17th December 2018
Commodities and Supply Chains in the Digital Era
When the internet was invented, only those that were designing the architecture behind it could truly envision the large scale effect that the internet would have on the world. Today the internet is as ubiquitous as any other technology, and has been proven to enhance almost every industry in the world.
One might be able to look at the timeline of the internet and deduce that blockchain technology is currently on the same trajectory.
Blockchain has a lot of promise for a technology that has been around for barely a decade. Programmers and data scientists can see the advantages that blockchain could bring the world if the technology is properly developed and scaled. These advantages apply to every industry, be it finance, agriculture, or manufacturing.
To understand blockchain on a simplistic level, picture it as a massive cryptographic ledger that can be accessed from anywhere in the world, integrated into other technology, added to, but conversely cannot be changed in any way. This is the true promise of the blockchain. An immutable ledger, that no one central party controls, and cannot be tampered with or censored. When you start to think about the many industries this groundbreaking technology can be applied to, you begin to see how truly revolutionary this technology is.
The Fintech industry is already seeing a massive overhaul with the adoption of blockchain. Worldwide payment networks are being developed that will eventually replace traditional banking applications.
This is one of the first and most practical use cases that the forefathers of this technology envisioned. However, there are other industries that are far behind in the adoption of new technologies and need a major overhaul.
The manufacturing and shipping industries are in desperate need of an update. Supply chains that move commodities around the world are relying on written documents and manual checking to complete these supply routes. This is the situation with the flow of commodities from all over the world. These industries have very much stayed the same in principle for decades, even centuries to some degree. Blockchain is currently being tested and applied to these industries, and the resulting changes could be enormous.
The import export business is an industry that globally accounts for trillions of dollars every year. Since ancient times, this industry has made or broken countless civilizations. Many of the world’s wealthiest nations and individuals are involved heavily in this sector. Interestingly enough, this industry is one of the few today that hasn’t changed much since the dawn of man.
Certain goods and commodities have always been prevalent in one country or region and absent in others. Common examples are rubber and coffee in South American countries, or spices from India. For reasons regarding the climate or ecosystem of plants, these goods have mostly remained exclusive to these countries. This is the foundational principle of international commerce, manufacturing and then shipping goods from one country and selling in another. Many nations across the globe have most of their income related to import and exporting.
With the importance of this industry in mind, it is quite baffling to consider that in the age of the technology available to us, this industry still mostly relies on manpower, written documents, stamping orders and other systems of manual checks and procedures.
Its estimated that an astounding 90% of all commerce relies on freighter ships and shipping containers. This is because while we all live online looking at digital ads and product reviews, we are very much still dealing with physical, heavy, and cumbersome products. From handbags to cars, everything is manufactured somewhere, then shipped off on ship to be sold elsewhere.
The tracking of these goods and commodities is quite frankly, no insignificant task. This is what we refer to as supply chain management. This is the process of transporting and tracking goods from the point of origin to the point of commerce or consumption. Supply chain management is a 15 billion dollar a year industry that is continuously growing.
Many goods every year are lost or stolen, confused with someone else’s order or any other possibility. Then there is the question of authentic goods. Replica factories specialize in making exact 1 to 1 copies of designer goods and electronics, for a much lower cost then what your business offers. This is a complicated issue, but blockchain technology promises to provide a solution to the many problems companies face.
The supply chains that exist today are incredibly complex. After all, we are discussing commodities from all parts of the globe. Electronics from China or Japan are sold in as far away regions as the USA or Europe. Depending on the product and its final destination, the chain can span over dozens of countries, with many stops in between, numerous invoices and inventory sheets, and lots more when you consider all the customs and international laws and regulations that must be accounted for. There are severe issues with the transparency between parties, and many aspects of theses supply chains can be automated and optimized to make them more efficient.
Blockchain is a publicly available ledger that openly shows all data that is recorded on it. This can certainly help with the many transparency issues in current supply chain models. The lack of transparency that current exists causes real issues for merchants and consumers in several ways. Shipments are sometimes lost or held up without the knowledge of either the shipping or receiving party. These types of hold ups can be for many reasons, but often times there are international customs issues.
One of the biggest overall issues however, is that consumers do not know the true value of products or the manufacturing conditions of the goods they are purchasing. This has caused severe humanitarian concerns for decades.
In just one example, manufacturing has been leaving USA and European soil for foreign Asian markets since the early 1900’s. Major western corporations establish factories abroad to both bypass health and labor laws in their home countries, but also to pay much lower wages to employees. When people purchase “fair trade” products they expect that these commodities were sourced and sold at a certain standard for the people that produce them. Unfortunately, when these producers are on another continent, it is not easy to guarantee the conditions that surround these products. The same goes for organic or charity based products.
The fair value of goods is not widely known either. There is a whole market surrounding price discovery for commodities trading worldwide. The lack of transparency makes finding the true manufacturing costs of goods impossible. It’s also similarly very difficult to verify the materials used, the origins of these materials, or to investigate supply lines. It is often times near impossible to prosecute parties or to prove guilt in cases of fraud. The system is built in a way that information is withheld on a need to know basis which in a way is an understandable destination that we have reached as a capitalist society that rewards ingenuity and progress. Manufacturers and corporations rightfully protect their own secrets and business edge from the competition, regardless if they use bad practices or not.
Though there are many different versions of blockchains, most share core similarities. When it comes to adoption of the technology, it is up to the individual enterprise to decide whether they should adopt an existing blockchain network or develop their own. Not all blockchain networks need to have a native token or currency to operate, and not all need miner support. Blockchain technology can be adopted on its own and this is an important distinction from blockchains like Bitcoin or other major cryptocurrencies.
The strength of blockchain ledgers like Bitcoin comes from how publicly available and widespread they are. The core principles behind Bitcoin and cryptocurrencies are immutability, censorship resistance, not owned by any central party, and highly secure.
Blockchain technology offers numerous solutions to every problem or shortcoming in the supply chain and shipping industries. First and foremost, payment, billing, and the transfer of money are the most clear and direct use cases for this new technology. Blockchain allows anyone in the world to transfer funds without any median party controlling the transaction. Each transaction is a direct peer to peer exchange, that is settled in a near instant manner. There is no waiting period of several days for a payment to clear, and the transaction is live on the blockchain to check immediately upon leaving the associated wallet. For business owners dealing with processing payments to many worldwide partners, there are obvious advantages to using blockchain for payments. However, this would require using cryptocurrency which means transacting in something other than your native currency.
For all matters regarding contractual obligations, there is a new development in the cryptocurrency world. Smart Contracts are new types of applications that are made possible with cryptocurrency and the blockchain. These contracts are written in code and are self executing when certain predetermined conditions are met. Once established, these smart contracts cannot be changed in most cases. The funds mentioned in the smart contracts are held in a central wallet, only to be released when the conditions are met. An example of these conditions in this case would be, when the shipment is scanned in by the receiving party and all goods are accounted for.
This means that essentially, you can use these contracts to replace traditional lawyer drawn contracts and escrow services. In fact, as these contracts exist outside any jurisdiction or country, they are superior in the sense that there is no need to go through overseas legal boundaries. Prosecuting parties in foreign countries is no easy affair. These smart contracts allow you to have a legal agreement that both parties have to uphold or forever lose their funds. The possibilities are astounding to consider.
Enterprises all over the world are looking at blockchain technology and wondering how they can harness this technology for the benefits while mitigating the risks. The risks involved are precisely why the adoption rate has been slow as far as the technology is concerned. Multi million dollar corporations do not like to take chances that could potentially cost them millions. This is why the US military and banking centers are still running windows XP. When important systems or millions of dollars are at stake, it’s hard to convince leaders to look ahead and see the benefits of adopting new technologies.
That being said, there’s no denying that blockchain technology comes with certain risks for certain industries. The ledgers and networks themselves are heralded to be very secure, but there are other aspects to keep in mind.
First, the ecosystem behind cryptocurrencies is still very young. It will take time to build up the elaborate and extensive networks that can handle the volume of transactions that industries across the world need. Visa processes 2 thousand transactions per second on average and is capable of 50,000 or more. Bitcoin, the industry leader in cryptocurrency, processes a paltry amount of less than 10 per second. On that note, the Bitcoin network in particular has been criticized for its poor handling of the scaling debate. This is just one example for the different cryptocurrencies but it is an alarming one.
Next, let’s consider the potential drawbacks of using cryptocurrency for transactions around the world. First and foremost, there is currently no way to do transaction pullbacks or recalls like in a traditional banking account. This is an intentional feature that is very important to the system. Once sent, transactions are out of your control, and if sent to the wrong address, they are potentially gone forever. This is not a feature that is easy for business owners to accept.
Also, to consider using Bitcoin or other major cryptocurrencies for transactions, you have to account for the expected and violent volatility. Not many currencies in the world regularly have the peaks and valleys seen in Bitcoin over the last decade. As far as the market looks now, this doesn’t seem to be something that will change anytime soon. This would almost certainly prevent business owners from holding these cryptocurrencies. Instead they would only purchase them right before they need to make a transaction.
Another important note is that experts in setting up and maintaining these systems are few and far between. It won’t be an easy feat to find someone qualified to join your organization as an in-house professional. Therefore almost all duties will be performed by contracted specialists. Many organizations would almost certainly prefer to have experts work for them directly, but sadly this field will need some time to catch up to the growing demand much like computer security professionals are always in high demand.
Despite these challenges, blockchain is already being utilized in several different businesses worldwide. Many massive shipping organization have begun experimenting to try and gain an edge over competitors.
There are also several independent companies that have formed around this new budding technology. They plan to make specialized systems and networks that can be integrated with existing supply lines.
IBM was once a monstrous force in computers and technology. In recent years they have had trouble competing with other giants of technology like Apple or Google. Though they have seen ups and downs throughout the years, it seems IBM is betting big on the future of blockchain and cryptocurrencies. Throughout 2017 and 2018, IBM has made big announcements regarding partnerships with various cryptocurrency startups.
The computer titan has made their way into the shipping and supply chain management industry. Right now, companies around the world are utilizing IBM’s blockchain technology to manage every step of the traditional supply chain system. IBM’s blockchain solutions help to track food shipments from anywhere in the world, with accurate location tracking in seconds instead of days. Shipments are traced accurately and are no longer lost among container ships. International payments are streamlined and optimized, with instant settlement systems. Payments overseas previously have taken days or weeks to clear, but now billing and payments are quick and efficient.
The food supply chain industry is one of the most important that IBM is tackling with this new blockchain initiative. This industry is in desperate need of an overhaul to protect consumers and producers alike. The lack of transparency in this industry has caused problems for most of history. There are many labels that consumers pay extra for like organic produce or “free range” meat. There is no certainty that these goods match the quality that is expected, or that they come from sustainable producers worldwide.
IBM’s blockchain tracks these food products every step of the way from the farm to the processor, the distributer, and finally the retailer. The information and data needed is meticulously recorded and verified at all times. This helps minimize waste as well, with the accurate amounts being transported, stored and sold are recorded and the data is processed by data engineers to map out and review. There are no blind spots in this supply chain and IBM is taking the steps to enhance supply chain management with blockchain technology.
Blockshipping is a Danish startup company that is taking aim at the mismanagement behind global container shipping. Like many entrepreneurs, this company is looking at the supply chain management industry and thinking of how to make it a better process. Interestingly enough, Blockshipping is creating a registry for freight containers, the world’s first in fact. This registry is blockchain based and will provide real time information for 27 million containers worldwide. This in turn has the potential to save the shipping industry billions of dollars every year.
Container based shipping accounts for a massive 60% of all seaborne shipping, which is 90% of all international shipping worldwide. Just like commercial airplanes want a full flight to maximize profit for the airlines company, freighter ships want a full load to maximize the amount of profit coming in versus how much fuel and payroll hours they spend. Making sure that each freighter is at max capacity is a process similar to a real life version of Tetris and is a multi million dollar industry by itself.
There are several other common issues that Blockshipping hopes to solve. These are numerous and range from overcapacity and under-capacity, to security problems, environmental regulations and low freight rates for the shipper. This is an industry that has not changed much in the last century and is need of an overhaul.
Blockshipping is introducing what they call a Global Shared Container Platform or GSCP. This is a real time registry that tracks every shipping container in the world. The primary goal of this registry is to provide real time data that shows shippers where their containers are at any moment, through the use of smart sensors and data points among the shipping lines. This system will also include smart contract based transactions between international companies that can transact with the carriers, ports, and customs handling. Blockshipping estimates that their global registry can save the shipping industry over 5 billion every year while reducing environmental impact through wasted fuel and co2 emissions.
It’s not just shipping and freighter companies that are rushing to adopt blockchain. The individual industries surrounding almost every commodity worldwide have taken notice and are testing out the technology. This includes everything from gold and diamonds, to oil, fruit, handmade goods, wine and more. International trade and everything it envelops will be affected by blockchain.
Gold is one of the most historically important and ubiquitous stores of value the world has ever known. It’s unfathomable that there was ever a time that this scarce metal was not important to mankind and it is hard to imagine a world without it. This is another example of a commodity that has supply routes that are hard to follow, as it is sourced through various mines across the world in numerous countries. The conditions surrounding these mines, and its workers are at large completely unknown to the general public and people who purchase it. The supply chain for gold is an estimated 200 billion dollar annual market.
The London Bullion Market Association is currently testing ideas submitted by blockchain professionals to determine how the gold supply chains can be reworked. The association intends to track the gold from where it is sourced in mines to the end point of the purchaser. Additionally, the organization hopes to gain a better understanding of how the gold is eventually used, from investments to jewelry, to industrial uses. Having knowledge of the full scale of implementation for gold will allow the LBMA to further serve its customers better.
The US based technology and finance company, Emergent Technology Holdings, is also attempting to track the supply lines of gold in what they consider a new approach to the concept. Emergent is focused on tracking the source of gold and ensuring that it is environmentally and ethically sourced. Starting from the mining source, the gold will be tracked from where it is harvested all the way to the distributor and to the final customer or destination. They plan to utilize digital sensors placed in tamper proof containers that make gold shipments scannable, ultimately providing a way to reliably follow the gold supply trails.
Emergent Technology Holdings has plans to offer their own cryptocurrency tokens as well. They have partnered with the NYSE listed organization called Yanma Gold to create their own “G-coins” which will be backed by grams of gold. Each coin is a digital representation of ownership of physical gold that can be used for trading or investment. They hope to provide new liquidity to the gold market.
Kinesis is a full monetary ecosystem that plans to provide two cryptocurrencies backed directly by gold and silver. The KAU coin will be backed on a 1:1 basis by a gram of gold and their KAG coin will be backed by silver. Kinesis will use a minting process that replaces mining on other blockchains. This system enables users of the Kinesis platform to directly create their own coins by submitting cash or digital currencies at one of Kinesis’ own digital exchanges.
Kinesis is forked from the Stellar platform, which is renowned for its speed and efficiency of transactions. There is numerous aspects to the Kinesis platform including digital wallets, several dedicated exchanges, shares of the fees that go to token holders and referral benefits. The father company of this new cryptocurrency system is the Allocated Bullion Exchange or ABX, a longstanding and reputable figure in the precious metals markets. This company is well established and plans to provide a multitude of features that have been designed with the consumer in mind.
The oil industry is one of immense international importance. It is without question one of the most important commodities to the function of the societies we all live in. Oil and gas have a very extensive and sordid history. Some of the most war torn regions in the world also happen to be some of the biggest exporters of oil in the world. This foreshadows the tragic history regarding international conflicts that have been fought over the control of this natural resource. With this in mind, it’s easy to imagine that the supply lines for oil are shadowy and very hard to track.
Several groups and professionals in oil and natural gas are considering different ways to utilize blockchain technology to track supply lines. BTL group is a blockchain based company that recently demonstrated a pilot program for several industry heads. The findings of the pilot report that overall costs regarding tracking oil can be reduced by up to 40%. The group plans to track many different commodities using smart contracts.
Another company that is focusing on this task is the group Petrobloq. This is a company focusing specifically on the supply lines of oil from regions like the middle east and south america. Petrobloq plans to work directly with refineries and producers to establish a connection that can be adequately tracked. The group claims that they will be able to save suppliers millions in costs related to the shipping process.
Venezuela is a country that is heavily reliant on oil as their most important economic driver and exported resource. The economy of Venezuela has absolutely plummeted in the last decade leaving its native currency, the Bolivar, as worthless as the paper it’s printed on. With these desperate conditions mounting, the Venezuelan government has announced they are taking a bold direction with their economy.
For the first time in history, a country’s’ national currency will be a digital currency. Venezuela will establish a cryptocurrency called the Petro that will be backed by barrels of oil in reserve. This essentially means that the economy will be based solely on the value of oil, a commodity that trades worldwide. While this move has drawn the appropriate skepticism, no one can be sure what is the true motivation regarding this startling announcement and how this will all play out. All things considered, this is a historic moment for oil, cryptocurrency and Venezuela.
Life changing technology comes in cycles and ushers the world into the next economic era. The industrial revolution was a period of time that saw major transformations in manufacturing processes and brought new prosperity to the world. Centuries from now, it will be apparent that the internet was one of the most important inventions in the history of mankind. Blockchain technology is an expansion on that concept because without the internet, blockchain and the way we share knowledge and connect with others could not be possible.
The possibilities that blockchain bring are just now being discovered. Blockchain truly stands to replace or enhance numerous industries around the world. With the addition of decentralized applications, blockchain can be integrated with the internet and existing systems or electronic processes to enable new functionality. Many industries will end up being fully replaced by blockchain while many will just be enhanced and optimized.
Its unfathomable how many businesses and industries still rely on notes or paper documents and the use of traditional postal mail services to send these documents. Supply chain management is an obvious industry, but there are many more. Government and bureaucratic services are looking into utilizing blockchain, as are fortune 500 companies. When you tell a CEO that blockchain can potentially save you billions, they tend to listen.
The future is certainly a mystery to everyone today, but many successful individuals learn to look ahead at the changing landscape. The internet is not in its finished form today. It is merely a version that will be updated to the next version down the line and blockchain could be the key to the next evolutionary step. Blockchain technology is more than cryptocurrencies, and it will soon be as well known in technology as IP addresses or email protocols.