the Ethereum, which are virtual machines, which enables the computation on the cloud.
In terms of applications, it typically applies in things which are to do with anti-counterfeiting, the security aspects so that no one can hack the network. End-to-end traceability of supply chains is another application. A lot of startups have done food traceability in the sense that if we have organic foods coming to a supermarket via imports from other countries and we want to know their country of origin, there’s something called Provenance which is how blockchain enables us to prove that this is how a particular product came through. Similarly, through cold chains, we want to ensure that the temperature remains within the zone and the food doesn’t get spoilt because some part of the chain did not adhere to the temperature limitations. All this is stamped on to the blockchain in supply chain. We can measure all this. This is why IoT and Blockchain is a big area where both the IoT sensor data and blockchain as the repository of that data and transactions work in tandem to ensure sanctity of the product, thereby, giving comfort to the customer.
Geographically, US and China have been doing the maximum number of pilots. A lot of this is to do with payments in banking and remittances. There are also use cases in food supply chain like we talked about and also of course the cross-border trade. We are either permission-less or permissioned. So all the enterprise block chains that came up earlier, which was with a set of nodes where all the participants participated, is what is called Permissioned Private Blockchains. Hyperledger’s one example of that. When we look at Bitcoin, Ethereum, all these kinds of ripple, these are all Public Permissionless Blockchain. There is also a variant of public blockchain which is permissioned. Ethereum, for instance, has both the permission-less and a permissioned blockchain. When you talk about permissionless and we look at neutral nodes voting, they have to be incentivized and that incentivization has to come through Bitcoin or some token where they get payment for voting. It’s like a Board of Directors and how we have to pay sitting fees to them. The same goes for the nodes because they are not party to the transaction, they are validating a transaction. They have to be compensated and that is through a token. So what we’ll find there is that financial services and health care are the places where the impact is the highest and what we are talking about blockchain and supply chain is really the second last category called transport and logistics. It’s really from a cost-saving perspective that blockchain is being used. The biggest pain point in supply chain is documents. If I’m trying to export something from India to US, I have a Packing list, a bill of lading, prepaid invoice and all kinds of other documents which are coming together at one point and then I have the custom clearance documents which is coming from the custom authorities; all these I have to staple together, send it with the ship and the container and then at each point it will get an additional document. By the time it reaches the port on the other side we will have a four-inch-thick set of documents which have to be managed. Managing this is at a huge cost. If we have something where we can digitize all these documents, we don’t really need to print out paper, we have a central store where every party to that transaction has access to the same set of documents; that would lead to the true digitization of the documents. The second thing is related to float. So, when an importer bank pays the exporter bank, the importer and exporter banks are actually playing with the float. The exporter bank will keep telling his client, which is the exporter, that money is not received as it’s taking time because it’s cross-border and the importer bank is holding onto the money till he’s forced to remit by the Bank of International Settlements. One is, we have BIS as the regulator which is the equivalent of RBI for a cross-border payment, and we have importer and exporter banks trying to play with float. Float means I have money in my account which actually belongs to the customer but I’m not transferring it to whoever he owes it to, so I’m playing with that interest. Float can be as high as 21 days in an export transaction and what blockchain does is that it reduces it to, worst case, 2 days. It could be instantaneous as well. So, if I have that ability to reduce float, I have an ability to make the documentation seamless. Just imagine the kind of cost saving that applies in this sector. What we really need here is that consensus mechanism which brings in part of the permissionless systems into what is essentially a permissioned network. TradeLens is a blockchain which has been created by Maersk at IBM. The biggest challenge that this platform faced was adoption by shipping lines. This was because Maersk was a competitor and the largest player in the segment. The biggest adoption challenge was creating that neutrality and the fact that Maersk would not get access to any of the data which was not related to them. That’s where they created a 51/49 joint venture which would not have Maersk as a company having any role to play in this blockchain pilot or initiative which was called the Global Trade Digitization. So, what it essentially did was that it ensured confidentiality so that only the parties to the transaction could participate. It tried to broaden the number of nodes because a malicious attack happens when the malicious actors control more than 50% of the Voting Rights. So, we have to ensure there are so many neutral participants that at least 51% or more should be the honest actors.
Today the challenge in blockchain adoption is that technology is hard and a lot of people who are conventional programmers have to put in a lot more effort to understand, like the Go programming and Hyperledger, which is also where the adoption is getting slow. But once the pilots come off the chain, the benefits are there to see. We have to have faith in it and have to believe in it for 3–5 years to actually see it fructify.
Mayank Saroha is a Business Consultant for Tata Consultancy Services in the India, Middle East & Africa region and a part of TCS’ Strategic Leadership Program. He holds an MBA degree from the prestigious IIM Bangalore, Cohort of ‘22.
