This is How Blockchain is Digitalizing Trust
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Modern economy runs on 5 letters - TRUST. But traditionally, trust is ensured by intermediaries and central authorities - governments, trading platforms, stock exchanges etc. Remember, banks don’t lend their own money! They are just an intermediary between the depositors and those who need the money. So are insurance companies, stock and commodity exchanges. At their core, they are an aggregator of vast amounts of centralized data.
But blockchains bring in a previously unimagined source of trust without an intermediary. The trust comes from a decentralized database, without a central authority and distributed widely across millions of computers just like yours and mine.
Zoom into retail supply chains of any sector, in any country. There are several areas where participants remain distrustful of each other. The source of most distrust can be pinned down to an asymmetry in information access.
Blockchains for Supply Chains
Much ink has flown to paint a vision of how blockchains will revolutionize everything. If we were to believe all of it, very soon we will all be able to run like Usain Bolt, bat-like Virat Kohli and look like Tom Cruise. But sobering reality points elsewhere.
There could be a few high impact areas, where blockchains can solve very real and specific. Let’s talk about just two of these.
“Where did it come from?”
The day was, 14th Sep 2006, the FDA office in the US, received complaints about E.coli infection in fresh spinach. They promptly issued an alert.
Just 3 days later the Centre for Disease Control upgraded the alert to the highest level. Sales of spinach in all forms came to a grinding halt. In the days that followed, the number of people reporting sick was steadily going up. On 5th Oct, FBI took over the investigation.
After 276 people were taken ill, 141 hospitalizations, 31 people with failed kidneys and 3 unfortunate deaths, the outbreak was traced to a single brand of spinach produced in a single farm in a single state - California! But doubts had been cast on tonnes of spinach, hundreds of farmers and thousands of consumers across 28 states were affected resulting in losses worth hundreds of millions of dollars and creating panic amongst consumers.
Why couldn’t the infection be traced back to the point of origin any faster? Was it inevitable that the entire uninfected produce worth hundreds of millions also had to be destroyed? How would the suppliers even know where their produce was stocked, if they wanted to recall their products?
It is not difficult to see that our food safety comes from the traceability of what we eat. The same goes for the myriad of things we consume from medicines to the clothes we wear or the cars we drive.
The pharmaceutical industry has regularly been in news for recalls. The problems with the pharmaceutical supply chain in India are particularly acute. The governing body, CDSCO has mandated that any Class I recall has to be effected within 24 to 72 hours, and for a Class II recall within 10 days. But the logistical challenges would make the task quite impossible for even the biggest and best-managed supply chain in the country.
Every time a defective product gets into the market, the same set of questions pops up - where did it come from? Traceability remains one of the toughest problems for any supply chain. Can blockchains do something about this?
Meet the real Bankers!
In India, as in several other countries, the manufacturers sell through numerous distributors. These, in turn, buy on cash and sell on credit to the retailers. These are the real bankers to entire supply chain.
Take the pharmaceutical business. Annually about Rs.120,000 cr. of medicines are sold. The industry carries almost 7 months of stock and the distributors end up financing approx. Rs.56,000 crores !
So who bears the credit risk? How does a distributor assess credit risk? Is there any way to establish trust between these transacting parties? How do you mark the wilful defaulters?
Today data plays perhaps no role in the credit transaction. All record keeping is in obscure paper-based documents and dog-eared registers. Should that remain so?
Can two different problems of the supply chains - traceability and assessing credit risks, have a common technology solution?
Yes. Definitely yes. Both problems can be solved by blockchains. But it won’t be a walk in the garden and there are still several unknown unknowns.
Imagine you are the head of a category, say prescription medicines or a skin cream, in a retail business. You are sourcing the produce through numerous suppliers and have no clue about their origin other than what these suppliers want you to believe. How do you use blockchains to bring traceability to the source?
The journey begins with drilling down and mapping every supplier and their suppliers down to the last level including an enormous data collection exercise. Crazy as it sounds this is precisely what major retailers in the world have already done at a global scale, using conventional databases of the pre-blockchain era.
This database created a Distributed Ledger, becomes the industry standard data model for all parties in their transactions with each other. Everyone from the downstream manufacturer to the last retailer in the chain references the same ledger to read and record the transaction.
Exactly the same approach would apply to assess credit risks in a supply chain. Another Distributed Ledger, where distributors or manufacturers who extend credit sales to transacting parties gets recorded, and accessible to all.
Before you extend a credit sale, the ledger would tell you the credit the party has already availed and guide you wrt the ability of the party to repay.
Both solutions are conceptually simple to understand, but enormously difficult to execute. There are several, unanswered questions - how do you make the entire industry agree to adopt the same ledger? Would everyone agree to the openness and transparency, which are precondition to making Distributed Ledgers work? There are large swathes of businesses in every sector which have no automation and no access to digital technologies. How are they going to be participating in the digital economy run by distributed ledgers?
There are also complex technology related questions that are yet to be fully addressed. But that’s a topic for another Day.
Blockchains on steroids !
While the geeks are salivating at the potential of blockchains, the emergence of AI as a practical solution is creating a new set of possibilities.
While blockchain acts as a fabric of data and be attached to every product in the retail ecosystem, constantly accumulating data about the product. AI can use this data to help consumers, sellers, and other stakeholders in the retail ecosystem optimize their requirements. For consumers, this would be finding the right product for their need. For retailers, this would be finding the right supplier. For suppliers, this would be finding the right manufacturer.
For the ecosystem, Blockchain and AI are poised to deliver a transformative paradigm-shift that might altogether free the retail ecosystem from the tyranny of information asymmetry. These technologies might finally bring the modern retail economy the trust it has sought to operate from the dawn of human civilization.
Wrapping it up …
There is indeed a huge interest in Blockchains as a technology. But the technology is still in search of viable applications to make itself real and relevant. Retail supply chains are promising and pragmatic areas for blockchains to become relevant.
Present day economy runs on the implicit TRUST we place on printed currency notes - “I promise to pay the bearer a sum of rupees ….” and signed by the RBI governor.
The future could be just the trust we place on bits of data generated by complex hash algorithms which most don’t understand, but TRUST !