To use blockchain to radically change supply chains, we will need the right players around the table—from farmers to workers and factory owners; from financiers to global buyers and government officials.
In this thought piece, Tara Norton, Managing Director, and Michael Rohwer, Associate Director, of BSR discuss the potential of using blockchain towards supply chain sustainability, and what is needed to reach these goals.
We need to talk about blockchain. Blockchain offers immense opportunities to achieve business and sustainability goals, but it is going to take serious collaboration to unleash its full potential.
Companies are experimenting with applications of blockchain to reach competitive objectives, and why wouldn’t they?
But blockchain is not software as a service: the promise of the distributed ledger system is to radically change a system; it provides a unique opportunity to create accountability, transparency, and privacy all at the same time. This is appealing at a moment when trust in institutions is declining. Blockchain offers the very real possibility to truly transform supply chains—to create the transparent, traceable, equitable supply chains that many of us envision. And to do that, we need collaboration, not competition.
When to Consider Blockchain
Companies and global organizations are starting to apply blockchain to solve problems. Some companies are creating smart contracts that only execute when sustainability or other conditions are met. Others are using it to overcome “first mile” traceability challenges, where tracking a commodity in the first instance is difficult in the absence of formal markets or identities. There are burgeoning applications that create identities and payments for farmers or miners where formal markets are scarce—and applications that identify exactly how your tuna got into that can. There are even opportunities for companies to trace the origins of their electricity back to its source.
We’ve identified four situations where a collaborative blockchain effort may be a particularly effective solution:
- When there is fraud or lack of trust in a system;
- When there are multiple parts to a transaction;
- When there is alleged inequity at key points in a system; and
- When there is a need to align disparate incentives in a system.
These are situations wherein a central authority is an impediment; where blockchain’s decentralized, distributed approach can create trust, transparency, and security. Some or all of these situations likely arise at some point in your supply chain. However, it misses the point of decentralization for individual companies to apply this technology independently in their own supply chains, particularly when companies’ supply chains overlap. Collective action will be more effective.
Consider this: If a blockchain solution for traceability in sustainably grown cotton is not trusted by the spinners and thus not used, the value of that cotton gets lost before it is even spun into thread.
If apparel companies haven’t agreed on the kind of data they’d like to see or the underlying blockchain fabric to use before deploying a solution, they risk a duplication of systems, which would run fully counter to the blockchain promise.
The Weakest Links in the Blockchain
Another compelling reason for collaboration is that the world of blockchain is still the wild west. It’s easy to forget that there are currently a limited number of live projects, most still in pilot phase, many of which will never emerge beyond that phase.
There are risks of blockchain we don’t fully understand or even know about yet. There are also risks that we are aware of: First, blockchain is inherently virtual, which can heighten the likelihood of dealing with unsavory actors.
Second, the energy demand for certain blockchain systems can be astronomical. While new designs are coming into practice to mitigate that energy use, it remains a consideration.
Third, blockchain is not immune to the “garbage in—garbage out” challenge; much needs to be done to ensure the information entered into a blockchain is an accurate digital recording of what is happening in the real world.
Finally, information security is critical. A well-designed system should be secure and very difficult to access, but experts agree that it could be possible to hack a blockchain.
How to Realize Blockchain’s Potential
Critics may say that blockchain is overhyped, but it should not be underestimated. According to Joseph Lubin, one of the founders of Ethereum and now Consensys, “It took about 10 years from when the world wide web [started] … to when my mother started hearing about email.”
This is a critical moment for the sustainability profession—a moment to come together around big ideas, like accountability, transparency, and privacy, and be the change we want to see.
To use blockchain to radically change supply chains, we will need the right players around the table—from farmers to workers and factory owners; from financiers to global buyers and government officials. We are just at the beginning of this journey, and at BSR, we are optimistic about the prospects of collaborating to leverage this technology in service of a better world.