Blockchain is revolutionizing the way transactions are done – and cutting costs in the process. Is it right for you?
(Article originally published in July/Aug 2018 edition.)
In a remote corner of the developing world, a third-party logistics (3PL) driver accepts the terms of a digital smart contract through a mobile app on his smart phone to pick up a refrigerated container of perishable flowers. Upon pickup, the driver scans QR codes on the documentation and a container connected to Internet of Things (IoT)-related sensor data – temperature, pallet-tracking, returnable packaging – thus accepting transfer of custody. The event is time-stamped with a network confirmation as the documentation is verified by artificial intelligence for authenticity.
While in transit, the app is continuously running in the background, providing real-time geographic, routing and sensor data to the network. For providing this additional data the 3PL is incentivized through micro-rewards (payments) intended to enhance traceability and continually improve route-planning and other delivery methods.
Upon arrival at the port, the transfer process is repeated, and a blockchain-enabled digital chain-of-custody record and an electronic proof-of-delivery (ePOD) are generated. Provided the terms of the smart contract are met (location, timing, container temperature), the self-executing smart contract immediately triggers the creation of an invoice and release of payment.
Futuristic pulp fiction, you say? Nope. In fact, a similar proof-of-concept event has already been historically recorded on a blockchain, forever, having recently been conducted on the OEL Enterprise Architecture involving OEL Alliance members OpenPort and Acudeen’s AssetChain. The OEL Alliance is part of the OEL Foundation, a nonprofit organization providing governance and resources for the development of the Open Enterprise Logistics blockchain ecosystem.
“Business as usual” has been disrupted.
In this example, an invoice was verified and bought at a competitive rate – without the need to interact with the seller’s payer – thus demonstrating how an irrefutable and immutable digital audit trail can enhance liquidity and cash flow while reducing both counterparty risk and intermediaries. The new ecosystem facilitates orders, letters of credit, bills of lading and delivery receipts with more efficiency and transparency than current methods.
Max Ward, Founder & CEO of OpenPort and the OEL Foundation, says, “We are fundamentally changing the way B2B trade is conducted. We provide real-time confirmation of exactly what has been delivered so that payment can occur and use trust to lower the cost of that payment. This changes the cost of capital and makes logistics work the way it should.”
The recently held Crypto-Event Blockchain INDO 2018 conference in Jakarta, Indonesia provided a well-organized introduction to the blossoming sector and to forward-leaning organizations like FloraChain. Its CEO, Brian Kanda, described how his company’s use of IoT and blockchain drastically reduces layers within the supply chain such as verification of source, quality (e.g., organic or use of pesticides) and delivery (including streamlining of customs clearance). This, in turn, fosters significant reductions in the cost of goods, highly competitive price points and increased consumer confidence.
The Fourth Industrial Revolution
A force has awakened again. Do you feel it? Civilization is comprised of revolutionary advances: steam power, then electricity and assembly lines, then computers or “bicycles for the mind,” as Steve Jobs eloquently said.
Prepare now for the exponential growth of efficiencies and a value-creation society building decentralized networks that use distributed ledger technologies like blockchains and cryptocurrencies.
For reference, the Genoans in the 1400s were credited with helping take humanity out of the Dark Ages and ushering in the Renaissance that was accelerated by a revolution in global trade largely attributed to the introduction of “double-entry” (credits & debits) accounting. Thanks to today’s blockchain, we now have a “triple-entry” accounting system that records a time-stamp or network confirmation and has profound implications – the elimination of double-spending, for one.
Arguably, the whole notion of writing was created for the purpose of recording transactions, and the actual concept of a “blockchain” has been around since discovering that the first scrolls of papyrus were used as ledgers. Each ledger could be considered a “block” of information, and when sequentially arranged (“1 of x,” “2 of x,” etc.) they formed a “chain.”
Voila, a “blockchain”!
Fast-forward a few thousand years and today it’s done electronically. Instead of one central and private controller of documents – capable of manipulating or silencing entirely – we can now cryptographically, simultaneously and autonomously distribute an identical record on a public, permission-less (anyone can participate), peer-to-peer network.
In order for transactions to be approved on the network, they must concurrently be agreed upon through an automated, mathematical algorithm consensus protocol by all participating members, who maintain the same record or “node.” The record now becomes “immutable,” “verifiable” and “tamper-resistant” or “tamper-proof.”
As each recorded event on the blockchain is assigned a digital fingerprint or “hash,” any modification to the original entry will alter the hash and thus become automatically noticeable by the network and rejected if not aligned with predetermined, consensus-driven rules. The system itself serves as the regulatory compliance or governance protocol.
Enter the “Age of Blockchain”!
For reference, companies like Samsung and IBM saw the writing on the wall with IBM investing upwards of $200 million in developing technologies and partnering with major players like Maersk. Even banks, despite all the negative rhetoric, are investing fortunes in partnerships with companies like Ripple and have recognized that implementing blockchain technology could reduce infrastructure costs by $20 billion per year, as reported by Santander InnoVentures.
Financial institutions will experience gains through attractive features such as “near-instantaneous clearing and settlement, transaction irreversibility, elimination of double-spending, reduced margins of error and open verification by the community of network users.” In addition, former Goldman Sachs trader and billionaire investor Mike Novogratz predicts that cryptocurrencies (the market force driving the sector) will eventually reach $20 trillion.
Andreas Antonopoulos, the notable coder, entrepreneur and author of Mastering Bitcoin, Mastering Ethereum and The Internet of Money, Vols. I & II, explains that “decentralization” or the removal of custody from a single player or cartel is an essential principle of blockchain, providing censorship resistance and immutability.
A decentralized, distributed database that stores all transactions that occurred on it and can also be accurately and independently verified by anyone in order to arrive at a consensus will dramatically improve industry safety factors. The advantages of an open, public ledger are that you can record the digital signature/fingerprint/certification and not necessarily the private confidential data itself in such a way that actors cannot modify the data without its being noticed.
For example, an aircraft inspector records a deficiency (like a fracture) that could cost an airline a lot of money or embarrassment. It’s then recorded on paper or, worse, a database that can be later modified or removed without a trace. At present there is no way to protect the integrity of that information.
With blockchain, that inspection record or report is placed on an internal, private database and given a digital fingerprint or hash, then placed on an immutable, public blockchain. The report may later disappear, but the digital fingerprint will not, and that will have to be explained. If the report is altered, so too will the fingerprint, which will be detectable as it provides proof of the existence of a record along with a specific point in time.
This protocol has significant application across any process that requires a trusted, verifiable record of activities that have happened such as transfer of custody/ownership, engineering records, and maintenance or vessel logs. The current method involves using a trusted institution, certified professional or recognized organization to provide trust, confidentiality and enforcement through legal or other penalties.
Antonopoulos argues that these same outcomes can ultimately be achieved much more efficiently through a blockchain rather than corruptible or politically motivated institutions with the added advantage of being openly verifiable without permission from anyone.
Don’t Miss Out!
Antonopoulos cautions to not underestimate this technology as most people did the power of the Internet in the early 1990s. As the saying goes, “When the tide goes out, those who are not prepared will be exposed.” Disruption can ruin your entire business model, and many companies are reluctant to change.
Contrary to mainstream thinking that this new technology is unregulated, it’s really quite the opposite. These systems apply the strictest of rules under highly deterministic and predictable models that are regulated through mathematics. In the future, industry will be regulated not just by institutions and committees but by algorithms and mathematics.
The new technology will gradually out-regulate the regulators and, in many cases, make them obsolete because the new system offers more certainty. Antonopoulos explains that “the opposite of authoritarianism is not chaos, but autonomy.”
For those confused about the specifics, don’t worry. We’ve all been using the mind-blowingly complex Internet-routing process for decades. You don’t have to understand the system internals of blockchain to have it work for you.
In short, get ready for Internet 2.0, aka the blockchain revolution! – MarEx
Sean M. Holt, M.B.A. is a regular contributor to The Maritime Executive. He is also an OEL Foundation ambassador and investor.
The opinions expressed herein are the author’s and not necessarily those of The Maritime Executive.