Consortial Blockchain Implementations in International Trade
Blockchain and IoT technology have the potential to support the realization of Industry 4.0 and reshape foreign trade operations. In a future where autonomous machines automatically interact and operate, trust is vital. The integrated use of the technologies seems to be part of the solution to this future. This article deals with implementation approaches and aspects which have to be taken into account when wanting to implement blockchain-enabled IoT solutions in the context of international trade.
Authors: Jens Herchenröder, Marcel Kaiser, Philipp Sandner
Why blockchain is a crucial factor in the industrial IoT sphere
Several factors point to the importance of distributed ledger technology in IoT applications: First, a centralized architecture may not be suited for the mass interconnection of devices (Reyna et al. 2018; Makhdoom et al. 2019). Gartner (2017) predicted that by 2020, there will be over 20 billion IoT units. Secondly, DLT offers capabilities that facilitate the Internet of things, which is an essential part of Industry 4.0 operations (O’Marah, 2017; Bugaiov, Litzel, 2019). Thirdly, transparency (Laurent, et al., 2017) in foreign trade can be improved by a number of promising applications of Blockchain technology (Hackius, 2017).
Possible obstacles for implementation
From a technological standpoint, interoperability, scalability, as well as the interlinkage of physical and digital information continue to pose problems (Reyna et al., 2018). Nevertheless, many technical flaws will be resolved within the next years. The future will show which technological standards (e.g. DLT, platforms, etc.) will prevail. The most significant challenges are external and internal in nature. External factors include regulations and legal implications of the technology. The development of legal frameworks has picked up speed over the last year (for example in China or Liechtenstein). However, much still remains to be clarified before the implementation of projects can be realized on a large scale. Internal factors include the mindset of enterprises and their willingness to undergo a paradigm shift towards decentralized architectures and loss of control. Many of these challenges materialize in consortia (Ganne, 2018).
In this context, the iBlockchain research project pursues the goal of clarifying how internal and external challenges can be relieved by researching the coordinative function of DLT based systems in the industrial context. For example Herd et al. (2018) show that buyers’ uncoordinated decision making can lead to disadvantageous market configurations (i.e. oligopolies), especially in the context of decentralized coordination mechanisms. In other words, rational outcomes of uncoordinated decision-making processes can provide lower social welfare. Therefore the project’s goal is to find out how a decentralized internet of things can avoid platform monopolies arrogating most of the markets and thus making participation for agents less attractive. This example has been established for the internet as a whole in Ciriani (2017).
iBlockchain aims to decentralize today’s central, proprietary platform approaches in the Industry 4.0 environment to federated structures by using blockchain technology. It is made up of universities, industrial companies, and blockchain and IoT experts. Optimally, the project will result in a marketplace structure that circumvents platform monopolies. More information can be found in the remarks below.
Status quo: foreign trade and its potential
Herchenröder (2019) summarizes in his work: Many use cases in foreign trade can be associated broadly to trade finance or track and trace. As cross-industry solutions are the most meaningful in this domain, it is no surprise that several consortia have been formed. These should involve as many players in the supply chain as possible. Eventually, the more supply chain participants (e.g. corporates, logistics companies, etc.) join, the greater the advancements. Unfortunately, the revolution of the industry will not come naturally to foreign trade practitioners. The great opportunities of the technologies can only be achieved through hard consortia work and sacrifices (e.g. surrender perceived control to the resulting architecture). Mindsets have to shift, which can take years. As competitors and parties with different interests come together, wise consortia governance becomes essential. In these situations, third-party moderators can support. Ultimately, not all companies will be able or willing to undergo this transition. Only the future will show which companies will leave their “comfort zone” and achieve the advancements of these emerging technologies.
Only few have recognized that the synergies of integrated use of IoT and blockchain can solve many of the challenges the technologies are facing today. This makes blockchain a potentially suitable technological foundation for IoT, whilst IoT enables the expansion of blockchain technology into the domain of physical transactions of goods (Reyna et al. 2018; Makhdoom et al. 2019). Especially in foreign trade, where transparency is amongst the major weaknesses of current applications, traceability is urgently needed in order to comply with regulations, respond to consumer needs, and increase efficiency. Not only does the utilization of the technologies reap several benefits, but its use may even be required to operate the Internet of things (Korpela et al. 2017; Sharma et al. 2018; Pureswaran et al. 2015). This is because central architectures, which are currently the standard for the IoT, might not be scalable enough to handle the projected masses of IoT devices and their created data in the future. When referring to the architecture, a more open and interconnected approach is needed to overcome today’s siloed landscape, which has resulted from the current cloud architecture of IoT operations (Reyna et al. 2018; Makhdoom et al. 2019).
How is DLT applied in international trade?
DLT could provide a solution to the above challenges. Numerous exemplary applications for this are available today. In Herchenröder (2019), use cases were clustered and sub-categorized. It was found that applications in foreign trade, which are related to tracking and tracing or trade finance typically commonly make use of private-permissioned blockchains. Tracking and tracing use cases can be clustered into sub-categories, such as counterfeit prevention, food safety (which can be seen in figure 1), and provenance, following industry-specific differentiation. In the trade finance sector, use cases deal with e.g. letter of credit digitalization or SME financing.
Herchenröder (2019) finds that most use cases in the area of foreign trade are making the most sense when they are applied as an industry-wide solution. Amongst lessons learned from interviews in Herchenröder (2019) were thoughts on the disparity of participants, its commonly shared concerns and ways to tackle challenges. Typical discussions in consortia focus on topics such as the sharing of private information amongst the competition. This, for instance, can be mitigated by selecting the right blockchain standard, which might vary from sector to sector.
Issue: cyber security in freight and international trade
Major cost elements in large enterprises are related to legal proceedings, capital lockups, quality assurance, and accounting. However, many companies have not recognized the importance of cyber security in order to save costs next to these areas (Corner, 2014). This is especially true in freight-related contexts. The sector has been heavily hit by cyber-attacks (Schwartz, 2018) which could have been mitigated by the described track-and-trace technology based on a consortial / enterprise blockchain. For example, one of the largest blockchain companies by revenue, personnel, and customer deployments, some companies are active in the cyber security sector and have a remarkable track-record of applying blockchain technology as a safeguard for data security. They also are active in multiple sectors around security in IoT and prove that this is a profitable blockchain use case. Thus, for a sector as important and sizeable as international trade, erecting modern DLT-based cyber resilience is an achievable goal.
Conclusion
In conclusion, IoT and blockchain applications in foreign trade have a high potential to circumvent many issues like cyber security, lack of transparency, traceability. Unclear governance poses one of the remaining challenges for consortia and blockchain applications in general. iBlockchain has, in a recent article proposed a governance structure for an open, decentralized IoT marketplace and is currently researching how governance has to be designed in order to be incentive-compatible in different scenarios. Members of consortia targeting a DLT based IoT application must cautiously evaluate the trade-off between retaining- and letting go of control. Thus, it is even more important that incentives for all participants are taken into account. Early movers may benefit from considering the implementations of these emerging solutions. Nevertheless, timing, size, and composition of the respective consortia play a vital role in successful implementation as well.
Literature
Bugaiov and Litzel, 2019: So revolutioniert die Blockchain die Industrie 4.0
Corner, 2014: Billions spent on cyber security and much of it ‘wasted’. Sydney Morning Herald.
Ganne, 2018: Can blockchain revolutionize international trade. World Trade Organization.
Gartner, 2017: Gartner report (2017).
Hackius, 2017: Blockchain in logistics and supply chain: trick or treat? Proceedings of the Hamburg International Conference of Logistics (pp. 1–19).
Herchenröder, 2019: Which blockchain use cases in the area of foreign trade and internet of things make sense?
Herd et al., 2018: Towards the model-based analysis and design of decentralised economies of things
Korpela et al., 2017: Digital supply chain transformation toward blockchain integration. Proceedings of the 50th Hawaii International Conference on System Science (pp. 4182 -4191).
Makhdoom et al., 2019: Blockchain’s adoption in IoT: The challenges, and a way forward. Journal of Network and Computer Applications (pp. 251–279).
O’Marah, 2017: Blockchain for supply chain: enormous potential down the Road. Forbes.
Pureswaran et al., 2015: Empowering the edge practical insights on a decentralized internet of things. Somers: IBM Insititute for Business Value.
Reyna et al., 2018: On blockchain and its integration with IoT. Challenges and opportunities. Future Generation Computer Systems, (pp. 173–190).
Schwartz, 2018: How Maersk proved its ‘herculean resilience’ after malware devastation. CIODive.
Sharma et al., 2018: A software defined fog node based distributed blockchain cloud architecture for IoT. Seoul: IEEE Access.
Remarks
This research and development project content was partially funded by the German Federal Ministry of Education and Research (BMBF) within the funding number 16KIS0906 and implemented by the VDI/VDE Innovation + Technik GmbH. The authors are responsible for the content of this publication.
If you like this article, we would be happy if you forward it to your colleagues or share it on social networks. If you are an expert in the field and want to criticize or endorse the article or some of its parts, feel free to leave a private note here or contextually and we will respond or address.
More information about the iBlockchain research project can be found here.
More information about the Frankfurt School Blockchain Center can be found here.
Jens Herchenröder is a Master in Management Alumni of Frankfurt School with some years of experience in the foreign trade sphere, IT and logistics. In his Master’s Thesis “Which Blockchain Use Cases in the Area of Foreign Trade and Internet of Things Make Sense?” he observed the landscape of blockchain and IoT use cases in foreign trade through expert interviews. Feel free to contact him via mail (jens.herchenroeder@fs-students.de), LinkedIn or Xing.
Marcel Kaiser is a project manager and research assistant at the Frankfurt School Blockchain Center (FSBC). His expertise is primarily decentralized finance (DeFi) and industrial blockchain applications. He analyzes the impact of blockchain technology on the economy in his master thesis. He speaks at public events about topics like Libra, quantum cryptography and blockchain in general. Feel free to contact him via mail (marcel.kaiser@fs-blockchain.de), LinkedIn or Xing.
Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner, in particular, includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@philipp-sandner.de) via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).
