Blockchain is not well understood yet, but think of it in terms of the cost of verification and networking
The first thing that Christian Catalini wants you to know about blockchain is that “most of what you have heard about blockchain is wrong.”
Speaking at the MIT Center for Transportation & Logistics’ annual Crossroads event last week, Catalini, an assistant professor of technological innovation, entrepreneurship, and strategic management at the MIT Sloan School of Management, further punctuated his opening salvo with this though: “Blockchain won’t be able to satisfy all ambitions in the next five years.”
Much has been written in recent months about the potential for blockchain in the supply chain, including in the Adam Smith Project. And for good reason. It’s not only a promising technology, it’s a pretty realistic one in terms of potential adoption.
Blockchain doesn’t necessarily require a total overhaul of processes or workflow. In its most rudimentary uses, a blockchain could essentially digitize a sequence of information gathering across one company or many that typically is collected through email chains (or even stacks of physical paper).
At this most basic level, blockchain is a digitized database that allows for a more organized audit trail. That, in and of itself, could be incredibly useful in supply chain applications.
But the reality is that blockchain as a technology is still in its infancy, more readily associated with the cryptocurrency bitcoin than any landmark commercial use cases.
“What’s unusual about blockchain is that three key fields are converging around one technology: computer science, market design and economics, and law,” he said in a wide-ranging presentation on the technology. “Economists think of technology changes in terms of costs. And we landed on two basic costs.”
Those costs, Catalini said, are on different ends of the “technological disruption” spectrum:
1. The cost of verification (“If you need to record something, it becomes simpler and cheaper to do that on a blockchain.”)
2. The cost of networking (“This is more disruptive, because you can create a network without the need for an intermediary. This is what established players don’t like about blockchain.”)
The reason blockchain is so immediately appealing in an application like an ocean freight shipment is because there are so many parties involved in a single transaction, and because the chain of custody can pass through so many hands. Those interchanges between parties, and the rigor required to collect and vet the required documentation, produces cost. Think of documentation fees or amendment fees.
“When something goes wrong in a transaction, you perform an audit,” Catalini said. “On a blockchain, that audit step is ‘costless.’ Whenever there’s a trust issue, it’s a lost opportunity.”
Another supply chain benefit is that a blockchain allows parties to trust one another without disclosing unnecessary information.
“Every time you engage in a transaction with a counterparty, you disclose a lot of information to that party so they trust you, like your social security number, or your ID card to a bouncer,” he said. “There’s a lot of over-disclosure, which has a big cost. Information leakage is becoming more difficult to control. That’s not because there’s not an investment in security, it’s because there are a lot of people involved in information security. You can understand why bitcoin is used in illicit markets, where unnecessary information disclosure is important to avoid.”
This technology expands what we think of the scale of an organization. Blockchain won’t replace intermediaries. But it will change what they do.
Many people have called blockchain an instrument of trust, in that the way each piece of data is encrypted and vetted by all parties inherently ensures trust not possible in traditional transactions.
“It becomes almost costless to have data integrity,” Catalini said. “Every ‘bit’ of a transaction is verified.”
This ability to reduce the costs and increase the reliability of transaction is at the heart of early stage uses of blockchain in supply chain settings. Applying available technologies is really about replacing burdensome, costly processes with more efficient versions.
Blockchain promises much more, Catalini said, and much of that future promise is tied to the second cost he highlighted: networking.
“Networking provides more of the danger for incumbents,” he said. “This technology expands what we think of the scale of an organization. Blockchain won’t replace intermediaries. But it will change what they do. For some, it will endanger them, and for some it will broaden the scale of what they do.”
Catalini wasn’t necessarily speaking directly about freight forwarders, but you could picture the talk about “intermediaries” being applied to such logistics providers. Instead of digitizing an existing transaction, blockchain could reshape how logistics transactions occur.
“The moment you have a full digital programmable currency, you can do a lot more with it than a traditional currency,” he said.
That has impacts on how suppliers get paid, the Incoterms of a shipment, even the role that freight brokers play in matching capacity to demand.
“Think of the ‘blocks’ in a blockchain in a very general way,” he said. “These transactions can represent anything you want. Authenticating a user, performing a trade. And this chain becomes more secure and tamper proof over time.”
That could apply to concepts like micropayments, where blockchain enables consumers to pay small amount for actual usage of a service (because the costs associated with administering the payment collection becomes virtually costless).
Catalini also described a more futuristic scenario where an autonomous vehicle buys up space in a designated highway lane because its occupant is late for work.
The more realistic near-term use case is so-called smart contracts, which are essentially blockchain-enabled contracts that are codified and repeated under the supervision of a relevant network of parties (well, those parties systems to be more precise).
A bill of lading would be a prime example of a smart contract, as would contracts consummated between retailers and suppliers.
At the heart of this development of supply chain-relevant blockchains is the intersection between logistics and finance. While the two departments often have an uneasy alliance in certain companies, blockchain technology could literally get those two functions on the same page. Payment to a vendor, for instance, could be automatically triggered by a party in a blockchain confirming an action has occurred. As opposed to the current system where a vendor invoices the buyer once a manual confirmation of that action has taken place.
It’s really only the beginning.
“Supply chain and provenance of goods is still developing,” Catalini said. “We’re going to come to a fork in the road where we decide to replace existing processes with more efficient, less costly, more trustworthy data. And then we’ll be talking about enabling entirely new processes.”