What’s the Value of Blockchain?
A few weeks ago I attended the IBM Blockchain Summit 2017 in New York. The Summit included a number of talks and panels, and - most important, - presentations of concrete blockchain use cases IBM has been working on in a number of areas, including finance, supply chains and healthcare. Such real-world use cases are particularly important when introducing a new, complex set of technologies in the marketplace. They’re the best way of getting on the learning curve for the new technologies as well as of explaining the kinds of problems they help us address.
Blockchain has the potential to transform our economic and social systems, but such a transformation is still many years away. Like the Internet, blockchain is a foundational technology, whose adoption process is gradual, incremental and steady, unlike the hockey stick adoption we typically associate with disruptive technologies as defined by Clayton Christensen 20 years ago. Foundational transformations must overcome many barriers, - technological, organizational, governance, political, - which is why they take a long time to play out.
Lest we forget, TCP/IP, - the communications protocol that defines the Internet to this day, - was first adopted in the mid-1980s. So were the protocols used in e-mail, - the first widely used Internet application which enabled its user base in government, universities and research institutions to easily communicate with each other. It wasn’t until the late 1980s that the Internet was first opened up to public, commercial users. General Internet adoption took off a few years later with the advent of the World Wide Web and the Web browser, and its transformational power wasn’t fully evident until the late 2000s, with the explosive growth of smartphones and the mobile Internet.
The concrete uses cases presented by IBM as it defines its blockchain strategy brought to mind the approach we took in the early days of formulating IBM’s Internet strategy, which I was closely involved with.
We did so by establishing an early market presence, including highly visible experimental web sites like the 1996 Atlanta Summer Olympics, as well as joint projects with clients such as LL Beans’s first e-commerce site. We developed a number of concrete prototypes working closely with customers across a variety of industries, from which we learned a lot about requirements for products and services. Market experimentation and concrete uses cases were critical to what became our e-business strategy, and they’re now equally important in formulating blockchain strategies. Let me discuss three such blockchain use cases IBM has been working on.
The first is an interesting, easy-to-understand dispute resolution application recently launched by IBM’s Global Financing (IGF) unit. IGF provides over $40 billion of financing to the IT channel annually and processes over 35,000 returned IT assets per week around the world. Its commercial financing business provides working capital to IT suppliers, distributors and business partners through financing of inventory and accounts receivables.
Managing and resolving disputes take considerable time and resources. Every year, around 25,000 disputes take place among IGF’s 4,000 partners and suppliers worldwide, tying up over $100 million of capital at any given time. It takes on average 44 days to resolve a dispute. Suppliers, for example, assume that when products are shipped their task is over and they will soon be paid. But business partners will file disputes and put payments on hold if the product was not delivered on time or at all, or if it’s not the right product. IGF then has to monitor the dispute interactions between partners and suppliers, and recover money financed to partners while doing its best to keep customer satisfaction high.
To address this problem, IGF developed a blockchain solution to significantly improve the resolution time and free up the capital tied up in common customer disputes, which is nicely explained in this short video. The blockchain provides an immutable, non-reputable record of events through the entire transaction cycle to suppliers, business partners and IGF. This increased visibility and trust has reduced the dispute resolution time from over 40 days to under 10, with a 40% reduction in the capital tied up in the dispute.
In early March, an article in the NY Times discussed two other IBM blockchain use cases, one with Walmart focused on the safety of the food supply chain, and the other with Maersk to manage the supply chain for container shipping around the world.
The IBM-Walmart partnership aims to track the shipment of foods from their source, so if something goes wrong, - such as an E.coli or salmonella outbreak, - the foods in question can be quickly identified and pulled off grocery shelves or restaurant menus. As a first step, IBM, Walmart and Tsinghua University, - a top research university in Beijing, -are using blockchain technologies to track the movement of pork from Chinese farms to Chinese stores.
“With blockchain, food products can be digitally tracked from an ecosystem of suppliers to store shelves and ultimately to consumers,” noted the IBM press release. “When applied to the food supply chain, digital product information such as farm origination details, batch numbers, factory and processing data, expiration dates, storage temperatures and shipping detail are digitally connected to food items and the information is entered into the blockchain along every step of the process. Each piece of information provides critical data points that could potentially reveal food safety issues with the product. The information captured in each transaction is agreed upon by all members of the business network; once there is a consensus, it becomes a permanent record that can’t be altered. This helps assure that all information about the item is accurate.”
The third use case is about global trade. Ninety percent of the goods involved in global trade are handled by the ocean shipping industry each year. The IBM-Maersk project aims to help the industry by developing a blockchain solution to manage global transactions among networks of shippers, freight forwarders, ocean carriers, ports and custom authorities.
“For Maersk, the problem was not tracking the familiar rectangular shipping containers that sail the world aboard its cargo ships - instead, it was the mountains of paperwork that go with each container,” said the NY Times article. “Maersk had found that a single container could require stamps and approvals from as many as 30 people, including customs, tax officials and health authorities. While the containers themselves can be loaded on a ship in a matter of minutes, a container can be held up in port for days because a piece of paper goes missing, while the goods inside spoil. The cost of moving and keeping track of all this paperwork often equals the cost of physically moving the container around the world.”
“What’s more, the system is rife with fraud. The valuable bill of lading is often tampered with or copied to let criminals siphon off goods or circulate counterfeit products, leading to billions of dollars in maritime fraud each year. Maersk and IBM began working on a version of its software that would be open to everyone involved with every container. When customs authorities signed off on a document, they could immediately upload a copy of it, with a digital signature, so that everyone else involved - including Maersk and government authorities - could see that it was complete. If there were disputes later, everyone could go back to the record and be confident that no one had altered it in the meantime. The cryptography involved would make it hard for the virtual signatures to be forged.”
I found these three concrete use cases quite useful to help explain the promised value of blockchain. As a recent Harvard Business Review article noted: “TCP/IP unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge.”