Articles

For Tassie exporters, paper trail risks vital trust

[This article was published in the Hobart Mercury]


Tasmania’s producers are perfectly placed to receive higher export prices by taking advantage of blockchain technology.

Applying blockchain to Tasmanian supply chains will deliver more trustworthy information to consumers, boosting prices of high-quality super-premium exports.

The State Government recently announced Brand Tasmania as a statutory body, tasked with promoting tourism and exports.

Building Tasmania’s brand is important. But this approach must be coupled with a way to ensure consumers trust the legitimacy of products

Supply chains connecting Tasmania to the world don’t just transport physical products like cherries, wild abalone or lobsters. They carry information about those products. As a customer in a Beijing restaurant, how can I know the lobster on my plate is true Southern Rock Lobster, not some cheap knock-off?

I must trust the restaurant owner, who trusts their supplier, who trusts their importer, and so on.

Particularly for high-information premium produce, there is an often-neglected type of supply chain infrastructure, one that carries trusted information between companies and across borders.

Today’s supply chains are riddled with problems. Pieces of paper pass between distributors, exporters, shipping companies and governments. This messy web of communications tries to connect hundreds of parties.

Some information is added along the way, but much is lost or tampered with.

Global food fraud estimates range to tens of billions of dollars a year. This comes from bad actors taking advantage of poor information flows. This has even happened with Tasmanian cherries. Cherries being sold in China and Vietnam were recently outed as fakes, sold in fraudulent “Tasmanian-grown” boxes.

The result is deeply damaging to a premium brand. Eventually prices will fall as premium produce is contaminated with fakes.

After the cherry controversy the industry responded by making more intricate boxes. Gold embossing and unique stickers helped deter fake cherry boxes. But this approach also cut deep into profit margins.

Luckily there’s now an alternative. Blockchain technology can carry detailed transparent information from producer to consumer.

Blockchain was invented in 2008 to power the cryptocurrency bitcoin. The technology enables data to be inputted and stored in a way that doesn’t rely on a central third party. Distributed ledger technologies are important and unique because we constantly use centralised companies and governments to update and hold information about our citizenship, medical records, bank balances, property titles.

Blockchains are different because they store information across a decentralised network. The word blockchain comes from the data structure — blocks of information chained together chronologically using cryptography. Blockchains aren’t stored and updated by a central party, making it extremely difficult to tamper with it. This is perfect for situations like supply chains where many parties need to share information who don’t necessarily know or trust each other.

What does this new distributed ledger technology mean for Tasmanian supply chains? Rather than passing pieces of paper between opaque organisations, a blockchain can act as a new digital infrastructure for supply chain information.

Each product or shipment can be given a blockchain-based digital representation.

As the lobster physically moves, information about it can be added to its blockchain-based record, forming a deeper digital identity.

This begins with the provenance of the product, but extends into its temperature and conditions during transport, such as its time at a distributor or waiting in a port.

Some information will be inputted manually by producers, or even governments as the goods cross borders. Other information will come from Internet of Things (IoT) infrastructure that automatically uploads information such as about location and whether the container has been opened.

For consumers, producers and governments, this new digital infrastructure creates a richer digital identity that can be viewed by all stakeholders.

This viability increases product integrity. Through a simple scan of a QR code, consumers can consult a tamper-proof record of a lobster all the way back to Tasmanian shores. Blockchains can provide the information that consumers are increasingly demand, such as proof of single origin or organic production.

Current supply chain processes are simply too fragmented and expensive to provide trusted information.

Thankfully there is an enormous amount of private investment in building new digital infrastructure using blockchains. IBM and shipping company Maersk have built a product called TradeLens. Australian companies and platforms such as AgriDigital, Agrichain and UCOT are also leading the charge. Given we can only expect more examples in coming months, what steps should Brand Tasmania take?

This experimental technology upgrade will require new trials and tests. New industry consortia will need to be co-ordinated and formed. And regulatory barriers and red tape removed, including at the border.

Only then will we see the full potential of this new blockchain-based digital infrastructure for Tasmanian producers, and the brand value and price premiums that come with it.

Dr Darcy Allen is with the RMIT Blockchain Innovation Hub and the Worldwide Blockchain Innovation Association.

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Articles

Why blockchain technology could be the key to solving the developing world’s biggest problems

[Together with Chris Berg this article was published at FEE.org]


The core of the free market explanation for global poverty is simple and compelling: much of the world’s poor are poor because of institutional failure.

The court systems that service the bottom billion are unreliable or hard to access. The governments impose extractive taxation. The bureaucracies are corrupt.

And some institutions are simply missing in the developing world. A lack of reliable identity services makes it hard to access financial markets. A lack of property titles, as Hernando de Soto famously wrote, makes it hard to use the capital embodied in homes.

Corruption and Monopolies

These explanations are all true. But the free market response to global poverty is insipid to the point of uselessness. Faced with evidence that institutions in developing countries are corrupt, classical liberals respond: well, don’t be so corrupt.

There are other responses, of course. We sometimes adopt the Washington Consensus approach—use the levers of political globalization to force reform on unwilling populations. Or maybe we just hope for a revolution that might turn out liberal. Neither alternatives have good track records.

The problem here is that institutions tend to be monopolies. One country has one court system, one bureaucracy in charge of property titles, one authority giving out birth certificates. To get better institutions, we have to replace the corrupt old ones, and that’s hard to do, especially given the intransigence of rent-seekers who benefit from them.

Institution Innovation

What the developing world needs is a technology of institutions—a way not to replace institutions but to create more of them, experimentally and entrepreneurially.

This is what we see in the blockchain. Blockchain technology is an institutional technology that allows multiple institutions to operate in one place. It is perfectly suited to hostile institutional environments.

There’s been a lot of work, unsurprisingly, on individual blockchain applications that might be helpful for the world’s poor: supply chains, democratic governance, and identity management for example. With these applications, blockchain might allow poor countries to leapfrog some of the stages of development—a poor country might skip the creation of the centralized institutions characteristic of the rich world and instead adopt immediately decentralized ones.

These applications don’t need to replace their competitors, and they are virtually impossible for the beneficiaries of the old order to prevent.

But we think blockchain technology offers something more fundamental than these specific applications.

It offers the possibility of creating new institutions—new algorithmic legal systems, contract dispute resolutions systems, identity technologies, mutual welfare and insurance, and public goods provision—in competition with the existing set of institutions.

For instance, the invention of a smart contracting platform could compete with existing court systems, helping to overcome the problems of hold-up or counterparty risks. The contracting parties to decide which institutional structure they wish to use—the terrestrial one or a near-infinite number of new digital alternatives.

These applications do not need to replace their competitors to function. And they are virtually impossible for the beneficiaries of the old order to prevent.

Institutional Layering

We call this process institutional layering. Blockchain institutions co-exist with existing institutions, effectively layering on top.

Blockchain entrepreneurs in developing economies don’t require international aid agencies or development experts to define economic problems and try to solve them. Rather, they apply their entrepreneurial judgment and skills to define institutional problems and use blockchains to design and test new institutional solutions.

William Easterly famously outlined the distinction between “planners” and “searchers” in economic development. Development economics has been plagued by planners implementing top-down institutions that don’t match local conditions and have a raft of unintended consequences.

Instead of working within the existing institutions, entrepreneurs can use blockchain to operate more effectively.

The capacity of entrepreneurs to search, however, is constrained by the transaction costs they face and the technologies they have available. Rather than propelling institutional change through centralized planners (whether it be through conquest or special economic zones), blockchain enables a new decentralized process of search.

Rather than forming businesses within the existing institutions, entrepreneurs can use the blockchain to more effectively operate on the level of the institutions themselves. Blockchain enables institutional entrepreneurs to search by operating on the governance or “protective-tier” level of entrepreneurship.

Now entrepreneurs can search, discover, and deploy new governance mechanisms. They can attract users by better economizing on transaction costs than alternatives.

Polycentric Institutions

The process of institutional layering will also be more polycentric. Rather than having centralized institutions attempting to fit over broad groups of people within a geographical nation-state, entrepreneurs will, over time, discover the necessary levels of institutional rules within regions and across borders.

Another ongoing problem of institutional change in the developing world is aligning formal institutions with the underlying informal norms. Blockchain-based institutional layering—using governance approaches developed by local entrepreneurs—might better match the underlying norms, or what James C. Scott describes as metis.

New, digital, uncensorable, trustful institutional technologies open up enormous opportunities for decentralized economic development.

Because blockchain institutions are built from the bottom-up and draw on local entrepreneurial knowledge, we might see greater levels of institutional stickiness, where formal blockchain institutions better match underlying norms and therefore are embedded and longer-lasting.

Our argument risks techno-utopianism. We are confident that blockchain—or successor distributed ledger technologies not yet invented—might solve several institutional problems within the developing world. It will not, of course, solve all of them.

Nevertheless, the invention of a class of new, digital, uncensorable, trustful institutional technologies opens up enormous opportunities for decentralized economic development.

And it allows the same entrepreneurial creativity that has driven prosperity in the rich world to be turned to the causes of poverty in the developing world.

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Journal Articles

Blockchain and supply chains: V-form organisations, value redistributions, de-commoditisation and quality proxies

Published in The Journal of the British Blockchain Association

Abstract: We apply institutional cryptoeconomics to the information problems in global trade, model the incentives under which blockchain-based supply chain infrastructure will be built, and make predictions about the future of supply chains. We argue blockchain will change the patterns and dynamics of how, where and what we trade by: (1) facilitating new forms of economic organisation governing supply chain coordination (such as the V-form organisation); (2) decreasing information asymmetries and shifting economic power towards the ends of supply chains (e.g. primary producers); (3) changing the dimensions along which we can reliably differentiate goods and therefore de-commoditising goods and disaggregating price signals; and (4) decreasing consumer reliance on quality proxies (e.g. production within national borders).

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Articles

Predictions for trade in a blockchain world

[Together with Alastair Berg and Brendan Markey-Towler this article was published at Machine Lawyering]


As goods move from producers to consumers, information about those goods must travel with them. Where did a product come from? Is this wine fake? How fresh is this lobster? Modern supply chains, however, are remarkably long and complex. This complexity makes it costly to produce trusted information about goods. Blockchain and other distributed ledger technologies are poised to help lower information costs, potentially expanding and reshaping global trade.

At first it isn’t clear why we should care about trade costs. Reducing trade costs might make our goods a bit cheaper, but what is the potential longer term impact? Finding new ways to bring down the costs of trade is important because it expands the number of trades that are possible, propelling growth and prosperity.

The standardised shipping container was invented mid-way through the last century. Alongside other new technologies such as air freight, it helped transportation costs plummet. Other technologies, such as the formation and success of international trade negotiation bodies (e.g. the World Trade Organization) lowered the regulatory costs of trade. Average worldwide import tariffs fell from around 8.6% in 1960 down to 3.2% in 1995.

Today a different form of costs dominates the frictions in global trade: information costs. We can think about goods as having different attributes: provenance, age, quality, physical location, and so on. Consumers often want to know a product’s provenance. Producers want to know who their final market consumers are. Governments want to know if goods comply with domestic regulations like biosecurity laws.

But where does this information come from? Who produces it and ensures its accuracy? Today we tend to rely on paper-based communications between hundreds of companies along a supply chain. Even when those communications are digitised, they spend much time within, and moving between, confined hierarchies.

As a new institutional governance technology for decentralised ledgers, blockchain might provide a better way. Coupled with other technologies such as the Internet of Things (IoT), blockchain can be applied as a governance mechanism to store and validate a ledger of information about goods.

It would be easy to suggest that blockchains will simply decrease the costs of supply chains and make consumer goods cheaper. In our recent working paper at the RMIT Blockchain Innovation Hub, we draw on economic theory to predict how blockchain might shift how and where we trade, leading to fundamental changes to globalisation.

First, we anticipate de-commoditization of economic goods. Many of the goods we buy are sold for the same price even where their underlying characteristics differ. Those goods are not sold in the same market because they are objectively the same, but because they cannot be economically or reliably differentiated due to information costs. We expect this over-commoditization to be most prominent in markets for luxury or perishable goods, where uncertainty is built into a single market price.

To the extent blockchain trade infrastructure provides deeper and more reliable information, goods can be de-commoditized and be sold in separate markets. Over time we expect price signals to disaggregate—put simply, there will be more prices—and ultimately facilitate better market coordination.

Second, blockchain trade infrastructure might shift economic power and therefore value to the polar ends of supply chains. Supply chains are plagued by information asymmetries—where some party holds information that another does not. These information asymmetries lead to market power. For instance, a primary producer of coffee in a developing economy might lack information about their final consumers or the price at which their coffee is eventually sold, restraining them from seeking new markets.

Information asymmetries persist for many reasons, one of which is a lack of incentives for actors along a supply chain to provide that information. By providing more transparency along the supply chain, blockchain might reduce information asymmetries for producers and consumers.

As a result producers of premium products might be able to charge premium prices, while consumers could more dynamically shift between different supply chains, for instance based on their appetite for organic produce. This suggests greater competition between suppliers of similar goods regardless of existing trade relationships.

Our final prediction is a reduced reliance on quality proxies, including national borders. As consumers we regularly rely on proxies to determine the quality and legitimacy of a product (such as brand reputations and production within national borders).

As uncertainty declines over the precise characteristics of a production, however, we would anticipate that the reliance on proxies as a measure of the quality of a product will diminish. Consumers will be able to more effectively rely on the specific attributes of a product. The longer-term effect might be to shift what products are produced within economies who currently suffer discrimination due to their reputation (perhaps for food and safety regulations).

We have outlined three predictions in this post. Those predictions are necessarily speculative and will play out through as an entrepreneurial and evolutionary process of search and discovery. What can we do in the meantime? Elsewhere our colleagues have suggested the need for open standards and a crypto-friendly policy sentiment, enabling entrepreneurs to build this new blockchain-based trade infrastructure—only then will we see if our predictions are correct.

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