Will Blockchain Disrupt Supply-Chains and Logistics ?

Blockchain is more than the technology behind Bitcoin and other cryptocurrencies. Beyond financial services, blockchain technology promises far-reaching applications in other business fields such as logistics and supply-chains. But a suitable policy framework is required. 

The media hype about blockchain probably peaked at the same time the price for a bitcoin reached its highest level. During this time, we also had a blogpost about the potential of blockchain technology for international trade. Though general media attention on this issue consolidated after 2017-2018, blockchain as the technology behind bitcoin is a growing focus of expert audiences, companies, and politicians.

Estimates on its potential market value vary a lot, on the high level at billions of dollars and experts and the media all expect sharp increases for the next years. According to Gartner’s, blockchain is already far away from the hype cycle and on its way to the plateau of productivity. One sign that this is truly the case is the announcement of the cryptocurrency Libra which is planned to be launched in 2020 by Facebook and other major companies.

The concept – Shortly some basics

Without going into the blockchain concept extensively (the internet is full of marvelous explanations) in a nutshell, five overlapping statements describe the blockchain technology:

• Blockchain is ever-growing – data is always being added to the chain and never deleted.
• Blockchain principally requires everyone participating in a blockchain to have his/her own copy – and needs to get one when joining a blockchain later on (for the bitcoin-blockchain these are currently about 250 GB).
• Blockchain can be viewed by any user – but no one can make changes subsequently.
• Blockchain is democratic – you need to hold a majority to change things.
• Blockchain is, as of today, totally secure – it uses cryptography.

To get the intuition behind it visually, look here.

Why blockchain can help in supply-chains?

The key characteristic of blockchain is that it offers security. Therefore, its application in the field of financial services is self-evident. But security is relevant in many business fields such as pharmaceuticals, energy, or logistics. In the case of logistics, security is linked to another feature, which is transparency.

In a proper implementation, participants of the blockchain are always able to track the location and condition of the product which is transported. Last but not least, blockchain can boost efficiency in logistics. Especially with respect to customs formalities, the technology promises many reliefs and could be an important element for paperless trade.

See, for example, the platform TradeLens from IBM and Maersk, where those mentioned characteristics are prevalent, and various players within the supply-chain come together.

What challenges still exist?

One major point of critique is the high amount of energy that blockchain applications consume. This is still an issue, but experts are confident that energy-efficient solutions can be implemented. And this is a critical aspect for the development of large scale blockchain-solutions. Most blockchain-based applications in logistics are not yet ready to work well with huge amounts of participants and data.

Furthermore, the legal situation for using blockchain applications is far from clear, especially in cross-border trade. As it is the case with new technologies and their use, this causes uncertainties for investment. In the digital age, it is important that jurisdictions react quickly and create reliable environments for the actions of companies and the state itself.

Otherwise, a few big players from some states will share the cake, leaving the crumbs for the vast majority. Prevention of quick and inefficient concentration processes within this business field could include focused support for small and medium enterprises through clusters and research networks.

Blockchain strategy from the BMWi – Improvements can be made

Digital strategies often lack information about the direction digitalisation will take in the short term. The blockchain strategy of the German Federal Ministry for Economic Affairs and Energy (BMWi), published in September 2019, is more focused than other strategies in the digital area because the fields of applications where blockchain is expected to generate large benefits are more apparent.

The blockchain strategy of the BMWi sets its focus on energy, public administration, and logistics. Considering Germany’s economic model, efficiency in logistics and supply chains is a key element of international competitiveness. For logistics, the strategy names the support for actions dealing in different ways with smart contracts, and projects working on implementations for the circular economy and in supply chain risk management.

However, the strategy primarily presents some isolated actions. Those need to be better coordinated and connected to concrete milestones in the future. This can help to leverage synergies between the diverse actions.