Blockchain explained through college basketball

When we launched BiTA in 2017, we expected that the organization would include 20 to 30 of the most innovative minds in freight who were thinking about blockchain to solve major issues that had plagued them for years. The members of the Alliance felt the technology could help them solve problems without the need for an intermediary or using a third party

Areas like driver recruiting, firm load contracts, accelerated payments, safety and compliance could all can be improved through blockchain technology. We recognized this, but we had no idea what the organization would become. In the first week, we had over 60 applications, almost all trucking-related in the US.

At first, we chalked up the initial response to excitement, intrigue, and FOMO driving interest. But our membership applications continued to explode. We received applications beyond trucking, representing all modes of traffic, including truck, rail, ocean, and air, and they were coming from all over the world. We rebranded as the “Blockchain in Transport Alliance” and the applications continued to pour in.

Today, we have members from 23 countries and have an application count that is over 1400. The organization is adding around 20 official members a week. Our membership generates over $1 trillion of combined freight revenues amongst them. We also have OEMs, vendors, banks, lawyers, accountants, insurance companies and others as part of the alliance.

We find that most of the members of our organization are involved in technology or the use of data in their operations, either for their internal development or through their product offerings. Many of them are thinking about collaboration that goes well beyond blockchain and are interested in how data can be applied in their business models to make faster decisions. They are also eager to use technology to provide better experiences for clients.

Certainly, reducing manual processes and accelerating cash flows are at top of everyone’s minds, but members want to go further.

One of the things that we get asked regularly by people who are not involved is to describe Blockchain. Having done so thousands of times, we understand that the description of a distributed ledger does not help to explain it.

Related: Read FreightWaves’ on-going coverage of blockchain

So we have come up with a simple everyday example anyone could relate with to describe Blockchain. Here it is:

Let’s say that you and a friend were to place a bet on a basketball game (we will call him Mike). He is a UNC fan and you root for Duke. So, we are betting on the UNC/Duke basketball game that will take place on March 3rd. 

You agree that the term of the bet is $100. We are placing this bet in February, so plenty of time for either to forget the terms of the bet. Both of you write down the bet in your independent “ledgers”. You write the bet in your phone and Mike puts it into Excel. Neither of you have any way to know what was written by the other, but both being honest and knowing the game is far off, you make the notes. Mike inadvertently leaves out a zero, making the bet $10 in his records, not $100.

The game is played and Duke wins. It’s time for Mike to pay up. You call him up and ask for the $100 that was agreed to. He responds that it was $10. When you protest the amount, he tells you he has it in Excel as $10, not $100 as you suggest. You respond that you have it written down in your phone and it was $100.

You are upset because you feel like he is trying to weasel out of a bet and Mike is upset because he is thinking you changed the terms of the bet. To deal with it, there are a few options.

  1. Mike can refuse to pay you anything until you have come to his number.

  2. You can agree to take the $10, upset thinking Mike “screwed you.”

  3. Mike can come to your number of $100, upset thinking you are “screwing him.”

  4. You guys can meet in the middle.

  5. You can hire a lawyer and sue Mike.

Think of how often this happens in business, almost every single day. One party disagrees with another and then we are in a state of constant negotiation. Shippers refuse to pay bills because the invoice is off by a penny a mile or the fuel surcharge is wrong. Detention notification procedures are not followed, etc. Carriers service fail loads and you have to pay fines. Truck stops fail to honor pricing discounts that were agreed upon, thinking the fleet is too unsophisticated to notice.

People forget. People change. The party with the most leverage usually wins.

Our society has all sorts of ways to deal with it. We have armies of lawyers, arbitrators, letters of credit, processors, etc., but those get quite expensive, and they can be manipulated, too.

But then came a technology known as blockchain that promises a better way. The technology itself is quite simple. Going back to our bet example, let’s say that you and Mike agree to use blockchain to record the bet. What would happen is pure magic (not really, but I’ve been at Disney this week). The bet would be recorded on the blockchain and both of you would have an identical copy. The $100 would have been agreed to by both parties. If either party tried to modify it, it would require consensus and all modifications would be ledgered, showing a perfect history of everything that happened.

Now, when it came to call for the bet, both you and Mike would know that the original bet was $100. We have a perfect record. This is a simple use of blockchain.

But there is more.

Let’s say we get real crafty and decide we want to enforce the outcome. We create a “smart-contract.” This smart-contract is built to execute upon some kind of triggering event. In our case, it is the basketball game. So, we code the smart contract to read the final score from ESPN’s RSS feed. As soon as the game is over, ESPN sends an alert of the final score and our smart-contract gets triggered. It knows that UNC lost the game and is programmed to know that Mike owes you $100.

We can even set up the smart contract to auto-settle the amounts by linking it to some type of monetary instrument, escrow account, or automating a payment process. Each of these have advantages and disadvantages.

Cryptocurrencies: The term cryptocurrency gets thrown around a lot because it is a digital currency that is fungible into another currency (ETH to USD for instance). A cryptocurrency is most commonly used for these types of applications, primarily because they have created a fantastic way for blockchain startups to raise capital to fund development. The downside is that both parties must agree to accept the currency, there is substantial volatility in the value of the currency, and the regulatory environment is not certain (and large corporates are unlikely to adopt them until it is). The other drawback of cryptocurrency is the tax treatment of them and the fact that the IRS sees these as assets and requires mark-to-market accounting treatment, meaning the holder of cryptocurrencies owns principal risk in the value. The other issue is that exchanging cryptocurrencies for fiat currencies–and vice versa–is usually fairly expensive (fees can be as much as 3%).

Escrow account-based smart contracts: Some of the use cases we have seen are where two counter-parties will agree to put a small amount of money into an escrow clearing account. Advantages include the ability to get paid in USD, the funds are held by a third party, and there is little risk of default. The disadvantage of using an escrow account is that both parties must have money tied up on the front end and there is a cost involved in the escrow process.

Smart payment: A financial institution or fintech company agrees to stand in for the default and performance risk of the smart contract. Once the contract outcome has been determined, the contract will be cleared automatically. The smart contract pulls the money from the fintech and puts the money in the correct party’s account. The fintech is responsible for collecting payment from the paying counter-party. The fintech could offer to front the money (securitizing) or require the payor to originate the money and once the funds are on hand, they will transmit it to the payee.

If you go back to our bet, we can talk about how this will be settled. You have coded the smart contract to payout upon an agreed set of conditions and events. If you used a Secured Smart Payment contract, a fintech would “back” the value of the contract, meaning that you would actually be collecting funds from the fintech and not Mike. Mike would have a credit account at the fintech and the fintech would collect from Mike.

If you are interested in learning more and getting involved in the future of freight, we invite you to join BiTA. We will also dive deeper into these concepts at our future of freight summit in Atlanta in May known as Transparency18, where we are assembling the most innovative minds in freight and transportation.

One Comment

  1. Cool, so with blockchain, you need an intermediary to code the smart contract, another intermediary to audit the code, and another intermediary which can move the money between bank accounts (no sane merchant would consider a cryptocurrency for a non-negligent deal). So much for cutting out the middleman.

Craig Fuller, CEO at FreightWaves

Craig Fuller is CEO and Founder of FreightWaves, the only freight-focused organization that delivers a complete and comprehensive view of the freight and logistics market. FreightWaves’ news, content, market data, insights, analytics, innovative engagement and risk management tools are unprecedented and unmatched in the industry. Prior to founding FreightWaves, Fuller was the founder and CEO of TransCard, a fleet payment processor that was sold to US Bank. He also is a trucking industry veteran, having founded and managed the Xpress Direct division of US Xpress Enterprises, the largest provider of on-demand trucking services in North America.