Blockchain is rising in popularity, so you’ve probably heard or read the word. But not everyone knows what it means. This technology might revolutionize many industries so it is time to get familiar with blockchain.
We can imagine Blockchain as a giant list of records, which is divided into blocks, which are securely connected to each other using cryptography. The design is based on mathematical algorithms that prohibit changing the data recorded earlier in the block without changing all the blocks that were created afterward. This is why Blockchain technology is so secure.
It may not seem like an important innovation on the surface, but if we look deeper we can see a huge amount of potential. Think about it this way: every interaction you have with any entity that holds information about you is based on your trust in the authority. For example, you may decide to open a bank account and give them a lot of sensitive information about you (income, spending, debts, etc). You do this because you trust in their authority and believe they will hold your data correctly and securely. This is also true with entities such as government departments, social networks, insurance companies, and so on.
It is not uncommon to hear of fraud, hacking, and data theft from chain stores, banks, and e-commerce shops – it is frequent enough to make consumers question how secure their data really is. These breaches are due to the way security architecture is currently built. Imagine companies have built strong walls around a fragile sculpture, but if (and when) the walls are broken, nothing can save the sculpture. Blockchain, on the other hand, has a very durable and robust structure, therefore it doesn't need these walls.
Blockchain simultaneously solves two problems: the anonymity of a user (you decide how much you want to identify yourself) and record security. This is why Blockchain has become so widely used in cryptocurrency. Bitcoin is the most well-known user of Blockchain. But the technology can effectively be used in other areas that need transparent, secured, and trusted ledger systems. Some examples of potential users are public and property registry, stock exchanges, financial institutions, or supply chain management.
Benefits of blockchain for international trade
We are just at the very beginning of using Blockchain in supply chain. We see three major benefits that technology can bring to the market (although there are many others too):
Implementation of Smart Contracts.
Eric Szabo first proposed Smart Contract in 1994. Smart Contract is a computer protocol that verifies an agreement coded into the system. It has predefined terms and conditions, and an algorithm of execution. It became possible to implement with Blockchain because technology ensured the consistency of the data thus avoiding misinformation and fraud. With Smart Contract you can set a sequence of executable processes. You can also be sure that these processes won't be altered. The next step won't start until the previous is fulfilled. A practical example of Blockchain in supply chain implementation is companies digitally signing a Smart Contract. This Smart Contract executes invoices, waybills, labeling etc. with predefined sequence. This sequence reduces the paperwork and administrative costs, simultaneously ensuring the correct information is put in every document.
Reduction or avoidance of middlemen.
Today any trade transaction between parties forces a lot of middlemen to step in: governmental entities (mostly customs service), chambers of commerce, banks, port authorities, inspection agencies, customs brokers – the list goes on and on. This is even more difficult when parties are in different countries, because the number of middlemen practically doubles. All this overhead consumes a lot of time and money, sometimes even making this transaction unjustifiable from the profitability point of view. But if Blockchain technology is properly implemented, it is quick and easy to automatically create and/or approve needed documents in compliance with regulations. With Blockchain, many of the intermediaries can be eliminated or minimized. Therefore, velocity will increase and costs will decrease.
- Increased traceability.
With Blockchain we can trace products from the source up to the ultimate end user. Therefore we can decrease the need in inspections and approvals at different stages. For example, if a food product has a product safety certificate issued by the appropriate agency in the country of origin, we can eliminate the inspecting agency check in destination country. This is especially beneficial for customs authorities – they need to know the country of origin to apply the appropriate tax. Manufacturers can also benefit from it. They can avoid the use of conflict resources, which are natural resources extracted in a conflict zone and used to finance the parties participating in the conflict.
In a 2013 report issued by the World Economic Forum, two key components of supply chain barriers are border administration and transport and communications infrastructure. The report also said that improvement in these two key components can increase international trade volume by almost 15% - 1.6 trillion USD. This exceeds the estimated benefit if we eliminate all the import tariffs worldwide by 500 billion USD. We need a new, advanced approach to the supply chain and international trade to achieve massive improvement. And Blockchain has all the makings of a solution.