It is not just a hype. There are good uses for Blockchain

An article published in the American Banker earlier this year claims that there are no good uses for Blockchain, and that Blockchain is only a hype, a fad that will disappear once a new technology trend arises.

Just like Kai Stinchcombe, the author of the American Banker article, I am under the impression that Blockchain for cryptocurrencies may not be the best option to support the digital economy at scale. This is specifically true for Bitcoin which mining mechanism involves huge energy consumption. It is one of the “not so good use cases” that I described in a story that I shared on Medium recently (see Blockchain is not a silver bullet).

Nevertheless, I believe that Blockchain technologies have a significant role to play in the economy of the future. Throughout the American Banker article, Blockchain is used to refer to cryptocurrency-based, public networks such as Bitcoin. Blockchain is not Bitcoin, Blockchain does not have to be for cryptocurrencies or digital payments, and Blockchain is not limited to public, permissionless models.

There has been significant interest from the supply chain community to understand and potentially leverage Blockchain to extract value for the business. The rationale behind this interest is that Blockchain’s core concepts (decentralized data, digital transactions, multiple participants) align well with the structure of a supply chain and can address some important business needs.

Collaboration in a business network

Given the nature of thhe supply chain where multiple parties sign agreements before they do business together, most immediate use cases will probably leverage a permissioned blockchain. This special kind of peer-to-peer network (sometimes called private blockchain), requires that all candidates have to be vetted before they can join and participate. A permissioned Blockchain creates a business network where the different parties are known to each others, but where visibility on transactions may be limited to some participants to ensure privacy when needed.

Moreover, agreement among the network participants is achieved using a predefined consensus mechanism, which eliminate the need for a third party to validate peer-to-peer transactions. In a traditional supply chain, independants organizations often act as intermediaries between companies to enable transactions, which typically increase cost increase cost and inefficiencies.

End-to-End Traceability

Transparency and traceability can be critical for some goods. Think about the validation needed for organic food, fair trade products, or cold chain compliance. The pharmaceutical industry has long been challenged with counterfeit products that have led to patient health risks and lost profits for the manufacturer. When products need to be recalled due to safety issues or tainted ingredients, Blockchain technologies can assist in understanding provenance of the products to accelerate removal and remediation of the affected products.

Built-in traceability capabilities in Blockchain can support these needs and automatically provide the information needed during audits. As the information on a blockchain is immutable, it is guaranteed that a logged transaction will never be modified or deleted. Besides, each new block of transactions is linked to the previous one in order to form an historical chain. So by design, a blockchain provides access to past transactions and their involved participants (signature authenticity and non-repudiation).

Traceability is a growing concern is the supply chain industry and there are many examples where a blockchain can support specific business needs:

• Consumers to verify product provenance (e.g. organic, fair-trade, etc..)
• Retailers to enforce food safety and regulation compliance
• Cold chain logistic actors to prove that perishable products are maintained in a low-temperature range
• Customs entities to identify counterfeit items in a shipment
• Governments to ensure that products are compliant with fair trade or fair labor requirements

Blockchain historical data is also valuable to support settlement and audit scenarios. When a problem occurs between participants, Blockchain will allow participants to trace back to the source of the problem.

Disintermediation

Blockchain frameworks are based on a peer-to-peer collaboration mechanism where trust between multiple parties can be ensured without the need of a central authority. Traditionally, third-party intermediaries have played an important role in the supply chain and retail industry. Brokers, agents or regulation bodies can arrange, manage and even certify transactions between multiple parties.

Nevertheless, the are many side effects related to intermediaries activities. When organizations leverage a third party entity for a transaction, they are basically externalizing a subset of their business process. This loss of control introduces additional steps and participants in the process, so additional risks. Companies accept the increased complexity as they usually don’t have a better option. But what if a technology could play the role of the middleman? By leveraging a blockchain, organizations could deal directly with another business network participant and eliminate the need for a third party entity. It could not only simplify the overall process, but also make it more efficient.

Intermediaries also increase the total cost of operation in the supply chain as they receive a fee in exchange for their services. By removing the need for third-party processes, organizations are able to reduce their costs and increase their product value.

Blockchain can enable the disintermediation in the supply chain, by cutting out the middleman. A peer-to-peer network can lead to cost saving and better efficiency for supply chain transactions.

Digitalization and Automation

A supply chain is always quite complex as it involves multiple participants, a significant amount of data and a lot of events over time. Retailers, distributors and manufacturers need to find ways to connect heterogeneous systems to exchange information. Shared information across distinct business entities is not an easy task. It involves significant effort to consolidate information from multiple sources, often using multiple non-compliant formats. Supply chain participants are still using paper documents to support some of their business transactions. The work required to process documents create inefficiencies, not only between two business partners, but also across the whole supply chain. Until information on paper documents is entered into an electronic system, it is not visible to the other stakeholders in the business network.

The Blockchain distributed ledger provides a mechanism to ensure that the information is always available. Participants in a business network can immediately know when a transaction between other parties happened. Blockchain may bring about an opportunity to process these transactions with less latency and lower transaction costs.

Moreover, sharing information on a distributed ledger eliminate the risk of discrepancy between multiple systems owned by different stakeholders. A digital, paperless supply chain is not only more efficient, it is also more transparent.

The management of the flow of goods and services involves a lot of transactions and the transfer of assets between multiple parties (asset ownership). When electronic receipts, custody management, and bill of lading are digitalized, processes can be automated using blockchain smart contracts. Transactions can trigger events, and based on predefined business agreements, specific business rules can automatically be applied. Blockchain smart contracts enable automation of the supply chain, which reduces latency. The automated process mechanism also ensure consistency across the supply chain as it guarantees that business rules are always applied the same way over time.

Smart supply chain and IoT

A smart supply chain must be able to react to signals coming from multiple sources. This requires visibility on what is happening real time across the supply chain, which may include:

• Maintenance alerts in a manufacture
• Localization of products in transit (ships, truck, trains, …)
• Inbound, storage and outbound events in a warehouse
• Customer interactions or shelf management in a store

With the adoption of IoT, automated communication between sensors and smart systems will become prevalent. An IoT network is an ecosystem of devices (participants) that exchange information. IoT technology is flexible enough to be leveraged across the supply chain, from the supplier to the store.

The decentralized nature of an IoT network is aligned with the distributed architecture of Blockchain. Shared ledgers can be used to log IoT transactions, with smart contracts providing simple mechanisms to trigger events for autonomous IoT. Then, when sensors transmit information, they can directly talk to other IoT devices or smart systems. An empty shelf in a store could directly create a task to get additional products from the backstore. It could also initiate the store replenishment. Along the same idea, a sensor in a truck could notify a warehouse system when it detects that the shipment will be late. And an IoT device on a forklift could contact the maintenance company when real-time data indicates that a repair will be needed.

Blockchain could potentially be the backbone of autonomous IoT networks such as Industry 4.0, connected stores (retail), smart transportation, and digital warehousing.

In the supply chain and retail industry, organizations have already identified several blockchain use cases: traceability, digitalization, automation, disintermediation, autonomy. As the blockchain technology matures, more use case will appear, but it is already obvious that Blockchain has a role to play in smart manufacture, smart transportation, smart warehousing, and smart stores.