An Optimist’s View of Blockchain in Supply Chain: Lessons from Bitcoin

November 17, 2017

Written by Dr. Madhav Durbha. This guest post first appeared on Kinaxis’ industry blog, The 21st Century Supply Chain

These days, not a single supply chain conference I attend goes by without someone mentioning Blockchain. Given the growing chatter, I wanted to share my views on the topic. In fact, my interest in Blockchain further increased as I started dabbling in Bitcoin, an application of the Blockchain technology.

As per Wikipedia, a Blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Bitcoin is a form of decentralized digital cryptocurrency, not controlled by any nation or issuing bank.

Launched in 2009, Bitcoin was initially written off as a scam or fad. However, to the surprise of naysayers, Bitcoin did survive and is thriving, building quite a following. Here are some factors that are making Bitcoin a very attractive proposition, which are a direct result of the underlying Blockchain technology:

  1. Secure encrypted transactions ensuring privacy of the involved parties: Through a combination of public and private key encryptions facilitated by Blockchain, Bitcoin provides a virtually hacker-proof way of making and receiving payments. This is quite fascinating considering the code behind Bitcoin itself is open source. In a Blockchain, each transaction is recorded to a “block” across a large number of distributed systems. This transaction is then authenticated by each node in the network and is facilitated by individuals like you and me, who are referred to as “miners” in the Bitcoin world. Once recorded, the transaction cannot be altered, and it forever resides in a public distributed ledger that’s shared between the network nodes. The identity of the sender and receiver are protected through the encryption mechanisms. Not surprisingly, some of the early adopters of Bitcoin were those dealing in illegal goods and drugs through the now defunct Silkroad, online marketplace being the most prominent. While any technology can be put to both good and bad use, supply chains require a high degree of privacy and security to ensure validity of transactions for perfectly legitimate reasons – which Blockchain can enable.
  2. Disintermediation of non-value added links and enablement of frictionless transactions: Bitcoin initially built an enthusiastic following among a group of privacy activists known as cypherpunks holding libertarian ideals, who wanted to decouple money and monetary policies from the influence and the reach of governments and central banks. Because Bitcoin transactions happen directly between sender and receiver, and are authenticated through other nodes in the network, no bank or middleman takes a cut in the process. Settlements are relatively quick compared to the latency associated with funds flowing through the traditional banking system (especially for international transactions). Aside from the few countries that have banned the use of Bitcoin, its appeal is universal as you don’t need to continually exchange it into different currencies as the money crosses borders, making transactions frictionless and eliminating fees. In a very provocative recent blog, author Magnus Lind makes some excellent arguments on how financial supply chains can learn from improvements in physical supply chains by organizing disjointed financial links into one uninterrupted chain. The design principles of Blockchain will be essential to such efficient financial supply chains.
  3. Blockchain is here to stay: For any currency to sustain, those carrying and transacting in it should feel confident in its value. Bitcoin is very volatile and is still considered more a speculative investment than a currency itself. However, if the trend to-date is any indication, Bitcoin is here to stay for the foreseeable future. As opposed to government issued fiat currencies that can potentially have unlimited supply as money can be printed by the government mints, Bitcoins, by design, cap out at 21 million coins. This limited, predetermined supply is another reason why Bitcoin is seeing increased demand. Regardless of the future of Bitcoin, the traction it has gained to date is a true testimonial to the potential of Blockchain.
  4. Strong network effects: As word spreads, more players are jumping on the Bitcoin bandwagon, causing a strong network effect that’s increasing the use and circulation of Bitcoin as a commodity, if not as a currency. The likes of Marc Andreessen and the Winklevoss twins invested in Bitcoin focused startups, lending more credibility. It has reached a point where major financial institutions, after brushing it off as a passing fad, are now taking Bitcoin and other cryptocurrencies seriously, as evidenced by the Blockchain groups that are now active in their organizations. The likes of Bill Gates, Elon Musk, Richard Branson and other business leaders are taking sides on the Bitcoin debate, furthering the network effect.

All this said, there is no Bitcoin without Blockchain. A Blockchain offers the potential to revolutionize the information and financial flows associated with material movement when it comes to supply chains. There are plenty of industries — such as pharmaceuticals — where the traceability of a drug is of extreme importance due to regulatory issues, as well as the need to mitigate the risk of counterfeit drugs entering the supply chain. Having a fully verified ledger of transactions that maintains end-to-end traceability could be an attractive proposition. Of interest, IBM, Unilever, Nestle, and Walmart have announced a collaboration in using Blockchain to trace food contamination. Just as I was writing this blog, I came across this very interesting post by Michael Casey on how Blockchain can turn supply chains into demand chains, elaborating on some other interesting use cases.

While from time to time I come across articles such as this, I have yet to see large scale, economically viable and proven use cases for Blockchain in supply chain, as significant challenges remain for mainstream adoption of Blockchain in supply chain. Interoperability standards for transaction recording need to be defined, which needs to start with a large player such as a channel master or a consortium. Perhaps the aforementioned collaboration between the consumer packaged goods (CPG) and retail giants is a good start. Cost of enabling a Blockchain is a significant consideration as well…. more so for enabling a “private” Blockchain.

Things will eventually change, and when it comes to digital technologies, it always seems to happen quicker than we think. For example, when I started my career in the late nineties, I had better technology available at work than at home (high speed internet at work vs dial-up modem at home). However, after the advent of the iPhone and the launch of Appstore, consumer tech hit an inflection point with corporations following suit. The digital collaborative applications we now use at work had their origins in the consumer domain. Bitcoin is just one shiny (at the moment anyway, and no pun intended!) application of Blockchain that had its start in the person-to-person (P2P) domain. The supply chain will follow– sooner or later. If you are a supply chain professional, dabble in experiments and learning pilots if you can afford them. If not, at the least start by researching into what Blockchain can offer.

What do you think? How quickly do you see Blockchain impacting the supply chain? Comment back and let us know. 

1 Comment

  1. shanjames

    Nice Blog| this blog is a very interesting to read and good for people who are ready to learn about Blockchain

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