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January 17, 2022

Blockchain in supply chains - a must or a maybe?

Current issues with supply chain management

Supply chain management is one of the biggest challenges faced by modern-day businesses. In addition to spending a tremendous amount of time and resources on investigating inefficiencies and identifying pain points along the chain, a lack of visibility also holds reputational risks. Increasingly, companies are held responsible for the social and ecological impact along their supply chains, going beyond their direct business activities. For instance, fast-fashion retailers have recently been criticised by the media and by consumers for the use of forced labour by their sub-suppliers. In addition, new laws are being passed or discussed across Europe such as the German Supply Chain Act (Lieferkettengesetz) that holds companies responsible for the human rights abuses of their suppliers.

Businesses often struggle to obtain information with regard to the sustainability and processes along their products’ supply chains. The necessary data about these upstream impacts is often not accessible downstream since supply chains are highly fragmented and information is lost with each transaction.

What exactly is blockchain? 

Whilst blockchain is best known for its use in cryptocurrencies like Bitcoin, its applications go much beyond virtual currency. So what does blockchain in supply chains actually mean?

In order to answer that question, it is first necessary to understand how blockchain actually works. Blockchain technology is at its very core a database, distributed across many servers in a network. The biggest difference between traditional databases and a blockchain is how the data is stored. Traditional databases use e.g. tables or graphs while blockchains structure data into chunks (blocks) which are stored in sequential batches, linked together and distributed across the whole network. Each block of data includes a timestamp to indicate when it was created, historical information about the blocks that precede it and information that is new to that block. This is one of the reasons why blockchains are resilient to alteration - because once recorded, the data in one block cannot be changed without changing all subsequent blocks.

The process of creating new blocks is called mining or validating. It cryptographically validates the information on a block. Each block must be agreed upon by the majority of nodes in the blockchain network. There are two major decision mechanisms that are used by various blockchains: proof of work and proof of stake. On the one hand, proof of work means that one party proves to the other that a certain amount of computational effort has been spent. Large cryptocurrencies such as Bitcoin and Ethereum are using proof of work as a method to validate new blocks. Miners, who are getting paid for their work as auditors, have to solve increasingly hard math problems (ergo spend money on electricity) and in return receive cryptocurrency. This leads to an enormous energy consumption which is widely criticised. Proof of stake on the other hand means that a validator (equivalent to a miner) needs to stake a certain amount of the respective cryptocurrency to validate a block. If they validate a malicious block they lose their stake. This leads to a considerably lower energy consumption but is more complicated to implement.

What blockchain can do for supply chain management 

While cryptocurrencies are usually the most cited applications of blockchain, there is a lot of excitement for using blockchain in supply chain management which might stem from their conceptual similarity: on blockchains, each block is attached to the previous one while in supply chains each actor interacts with the next and previous actors along the chain. 

The biggest benefit of using blockchain for supply chain management is traceability. Essentially, blockchain allows organizations to store information about transactions and their impact in an immutable and transparent way, ensuring that information about upstream events arrives downstream unaltered. Since every actor has their own copy of the chain, it cannot be tampered with, which increases transparency and trustworthiness of the provided information.

Increased transparency in supply chains can be used to implement more ethical and sustainable sourcing strategies, since the immutability of the blockchain makes it easier to verify where materials and goods come from and who had access to them at what time. This improves compliance with regulations as visibility is improved. This doesn’t necessarily mean that all details about a supply chain have to be publicly visible in order to be credible. Protocols such as zero knowledge proof can ensure that information is automatically verified while the details remain hidden. As blockchain increases in popularity as a tool, platforms are now developing to offer blockchain services specifically tailored to supply chains.

Blockchain and seedtrace 

At seedtrace our use of blockchain is very much focused on proving the impact along the various steps of a supply chain. Our solution provides a tamper proof way of verifying claims a company is making about its impact. In order to do so, we are working with a dedicated partner: Topl. 

The Topl blockchain is purpose-built for impact tracking, tokenizing and monetizing. This means that the Topl blockchain is public and permissionless, extremely low in energy use and available at low, stable transaction costs. One of the key benefits of the Topl blockchain is that it uses a proprietary proof-of-stake protocol that guarantees the highest level of security while still using 10 million times less energy than early blockchains like Bitcoin. As a result, the carbon footprint per transaction is close to zero.

Together with Koa, a cocoa producer from Ghana and Switzerland, seedtrace set out to solve one of the biggest challenges in the cocoa industry: unfair labour conditions and exploitation along the supply chain. Together with Koa we are building an automated system that verifies each transaction to smallholder farmers, stores it irreversibly on the Topl blockchain and makes it easily accessible through the seedtrace platform. This enables Koa to prove the payments to their suppliers as well as to consumers - making their supply chain as transparent as possible.

Do you want to build crucial trust with your customers, but aren’t yet a user of the seedtrace transparency solution? Our supply chain transparency platform uses blockchain technology to help businesses credibly demonstrate their social and ecological impact. Businesses can easily collect all of their impact information in one place and then share it with customers and stakeholders, helping them to achieve full transparency, step by step. If you’re interested in increasing customer loyalty, engagement, and willingness to pay through supply chain transparency, please get in touch to have a chat - we’d love to speak with you!

Many thanks to our blockchain partner, Topl, for helping us with this blog post. 

Sources 

https://www.ibm.com/topics/what-is-blockchain

https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/

Topl, Interview December, 2021

https://hbr.org/2020/05/building-a-transparent-supply-chain

https://www2.deloitte.com/us/en/pages/operations/articles/blockchain-supply-chain-innovation.html

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