The biggest barrier to blockchain’s adoption by enterprise on an industry-wide scale is a set of misconceptions about what exactly blockchain is and its relationship to cryptocurrencies like Bitcoin and Ethereum.
Most people who are aware of blockchain learned about it because of the media’s fascination with Bitcoin, the volatile digital currency that has taken its “hodlers” on a wild ride in 2017-8. When you ask someone in the transportation industry—say, a trucking carrier—if they’re interested in blockchain for industry applications, they often assume it means receiving payment in a cryptocurrency like Bitcoin.
And why would you want to receive payment in Bitcoin? The value of a Bitcoin fluctuates daily, and the currency has doubled its value in a month, then halved it the next month. Currencies work well when their value is stable—you want to know that the $1,000 you’ve contracted to be paid in a month is going to be worth about the same as it is now. At this point, Bitcoin is an asset more like gold than the USD, ‘invested’ in by speculators hoping to strike it rich when a flood of demand hits a commodity with a finite supply.
But does blockchain make sense without cryptocurrencies? It’s a question worth asking, and FreightWaves reported last week from the Digital Chamber of Commerce’s Blockchain Summit in Washington, D.C., where the issue was discussed. It’s a question worth asking because, after all, the ideas of blockchain and Bitcoin were invented simultaneously. Satoshi Nakamoto (a pseudonym of an anonymous person) wrote his now-famous 2008 white paper to propose a solution to the double-spend problem in digital currencies. The double-spend problem is essentially this: say I’m using a digital currency to buy something online. What is there to stop me from spoofing transactions, and spending the same digital dollar twice? And if I give two different parties a digital dollar with the same ‘serial number’, who is holding the authentic money and who’s holding the counterfeit?
Satoshi’s solution was to create a distributed ledger so that many, many computers held a record of the Bitcoin’s transaction history. Satoshi wrote, “We need a way for the payee to know that the previous owners did not sign any earlier transactions… we need a system for participants to agree on a single history of the order in which [transactions] were received.” The system involves cryptographic hashes, a process that takes an arbitrary size of input data (a text file, or an MP3, or a video), runs it through an algorithm, and generates a 256 character output—the ‘hash’. The particular way that the hash algorithm works makes it essentially irreversible… in other words, it’s very easy to take input data and generate a hash (and the algorithm always generates the exact same hash for the data), but it’s virtually impossible to reverse-engineer the original input data from the hash. Here’s a video that explains how it works:
A Bitcoin is just a string of these kinds of hashes. The initial hash records the creation of the Bitcoin. When the Bitcoin is given to someone else, a record of that transaction along with the initial hash is fed into the algorithm, which generates a new hash. Each hash is a ‘block’, and this recursive way of linking them all together is what generates the ‘blockchain’. Since the hash is only 256 bits, it’s really easy for all the computers on the network to check and make sure they all have the same copy of the transaction record… even gigabytes of transactional history can be translated into a 256 bit hash, which can be verified instantly.
Satoshi invented the idea of the blockchain to have an immutable, irreversible record of all of the transactions a particular Bitcoin has gone through so that no one could double-spend their digital currency. But there’s no reason in principle why a blockchain can’t be used to record any other kind of data, or records about a physical object. IBM and Maersk performed an experiment where the companies tracked a shipping container of flowers from Mombasa, Kenya, to Rotterdam, the major port in the Netherlands. They found that just a simple refrigerated shipment went through more than 30 different organizations and required over 200 separate communications. Any lost form or delayed approval could hold up the container in port indefinitely. In a blockchain, all of these steps in the chain of custody would be permanently recorded as they occurred in real time, made available to all concerned parties instantly, and would be completely tamper-proof.
Shipment tracking is just one application of blockchain without cryptocurrencies that has potential in transportation and logistics. Smart contracts are another: because the blockchain is at its essence code, it’s programmable, and can automatically execute actions when certain events are hashed into the chain.
Payments can also be made using blockchain tokens, but rather than dealing with floated cryptocurrencies that experience volatility, the token value is fixed to US dollars. The token governs the value of the transaction and is executed based on the terms of the smart contract. Once a triggering event happens, a transfer of value goes from the payor to the payee. The funds are guaranteed by a bank or clearing house that stands in for the value in USD. Blockchain ledgers are used to record the activity of the transaction, the history, and the tokens are instantly converted during the settlement.
The token itself still holds value and the value is transferable. This means that the bank that has provided the settlement service could trade the token that has a finite value. The value of this token is based on the cash-flows that the token is expected to generate throughout its life. If we are talking a load, the maximum value of the token is the total charge on that particular load- including line-haul, fuel, and accessorials.
How would this work?
A shipper would tender a load that is backed by a smart contract token and honored by a clearing bank. The trucker would know the value of the token and the the requirements to get the full value of the token. Once the truck delivered the freight and the POD is transmitted, the carrier could request payment in the form of the token. Assuming that the requirements set forth in the smart contract have been honored, the token transfer would be immediate and exact. Any disputes to the outcome would go to a process of smart arbitration, offered by the clearing house. The trucker would receive funds immediately, but the clearing bank could offer to “float” the payment terms to the shipper. A shipper that wants to pay in 120 days could do so, assuming that a clearing bank is willing to stand in for the risk of default.
The clearing bank would charge a fee to float the money, based on current value of future cash-flows, underwriting, and the risk of default. There is the possibility that the token could be sold off into the secondary market. Single load transaction values are quite small, so it is unlikely that a single load would be sold off to an investor. But with blockchain, a set of loads or a portfolio of transactions from a specific shipper could be packaged up and sold off to investors based on their risk profile.
Crypto purists will argue that payments in blockchain must be used with a floated token, because the idea of eliminating third parties and intermediaries is appealing. The idea that you have to trust a third party to ensure payment is what blockchain was built to address. If the third party were to go out of business during the payment cycle, it would put the integrity of the payment network at risk. If you are dealing with assets that have long life cycles, such as real-estate, the argument could be valid. But when it comes to domestic freight, the payment cycles are usually within 60 days and the risk of a bank default is incredibly small. If the clearing house is an FDIC insured bank that is providing the funds guarantee, then the risk is tiny. It is certainly less risky than getting paid in a floated cryptocurrency where you neither know what is injected in the underlying crypto code or the volatility of a floated instrument. Plus, cryptocurrencies that float are considered assets and must be treated under mark-to-market accounting requirements and any gains on the value of the currency are considered taxable income by the IRS.
The confusion and misconceptions surrounding blockchain are understandable because the term is something of a buzzword, and doesn’t have a clear definition. Trade organizations like the Blockchain in Transport Alliance (BiTA) are using the word ‘blockchain’ to refer to a cryptographically generated distributed ledger, with or without a token. There are lots of industries that could use shared, tamper-proof, instant record-keeping but have no desire to wade into cryptocurrencies.
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