The blockchain. Heard of it? Maybe, maybe not. If you have, can you explain what it is and how it works? More importantly, do you know if it is right for your business or not?
CLN Worldwide has kept an eye on the blockchain for a while now. We’ve seen bitcoin, cryptocurrencies, and Initial Coin Offerings (ICOs) bubble up, burst, and simmer again. And we’ve heard talk of supply chain and logistics companies adopting the blockchain. But questions remain. In light of the talk around blockchain and the questions that it poses for our industry, we will offer posts about the blockchain, its relationship with our industry, and its pros and cons.
In this our first post we’ll give a general overview of what the blockchain is and what problems it aims to solve. Then we will talk about what the blockchain hopes to do for the supply chain and logistics industries.
In future posts, though, we will dig deeper and ask more probing questions about blockchain technology. At the moment, press surrounding the blockchain is overwhelmingly glowing. While we do believe that the blockchain has potential, we also have our reservations and our questions about it.
What is the blockchain?
The blockchain is software that has two main goals; first, to make digital assets more secure by storing them in decentralized locations, not their current centralized ones; and second, to provide trust between parties that participate in transactions where only faith previously existed.
The blockchain attempts to achieve these goals by acting as a distributed ledger, by providing superior security, by making its records immutable, and by providing unprecedented transparency. Let’s take a closer look at each of these means.
In its most basic form the blockchain is a distributed ledger. Presently, a vast majority of ledgers are centralized. Centralized ledgers are kept by governments, banks, and other large, established, but slow to react institutions that only keep a single copy of their ledger and the transactions on it. The problem with centralized ledgers is that if they are destroyed, deleted, hacked, or corrupted everyone who relies on that ledger is out of luck.
Blockchain’s distributed ledger solves this problem by creating and sharing thousands of copies of ledgers and the transactions on them around the world. So even if one copy were destroyed, deleted, hacked, or corrupted, there would thousands of others that can confirm the veracity of the ledger and the transactions on it.
On top of the security these decentralized ledgers provide, each block on the blockchain - that is, each entry in the ledger, each transaction recorded on the ledger - is connected to the blocks that precede and follow it with a 256 bit hash that is 64 characters long. According to howsecureismypassword.net, it would take a computer 2 googol years to break a 64 character password. How long is a googol year? One googol year is equal to 10,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000, 000,000,000,000,000,000,000,000,000,000,000,000 years.
Once a transaction is recorded on the blockchain it cannot be changed unless all participants on the blockchain agree to change it. The benefit of the blockchain’s immutability is that one party cannot change the details of a transaction to benefit themselves without everyone else on the blockchain not only knowing about the change, but agreeing to it.
Depending on the type of blockchain one uses and how they configure it, the blockchain can provide a new level of transparency. Users of the bitcoin blockchain can see every transaction ever recorded on it. If your supply chain company participates in a private blockchain with several other vendors each participant will be able to see every transaction on your private blockchain.
All of this - the distributed ledger, the heightened security, the immutability, and the transparency - is supposed to lead to greater trust between parties. Trust built into software that will then save time and money normally spent on attorneys, mediators, insurance, transactions fees, and more.
At the end of the day, trust is the promise of the blockchain.
What is the blockchain’s potential impact on the supply chain and logistics industries?
The current state of affairs
Currently, the supply chain and logistics industries work as silos. Each one knows what they do or do not have, but no one else in the chain can see the bigger picture.
The blockchain offers a way for all parties in a transaction to see a product move along the blockchain from its starting point to its final destination.
How do we know that blockchain technology is a good fit for the supply chain and logistics industries?
Let’s walk through this blockchain decision tree from the Linux Foundation, a non-profit “dedicated to building sustainable ecosystems around open source projects to accelerate technology development and commercial adoption.”
For everyone, including the client, to see the supply chain in its entirely, there is a need for a shared common database.
As long as the product is moving from Point A to Point B there are multiples parties involved, namely, the sender and the recipient.
Often people only work with other people that they know and trust. Unfortunately, this hinders a company’s ability to grow. Because of its promise to build and maintain trust between unknown parties the blockchain can help here.
Participants along the supply chain already work with a uniform set of established rules and regulations that their blockchain can adopt and enforce.
Assuming that all the information submitted to the blockchain is correct, an objective, immutable log that traces the movements of a product along the supply chain provides greater trust and service through greater transparency.
The supply chain and logistics industries have been around for centuries and have, for centuries, abided by a set of transaction rules that do not change daily, but are, for the most part, static.
Lastly, depending on whether the participants in the supply chain want their transactions to be public or not, they can choose to create and maintain a public blockchain or a permissioned blockchain. In a permissioned blockchain only those who have received permission to participate may do so. What is the promise of blockchain for the supply chain and logistics industries? IBM, which is an active participant in the Linux Foundation’s development of Hyperledger (private blockchains for B2B purposes), is a firm believer in the future of blockchain and what it can do for the supply chain and logistics industries. IBM has already started blockchain supply chain projects with Walmart and Maersk. Why? Because IBM believes that blockchain technology can significantly help supply chain companies in the following ways:
1) Reduce or eliminate fraud and errors;
2) Improve inventory management;
3) Minimize courier costs;
4) Reduce delays from paperwork;
5) Identify issues faster; and
6) Increase consumer and partner trust.
Those all sound like nice problems to solve, but how much money are we talking in actual savings? It is early days, but after completing a pilot program IBM believes it can save Maersk $38 billion annually from using blockchain technology. (According to their 2017 Annual Report, Maersk consolidated income statement showed total revenue of $30 billion dollars and operating costs of $27 billion.)
According to Forbes, client’s of IBM’s blockchain services have already “reduce[d] back office processes ‘by up to 30% and cycle time of accounts receivable by 50%’, thereby unlocking millions of dollars in cost savings and market capital.”
This all sounds great, right? No problems, no issues. Piece of cake.
Unfortunately, there are a number of issues with the blockchain and in the following posts we will delve into them in more detail.