Blockchain: bridging the gap between reality and innovation

While blockchain was originally devised to enable secure, transparent and tamper-proof transactions through a decentralised ledger, its evolution has largely been overshadowed by the volatile world of cryptocurrencies.

 

However, there have always been high expectations of blockchain – the underlying technology behind crypto – to find more mainstream use cases for itself.

 

During the 2016-2018 peak of the first hype-cycle, blockchain was heralded as a cure for inefficiencies across several sectors. Yet a slew of ambitious supply chain initiatives fell apart without bringing any lasting change.

 

By early 2023, Marco Polo, a blockchain trade finance network, became the sixth failure in the space, following, among others, the demise of We.trade, a blockchain-based platform for open account trade developed by 12 major European banks and IBM, which lasted five years before shutting down after failing to secure further funding.

 

A post-mortem of failed projects

 

The story of Contour, another blockchain-based trade finance network, illustrates well why the consortium model typically adopted in these projects was doomed to fail.

 

Designed to digitise letters of credit (LoCs) – used when trading partners lack trust or operate in high-risk jurisdictions – Contour aimed to unify all stakeholders, from banks and shippers to customs authorities, on a single communication platform.

 

The use case made sense. LoCs are still largely paper-based and managed through SWIFT, a messaging infrastructure born in the 1970s, and they are making a strong case for the digital transformation of the sector.

 

However, the network effect that powered the stellar rise of social media, rideshare platforms and online marketplaces failed to materialise in the case of Contour, Marco Polo or We.trade.

 

While bankers in the consortium were excited about the efficiencies the Contour platform offered, purchasers and sellers couldn’t see its benefits. Without end-to-end adoption and with smaller banks reluctant to join, the platform struggled.

 

When funding dried up, Contour was acquired by Hong Kong fintech Xalts, which preserved its trade finance core but shifted to API-driven integration while keeping blockchain solutions only for use cases where they make business sense.

 

Such stories underscore a wider problem: even in trade finance, one of blockchain’s most promising arenas, scaling has proven elusive. But other sectors, such as provenance tracking and logistics, haven’t fared much better.

 

Maersk’s TradeLens – a joint effort with IBM to digitise shipping – was shut down in early 2023. Its failure, too, was attributed to “market apathy” and the inability to achieve commercial scale.

 

Even Walmart’s much-publicised partnership with IBM, using Hyperledger Fabric, has yielded modest results. A pilot launched in 2016 to trace pork in China and mangoes from the US now includes just over 25 products from five suppliers – a tiny fraction of the supermarket giant’s more than120,000 SKUs in its physical stores.

 

Is blockchain a solution to the wrong problem?

 

So is blockchain an unfit solution for supply chain problems, or are there other factors to blame for the lack of positive outcomes from these projects?

 

Carl Wegner, CEO of Contour, insists the technology wasn’t the problem. “No one ever challenged me about Corda [the blockchain platform it was built on]. That was the easy part. It became scalable,” he says.

 

This view is echoed by researchers Michael Lustenberger and Florian Spychiger, who in their paper, Blockchain in Supply Chains: An Unfulfilled Promise, concluded that technology limitations weren’t to blame. Instead, they pointed to the absence of network effects, limited trust among users, IT system interoperability issues and poor co-ordination on governance and business processes.

 

Blockchain solutions for supply chains have already been customised to special sectoral use cases. The enterprise blockchain solutions involved in these projects – R3’s Corda and IBM’s Hyperledger Fabric – operate on permissioned networks, which means that data is only visible to authorised participants.

 

These platforms also feature privacy tools that enable selective data sharing.

 

On Hyperledger Fabric, this is achieved by private channels, where a subset of network participants can share data confidently, while other platforms employ zero knowledge proof – a cryptographic method where the prover can verify that they are in possession of some information or document without actually revealing them.

 

Naturally, blockchain’s suitability to address supply chain pain-points also depends on the types of use cases.

 

While its benefits are easier to see when the technology is applied to a digital ecosystem, new challenges present themselves when it is used to create a bridge between the physical and the digital realms – for example, in the case of traceability-focused use-cases.

 

While the integration of blockchains into enterprise systems can have its own specific difficulties, these are compounded when data transmitted from physical items such as RFID tags and sensors, or external databases, must be fed into blockchain systems via oracles – middleware that’s not always easy to manage or trust.

 

But don’t write off blockchain’s potential in supply chains just yet.

 

Despite current setbacks and question marks over whether blockchain represents overkill for resolving the data sharing, digitalisation and automation challenges supply chains are grappling with, experimentation with blockchains is probably worth continuing.

 

Particularly when considering what may lie ahead in the medium term – a widespread use of smart contracts in global supply chains.

 

Smart contracts are blockchain-based self-executing contracts, which execute automatically if certain pre-programmed conditions have been met. In theory, these contracts could automate a range of supply chain functions, releasing payments upon delivery, initiating reorders, verifying document submissions and even enforcing LC terms.

 

The opportunities and the level of automation that smart contracts can enable are endless. The benefits they may bring to all players in a supply chain network are the perfect carrot to incentivise adoption.

Many of the hurdles facing blockchain are less about the tech itself and more about the lack of digital readiness across global supply networks.

 

What needs to be done is to get the basics of digital transformation right. Once those fundamentals are established, blockchain’s promise – particularly in automation and trust – may yet be fulfilled.

If digitalisation in supply chains gains momentum and integrations with blockchain become more effortless, buy-in will come naturally.