Since its first implementation with bitcoin back in 2008, blockchain has shown extreme promise to upend a number of industries – and most recently, the industry in the spotlight has been transport and logistics. In December, logistics leader UPS joined the Blockchain in Transport Alliance. In January, Maersk and IBM announced their intention to form a blockchain joint venture. And in February, Warren Buffet’s BNSF Railway joined the Blockchain in Transport Alliance as the first of seven major railroads to do so.
To understand more about this industry transition, Transmetrics’ Co-Founder and CCO Anna Shaposhnikova spoke with Martijn Siebrand, expert and advisor in blockchain technology in Supply Chains.
This is the first part of a two-part series interview about blockchain technology in the supply chain and logistics. Read the second part here
ANNA: The first question for you today… Blockchain is a relatively new technology. Could you please introduce, in short, the history of blockchain, when and how it appeared – and in which industry? Also, what were the reasons it was created in the first place?
“Put simply, blockchain is an open ledger of transactions that is distributed among computers in a given network. Since everyone on the shared blockchain has access to the same ledger of transactions, there is complete transparency making it impossible for users to trick the system.”
MARTIJN: The first product of blockchain was bitcoin, which, to date, still remains the best example of blockchain in practice. The inventor of bitcoin actually wanted to exclude banks from the financial system, and developed blockchain as a way to do this.
Put simply, blockchain is an open ledger of transactions that is distributed among computers in a given network. Since everyone on the shared blockchain has access to the same ledger of transactions, there is complete transparency making it impossible for users to trick the system. When a transaction occurs, 51% of devices on the network must verify and confirm the transaction as valid, which thereby eliminates the need for a third party control – which, in the case of bitcoin, for example, means banks.
ANNA: So, bitcoin was the first use case of blockchain. But what other blockchain products exist now, and in which cases they are applied?
MARTIJN: At first, we saw a lot of activities where people were using the bitcoin protocol to build other blockchain solutions, but now, most blockchain products are being built using other protocols like Ethereum, which is known for its “smart contracts.” A smart contract is a program/software that allows you to make all kinds of rules and Softline codes – such as “if X happens then Z appears” – that automate the execution of a transaction if and when all of the set criteria are met. Lately, we’ve seen a lot of products being created with smart contracts, and even some big companies are using them internally to reduce administration costs by giving everyone access to the same information – a historic struggle for the logistics industry.
These smart contracts are particularly interesting for logistics because, without the help of a trusted party, you can automatically execute supply chain activities. As soon as you have a single ledger of information visible to all parties, processes become much more efficient and move faster, which can help reduce their cost. Most blockchain solutions that you see right now are permission-based with predefined ecosystem partners, and are created for reducing the cost, eliminating paperwork and gaining efficiency. And while smart contracts are perfect for logistics, their implementation in the industry is still in its early stages.
ANNA: Can you elaborate a bit more on what you mean by the technology being in its early stages?
MARTIJN: What I mean by that is that it is very similar to the early days of the internet and intranet. Most of the blockchain solutions in logistics these days, such as that of IBM and Maersk, for example, use closed, permission-based blockchains – just as the intranet was once used to limit access to a closed network. This type of solution is currently being used for various purposes within finance, where it is important to ask permission from the owner before joining the blockchain network.
The other type of blockchain, however, is where the real disruption is coming. Permissionless blockchains like bitcoin are open to anyone, and enable a far greater level of transparency. If you would like to buy bitcoin, for example, you don’t have to identify yourself as you would when you open a bank account; rather, you simply go to a website, and pay for a bitcoin. If you would like to sell amounts of bitcoin back to fiat money, you have to register at exchanges to be able to do so – but you are still able to buy cryptocurrency 24/7 around the globe.
That is the primary distinction between permissionless and permission-based blockchains. At this time, the technology is in its early stage, so most of the companies are working with permission-based blockchains, meaning that they are building closed ecosystems with closed blockchain solutions. But this will change with time – just as the internet eventually beat out the intranet. So far, there are very few use cases of permissionless blockchains within logistics – only a handful of startups trying to do things. However, the problem remains that, for the most part, these companies don’t have the ecosystem or clients in place to create a major impact with their products in this stage.
ANNA: As you know, for the logistics sector especially, and for any sector to a certain extent, the security of data and data sharing policies are very sensitive topics. For this reason, I assume that companies within the logistics industry would most likely go for permission-based blockchains. Do you foresee logistics giants like DHL, FedEx, and UPS each creating their own permission-based blockchain ecosystems, and the whole logistics industry becoming overcrowded with several blockchain solutions?
“Within logistics, everyone is looking for a new Uber model. The idea is that with blockchain, the creation of smart contracts, and the introduction of IoT, there may soon be products or services where loads and packages are looking for the truck, instead of the truck looking for the loads.”
MARTIJN: We already see that some blockchain protocols are focusing on specific sectors rather than trying to cover all of them. Supply chain is a very interesting sector for tech companies because it is a huge global market. As I said, though, the most promising use will come from the permissionless applications. And the interesting thing is that smaller companies with smart ideas can join together to create an open blockchain ecosystem in order to compete against those logistics giants. There have already been some rumors that blockchain technology could disrupt Airbnb and Uber. And within logistics, everyone is looking for a new Uber model. The idea is that with blockchain, the creation of smart contracts, and the introduction of IoT, there may soon be products or services where loads and packages are looking for the truck, instead of the truck looking for the loads. In that case, small companies can compete against the big ones by creating ecosystems and building flexible solutions around their products. Also, we won’t need third-party companies like Airbnb or Uber anymore, as we will be able to interact directly between supply and demand using smart contracts.
Maersk and IBM are developing trade finance and supply chain solutions on the HyperLedger platform. However, because Maersk has already set the standard for the platform, other big players may decide not to join because they would have to play by Maersk’s rules. The big logistics players will most likely have a problem in terms of getting other companies on board with their closed environment. It will be interesting to see how it will all play out. Maersk and IBM have created a joint-venture to apply blockchain to improve global trade and digitize supply chains. It will be an open standard and designed for use within the entire global shipping ecosystem. Most likely, however, big logistics companies will face a major challenge in convincing their competitors to join their own platform using their own standards.
ANNA: What it sounds like, then, is that for the big companies, there is no way of creating a common industrial blockchain, unless they all agree and compromise on the conditions and rules. But this is unlikely to happen – at least now and in the near future – given that they are very sensitive and protective about sharing the data.
Also, speaking of big players, it’s hard to leave Amazon out of the conversation. The e-commerce giant is becoming more and more challenging for big logistics companies to compete with, having already purchased its own air fleet, trucks and ships, so as to eventually position itself as a mega-logistics giant. Meanwhile, DHL, FedEx, and other big companies might be thinking about some sort of consolidation in order to survive and compete against Amazon. Most people expect that small and medium-sized companies will be consolidated with these larger companies and not survive the fight. However, what you seem to be saying is that blockchain technology can actually save the small companies if they band together, so they shouldn’t be pessimistic and assume that consolidation with the big companies is the only way to survive. Rather, they could actually create their own ecosystem and compete against not just DHL, FedEx and other logistics giants, but also against Amazon.
“We will never fill each truck 100 percent, but when you go from the current average of 50 percent to 60 percent or even 70 percent, it will dramatically improve the results of logistics companies. But this requires logistics companies to work together. And before they start working together, they must trust each other enough to share parts of their invoices. In essence, blockchain would be able to bring these companies together as one entity.”
MARTIJN: Exactly. The thing with big companies, and particularly Amazon, is that because they have their own logistics networks of boats, planes and trucks, they have access to data that gives them visibility over a huge portion of the supply chain. Smaller logistics companies do not have the same level of visibility, but they could if they come together by forming a shared blockchain ecosystem. If these companies were to extract data from their ERP systems and share the data with the entire ecosystem on an open blockchain, everyone would have access to the same information at the same time. As a result, they would be as well informed as the big companies, and able to act on the information to improve efficiency – particularly by reducing waiting times and increasing the utilization of space within each truckload.
Today, there seems to be a shortage of truck drivers, but in reality, that is not really the case because we are not maximizing the capacity of each truck. We will never fill each truck 100 percent, but when you go from the current average of 50 percent to 60 percent or even 70 percent, it will dramatically improve the results of logistics companies. But this requires logistics companies to work together. And before they start working together, they must trust each other enough to share parts of their invoices. In essence, blockchain would be able to bring these companies together as one entity that is comprised of many individual parts.
ANNA: So what you are saying here that blockchain can enable distributed networks. Would you mind explaining to our readers the principle difference between these networks: distributed, centralized and decentralized types of networks?
“Blockchain enables a distributed model, whereby users can connect with each other directly, without paying a fee to a third party as they would under the decentralized model. This type of network structure allows participants to create a governance together and, using smart contracts, find a load, hotel room or whatever they need via the blockchain network.”
MARTIJN: The banking system is the classic example of a centralized network; all transactions between parties must go through a third party (the bank) for validation. Decentralized networks, on the other hand, are everything we are seeing now with the rise of the sharing economy – companies like Uber and Airbnb, for example. With decentralized networks, individuals or companies can connect directly with the people providing the services they need, but the platform that connects them will take a cut. The main problem with this model is that as soon as these companies (e.g., Uber) have a certain number of customers, they can very easily increase their rates because customers become dependent upon them.
In contrast, blockchain enables a distributed model, whereby users can connect with each other directly, without paying a fee to a third party as they would under the decentralized model. This type of network structure allows participants to create a governance together and, using smart contracts, find a load, hotel room or whatever they need via the blockchain network. Thus, no central entity decides which results you get to see; you can see all of your options and make a decision accordingly.
End of Part I. If you are interested in learning further, read Part II here