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How a new technology can interrupt the global supply chain

An interdisciplinary team from MIT, Wharton and Boston College has created a new blockchain-based system that has the potential to break the global supply chain. Called "b_verify", the system is designed to help small and medium-sized businesses, particularly those in developing countries, obtain financing from credit institutions on potentially better terms while reducing fraud on warehouse depots. The system brings more transparency to a fundamental part of the supply chain, which can have a major impact on the financing of global trade. B_verify introduces a series of bespoke blockchain technological innovations to facilitate the management of finance and operations management.

"The potential benefits are vast and global," said Gerry Tsoukalas, a professor of operations, information and decisions from Wharton, who was part of the team. Small and medium-sized businesses, he said, represent the backbone of many economies in the world and account for more than half of jobs and a third of global GDP. But despite the scale and impact, these companies have more difficulty obtaining funding than the largest consolidated companies. He said the World Bank estimates that the global funding gap is $ 2.6 trillion.

Even small and medium-sized enterprises have difficulty obtaining loans on terms that are as favorable as those obtained by large companies, because they usually lack the track record and reputation of the latter. Banks would normally charge higher interest rates or impose greater restrictions on loans to small businesses because they are less certain than repayment. Add to the mix the propensity to fraud, especially in developing countries, and smaller firms have the worst end of the proverbial stick. "Getting loans at reasonable rates can be very difficult for small businesses," said Tsoukalas.

Enter b_verify. "The use of blockchain platforms [like b_verify] it has the potential to redefine global supply chain operations by democratizing operational transparency, "said Nikolaos Trichakis, a professor of MIT's operational management department, who was part of the team, which includes the computer scientists Henry Aspegren (MIT and Tsinghua University) and Mark Weber (IBM and MIT), worked with the Mexican government and Ukrainian entrepreneurs, and also conducted field visits on the road to inventing a new system incorporating both public and private blockchain elements. emphasize that you can access b_verify cost-effectively via smartphones and tablets without the need for advanced technologies.The creators are also giving away open-source software for free.

What is B_verify?

When a bank or other credit institution makes a decision whether or not to grant a loan to a company, it will evaluate the creditworthiness of the business or the ability to repay. Generally, the stronger the business, the better the possibility of repaying the loan and therefore will obtain more favorable loan terms. With small and medium-sized businesses, it may be more difficult to assess the true state of their business because not much information is available. As such, loans to them are seen as riskier; lenders offset the risk by charging higher interest rates or by giving stricter lending conditions.

"The potential benefits are vast and global". -Gerry Tsoukalas

What happens if the lender can accurately verify what a business is really doing? Smaller companies will benefit more than large companies because they can benefit from better financing conditions than they otherwise would, as there will be reduced risks for the lender. The team developed b_verify to do just that, as detailed in the research document "Blockchain and the value of operational transparency for supply chain financing". The authors are Tsoukalas, Jiri Chod of Boston College, Trichakis, Aspegren and Weber.

Through a blockchain-based app, b_verify allows lenders to easily control a company's inventory transactions because they do not have to send people to monitor operations on-site or rely on easily forgeable records. In turn, this has two important implications: first, stable inventory can be used more credibly as a loan guarantee. Secondly, as shown in the document, even in the absence of any guarantee, the transaction record itself opens a window of transparency in the operations of the company.

The team believes that by observing inventory transactions, lenders will get a more accurate picture of the health status of a company's business than they might otherwise simply by observing loan applications. (Some banks consider the conditions of the loan to make inferences about the health of a company: for example, the larger the amount of the loan, the better the expansion of the business, but a business it can more easily inflate the size of the loan required to give this impression than to order more inventory.)

How does it work

B_verify uses blockchain technology because it is a cryptographically secure or practically inaccessible database. (Previous attacks of the Bitcoin blockchain were made on the margins, as in the case of the cryptocurrency exchange level, not the blockchain database itself.) As a distributed master book in which all participants have a copy of the records, the blockchain makes the falsifiable transactions almost impossible. Moreover, blockchain is a system in which members do not have to trust one of the other to make it work.

The team considered both public and private blockchains. The Bitcoin blockchain is an example of a public one, to which anyone can participate and the participants are identified only by a cryptographic key. Private blockchains are those in which members are invited to participate and are typically managed by an entity, such as a company. However, they are not completely decentralized, they have difficulty in downsizing to obtain adequate security guarantees and involve relatively large infrastructural costs. Public blockchains do not have these problems, but they often lack some things that are in private blockchains, such as verifiable identification of the parties, data privacy and the costs of transactions controlled on the network, according to their article.

"The use of blockchain platforms [like b_verify] has the potential to redefine global supply chain operations by democratizing operational transparency. " -Nikolaos Trichakis

"Using a private blockchain means losing the properties that made the blockchain famous in the first place," Weber said. "Bitcoin has paved the way for a specific type of distributed register technology in which a large number of nodes creates consensus on successive blocks of information, each block pointing to the previous one, thus making the sequence interdependent. the more independent nodes are the one from the other, the more secure the register is, this security is provided with high energy and transaction costs ".

"The Bitcoin network has become so secure, we refer to its ledger as (practically) immutable," Weber continued. "But this property is lost if you use a smaller closed network controlled by an intermediary or a group, which is what the so-called private blockchains do," he added. "There's nothing wrong with delegating trust to an intermediary, but in this case, it makes little sense to use a blockchain system architecture, except to exploit the" hype ".

The problem facing the team is that they needed both public and private blockchain elements for their purposes. That's why they decided to create a hybrid: b_verify. "At a high level, public blockchains like bitcoins are lacking in privacy, which is essential in supply chains." Private blockchains have no size and therefore security, "said Aspegren. "B_verify uses unique innovations to fill these gaps, which is designed as a" thin "protocol that uses (does not replace) the existing Bitcoin infrastructure or any secure public blockchain, while ensuring privacy."

On the ground, this is how b_verify would work: a farmer who brought crops into the warehouse placed the goods on a digital scale connected to the Internet. The quantity of goods would be weighed and recorded. A warehouse employee would manually confirm the weight. If all three are in agreement, they will have to sign with their private digital keys. Then the inventory would be sent to a server running the b_verify protocol for processing and registered in the public blockchain. Creditors can access these records to check inventory as collateral and transaction history. If all goes well, the loan is approved.

Uses and practical limits

As part of their research, Trichakis and Tsoukalas have investigated how businesses should finance their operations. In 2015, they visited a warehouse in Italy that kept the Parmesan cheese, used as a loan guarantee. (The bank owned the warehouse and had essentially played a crucial role in the cheese supply chain, giving it a deep operational expertise and superior ability to issue profitable loans.) The next two joined forces with Chod, a finance supply chain expert from Boston College and Aspegren and Weber at MIT, who were developing a new blockchain-based solution to cope with warehouse fraud and were also interested in the agricultural sector of developing economies.

"Because these systems are governed by governments, adoption is more a top-down project." -Mark Weber

"Aspegren and Weber had an idea about how to design a system to facilitate trade in those economies" to overcome issues like fraud, Trichakis said. "People would bring grain into a warehouse, deposit it and get a loan, but sometimes it's not grainy – it's hard for banks to check that it's actually there." But Aspegren and Weber needed help in the side of supply chain finance, where Trichakis, Tsoukalas and Chod had arrived. "We helped them design a system that is effective for the financial aspect," said Tsoukalas. After about three years of development, b_verify has been created. The next step is the field distribution.

Weber said that Mexico and Ukraine are interested in b_verify because they face a big problem with stock fraud. "They are countries that use a lot of warehouse depots," he said. These governments have identified a strategic need to improve the accuracy of their warehouses and deposits. Furthermore, in the agricultural sector, transaction records often have to be made public by law – 49 of the 62 agricultural economies have legislation on inventories, and 13 of these have specified laws for electronic warehouse receipts, Weber noted.

"Because these systems are governed by governments, adoption is more a top-down project," Weber continued. For example, the Mexican government required protocols for certified warehouses and warehouse receipts, including the obligation to load warehouse receipts into a public register called RUCAM. "This is the target market for a more secure protocol like b_verify, which would help all stakeholders," he said.

Weber made it clear that b_verify is a proposed protocol or standard, not a startup or a company. "If governments and industry stakeholders decide to use this standard, we expect companies and start-ups to compete for that standard," he said. "B_verify requires a third-party server [such as IBM] play a coordinating role in the system, although cryptography is constructed in such a way that the stakeholders do not have to trust this coordinator. "The cost is around $ 1 per transaction.

"Public blockchains such as bitcoins are lacking in privacy, which is essential in supply chains and private blockchains have no size and therefore security". -Henry Aspegren

To be sure, b_verify can not eliminate all frauds. Warehouse receipts may contain errors, or participants bent on cheating may falsely attest to inventory before it is recorded in the blockchain. The authors have recognized that their solution is not secure, but they argue that b_verify will make it harder to cheat. In fact, the verification by many parties and the immutability of the blockchain "is not always sufficient to completely alleviate the fraudulent behavior, but mitigates it with respect to the status quo", said the document.

"Open a small window of transparency in the operations of a company, in particular, its input transactions [like inventory orders], could do much to alleviate the difficulty of financing operations, which is a systemic problem for small and medium-sized enterprises that is all the more serious in developing economies, "concluded Tsoukalas." Blockchain technology could provide an efficient way to achieve this by providing verifiability of the input transaction in supply chains in a way that is accessible to small and medium-sized companies. We believe this is a new use case for the blockchain technology that has just been studied. "

The team is currently collaborating with the Inter-American Development Bank to pilot b_verify in Latin America, after which it will be evaluated. "If we succeed, we hope that this work will motivate warehouse modernization projects across the region for the benefit of farmers and the economic health and food security of those nations," Weber said.

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