Supply Chains on Blockchains

My RMIT colleagues Chris Berg, Jason Potts and I wrote an essay.

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Blockchain technology is shaping up as one of the most disruptive new technologies of the 21st century, facilitating an entirely new decentralised architecture of economic organization. While still experimental, it is disrupting industry after industry, beginning with money, banking and payments, and now moving through finance, logistics, health, and across the digital economy. These waves of innovation are being driven by both new entrepreneurial startups as well as by industry dominant firms reimagining and rebuilding their business models and services to use blockchain technology. Trade platforms and supply chains are shaping up as the major use case for blockchain technology, and we explain here how this may lead to a second phase of globalisation.

Breakthroughs in the technology of trade can have far-reaching consequences. Sailing ships and steam ships, refrigeration and aircraft were all watersheds in the making of the modern world, but two technologies of trade delivered us the modern era of globalization: these are (1) the shipping container, and (2) the WTO (formerly known as the GATT).

The invention of the shipping container in 1956 led to a revolution in international trade, birthing a new phase of globalisation. Blockchains, invented in 2009, promise a similar revolution. Blockchains offer a fundamental architectural change in the way firms and governments manage international trade, with enormous efficiency and productivity gains.

But, just as the shipping container required significant investment to bear fruit—and came up against the interests of the unions, regulators and ports—blockchain-enabled trade will require substantial upfront investment in new systems and will inevitably challenge existing interests. In the 1950s the shipping container was the solution to the problem of the high expense in money, time, and security to load cargo in and out of ships. Handling costs were high, operations were slow, and theft was rife.

Today the constraints on trade consist of the ever-increasing complexity of the data, records, payments and regulatory permissions that accompany goods as they travel across the world. Every good moving along a supply chain is accompanied by a data trail, often still as paperwork, to track bills of lading, invoices of receipt and payment, origin, ownership and provenance, as well as compliance with vast schedules of trade prohibitions and environmental regulation, taxes and duties.

The shipping container is a physical coordination technology, while the WTO is an institutional coordination technology. At the Blockchain Innovation Hub we believe that blockchain technology – as tradetech – is shaping up as the third great technology of trade.

The Cost of Information and Trust

Blockchain technology can solve a major and growing problem with the global trading order – namely the problem of information. Every time a good or service moves, information moves with it. The quantity of information associated with each product continues to grow, and the costs of dealing with this information, from compliance, auditing, verification – trust, in a word – is becoming a greater and greater share of the costs of the global trading system.

This information includes provenance and inputs – the information on a label. It includes trade-finance, bills of lading, shipping and handling information, security clearance – the commercial and administrative information. It includes the documentation of where it’s been and where it’s going, and who has handled it and who hasn’t. And it includes all the information that each country requires in relation to customs and duties, biosecurity, labour and environmental regulations, compliance with various treaties – a vast rigmarole of auditing and compliance, each of which is necessary, desirable and costly. With each day, the information burden increases, not decreases.

As the information cost of trade increases, it is not simply enough to digitize everything, because the real problem is that we need to be able to trust the information that is there.

Tradetech

Globalisation 2.0 will be built on tradetech, and the crucial infrastructural component of tradetech is blockchain. Blockchain technology, which is a distributed, append-only, peer-to-peer, trustless secure ledger, is almost custom-made for trade-tech. It provides an infrastructural platform upon which to build a new information architecture for globally tradable goods – and to do so in a way that is fully digital, tamper-proof, low-cost, end-to-end secure, verifiable, transparent, scalable and computable. What cryptocurrencies did for money tradetech will do for globalization.

Tradetech will integrate the benefits of fintech into trade networks. Crypto-based models of payments, trade finance, insurance and other risk management tools will be automated. Tradetech will integrate the benefits of regtech into trade networks. Verification and compliance with local regulations will be automated. Tradetech will power-up logistics technologies with blockchain affordances such as smart contracts, decentralized autonomous organisations (DAOs), and the full technology stack that includes AI integration.

So we think of blockchain as a next-generation infrastructural technology for the global movement of goods and services. Service exports have the same constraints with respect to compliance with certification, credential verification, and quality standards assurance. These same problems apply generally to the movement of people too. We are still yet to weave together a seamless global system of identity documents, education and trade certification and permissions, and taxation and other public liabilities.

Example: Benefits for Australia

Tradetech facilitated supply chains could to bring significant advantages to Australia, and her trading partners. This is win-win because there are both consumers and producers on each side.

For Australian exporters, there are at least two obvious advances. Tradetech facilitated Australian Agriculture will significantly boost the quality of provenance claims as to origin and quality of product. When this transparent verifiable information passes at much lower cost to final consumers, more of that assurance value passes back to suppliers, boosting primary producer income.

We are starting to see this already with start-ups in the primary export industry, for instance with Beef-ledger, Agridigital and Grainchain. We will also likely see the benefits of similar assurance in advanced manufacturing, such as in aerospace, medical devices, pharma and other high value bespoke manufacturing where quality is paramount and certification is costly. Or in other areas that rely heavily on intellectual property, such as creative industries.

Blockchain based tradetech will benefit producers and consumers by lowering the cost of providing and processing high value information that rewards legitimate quality production and minimizes
rent-extraction along the way.

Crypto Free Trade Zones

Blockchain-based next-generation trade infrastructure opens the prospect of a next generation of crypto free trade zones. These may overlay existing trade zones – within bilateral or multi-lateral zones – with a standard protocol for information handling. This would lower the transactions costs of trade, which economic theory predicts would increase the quantity of trade, and therefore value creation.

But blockchain trade areas could also build on private supply chains and infrastructure, as with consortia such as the IBM-Maersk-Walmart alliance, or with the recently announced adoption by FedEx of blockchain technology. This is the difference between say email (an open standard) and Facebook (a proprietary model). The strength of the closed network model is that it incentivizes investment. But it creates power, and invariably requires regulation to constrain that power. And regulation in turn stifles innovation.

We need to start thinking about how we want free trade to evolve in the blockchain era. Global open standards should be our ambition, because this brings the maximum prospect for growth and innovation. But open standard protocols are challenging to get started, because it can stumble on a coordination problem at the outset. This is why in order to build the next generation of globalization on blockchain infrastructure we will need to solve the open standards coordination problem.

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20 Responses to Supply Chains on Blockchains

  1. Sorry Sinclair, you get a fail for the article. You have put in no description of “Blockchain” -ie what it is and how it works. You have repeated the word “Blockchain” ad nausium and have not informed me at least what you are talking about. I have dealt with exports, including chartering a ship and getting product testing for export quality. I have done some computer programming, I have knowledge of accounting know mathematics etc. Have heard and seen other articles rave and warn about “blockchain” but still have no idea how it works or if it is just another scam.
    I am an editor of a technical journals. The first I look for is in the abstract what is the research about, has it some merit and application or outcome of the research. In the introduction I look for background (problems, other research and developments, and the nature obtaining solutions or outcomes described in the article.) I have rejected as many articles as accepted for multiple reasons such as nothing new, does not meet journal criteria, lack of data, wrong calculations and conclusions etc.
    Finally, globalisation is the last thing that is needed. There are more than 150 countries around the world who want to be independent. Some of these countries are federations of states (eg Switzerland and suposedly Australia) which also want to have some control and independence. Trade should be bilateral. In Australia trade been the states works but it was a big mistake to give the taxing powers to the Federal Govt.

  2. .

    Sinclair – was XYO the altcoin you were involved in the development of by any chance?

  3. Sinclair Davidson

    Sinclair – was XYO the altcoin you were involved in the development of by any chance?

    No.

  4. Sinclair Davidson

    You have put in no description of “Blockchain” -ie what it is and how it works.

    Sign up here.

  5. pbw

    These same problems apply generally to the movement of people too. We are still yet to weave together a seamless global system of identity documents, education and trade certification and permissions, and taxation and other public liabilities.

    Heaven help us.

  6. .

    Everyone should about blockchain technology and get a digital currency wallet and buy a few small things with it.

    “No, I don’t want to learn about these poofter credit cards, ATMs or internet banking!”

    Same diff.

    The blockchain will actually be the most useful regarding land titles (and real property).

    It might make the Torrens system and the PPSR obsolete.

  7. struth

    Spell it out.
    I feel like I’m reading one of those adds that tell you about a miracle cure for back pain and then spend the next 40 MINUTES describing the back pain, why the back pain occurs, a few hundred people telling me about how bad their backs were, the hopelessness of other cures, an actor in a white coat and stethoscope assuring me it’s all legit etc and I still don’t know what the product is, whether it should be rubbed on , taken orally, ridden, read or shoved up my arse.
    If you think I could have expressed my feelings more succinctly. …….how does it feel?

  8. .

    “learn about”

    Fire that kid.

  9. pbw

    Where does proof of work fit into this model? That’s something I’ve never understood. The motivation for crypto mining is the payoff (in coin of the crypto realm) for mining a new block. What’s the equivalent, if there is one, in these information technologies. How does it get paid for? What stops forking?

  10. jupes

    I still don’t know what the product is, whether it should be rubbed on , taken orally, ridden, read or shoved up my arse.

    LOL

    Love your work struth.

  11. .

    The way forks are done/managed is a real turn off for BTC.

    Deal with that and make the LTC network work, and it will dominate.

  12. .

    Dumb mistake, I meant lightning and forgot the acronym (if there is one), obviously not LiteCoin.

  13. RobK

    Interesting. We have the prospect of machine learning and machine trust.
    It is a brave new world, so long as mere mortals dont lose the use of those two pillars of being. That is some time away I hope. What will happen with the next Carrington Event or neutron bomb?

  14. RobK

    Forget the neutron bomb, its covered.

  15. Might even be good if it was hack proof! When scams like this start with worthless concepts like Bitcoin, does anyone really give a shit? Hacking to thieve Bitcoin is a bit of a sport which does no damage to anyone honest, but no one expends much energy on hacking to change the ownership of garbage like this but what when Sinc’s utopia is reached and real property is there for the hacking? Whos assets will be safe then?

  16. Spring is coming

    At my work we had an IT guy working extraordinary hours which was most impressive. Until the powers that be found he was running the IT hardware full tilt to mine bitcoin. They showed him the door. Disappointing really as in mid winter the office was nice an toasty each morning.

  17. .

    Haha that is gold.

    He should have just made bloatware to run it in the background.

    LTN – correct acronym for the lightning network.

  18. Tel

    Not directly related to shipping and supply, but here’s an angle for Sinclair to get his boys working on.

    Regarding the whole business of High Frequency Trading, where buys and sells are happening at the millisecond timescale… my opinion is that no real object in the economy is changing hands this fast, nor is any genuine new information coming into the system (e.g. new mineral discovery or big storm does not happen at the millisecond timescale). The whole High Frequency Trading operation is just one bunch of traders trying to fake out other traders getting micro-arbitrage and doen’t contribute anything worthwhile to the market as a whole.

    Here’s a quote that outlines the basic idea, but that blog has other good things in it if you want to read more than just this.

    https://falkenblog.blogspot.com/2013/02/al-gore-sociologists-address-hft.html

    It should be in the interests of the stock exchanges to attract investment. If the small-time investors who just trade once every week or so think they are being shafted by a robot trader with the ability to react in milliseconds, then the investors will keep their money in their pockets and the robots can go play with each other. That’s a bad situation for the exchange once it becomes entrenched.

    Thus, innovation in the design of an exchange should lead to way that discourage robot traders and it is easy enough to do. Just queue up all bids until a random “tick” comes around and then freeze all trades instantaneously, resolve the backed-up queue as far as it can be, and then unfreeze and start accepting new bids. Try to make the random “tick” happen only about 10 times a day, because quite frankly the real value of a corporation does not change any faster than that.

    So getting to the bit about “Blockchain” technology, it just so happens that the proof of work by reversing a hash algorithm also implements the randomized “tick” when transactions get frozen into the chain. For Bitcoin this “tick” happens approximately every 10 minutes but no person anywhere in the system knows exactly when. Sometimes you might get a bunch of mining events only minutes apart, at other times it might stretch out and take longer. The software is tuned to keep the average hash difficulty at a level that will result in a mining event roughly once every 10 minutes, but these are genuine random events.

    What does this mean for high speed traders? What happens here is that any information on a timescale significantly faster than the event rate that the Blockchain is designed top operate at, will be destroyed. If a trader makes an offer then tries to quickly pull back the offer in order to fake out other traders, there is a non-zero probability that the miner will incorporate that trader’s offer into a permanent and non-revokable transaction. Thus, a trading platform built on a Blockchain technology will AUTOMATICALLY solve the problem of high speed trading once and for all. It simply comes out of how the proof or work operates.

    I don’t think anyone has written a paper on this, but we should be talking at least one Nobel Prize here…

  19. RobK

    Tel,
    That would be useful if it can work as described.

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