Blockchains and the future of trade - AUSPACK 2021 · • There are some obvious problems with...
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Transcript of Blockchains and the future of trade - AUSPACK 2021 · • There are some obvious problems with...
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RMIT Blockchain Innovation Hub
sites.rmit.edu.au/blockchain-innovation-hub/
Prof Jason Potts Director
Prof Julian Thomas
Prof Sinclair Davidson
A/Prof Ellie Rennie
A/Prof Marta Poblet
Dr Chris Berg
Dr Mikayla Novak
Dr Darcy Allen
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What I’m going to talk about
• What is a blockchain? A distributed ledger.
• Why should you care? Economies are made of ledgers.
• What does blockchain mean for supply chains? Blockchain
changes the organisational structure of how we govern
supply chain information.
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Why digital currencies?
• Bitcoin emerged from two dreams in the 1990s:
1. A native digital currency for the internet.
“The phrase ‘the cheque is in the e-mail’, will soon be as common as
its snail-mail equivalent” – The Age, 14 February 1995
2. Second dream: escaping government control.
• Many attempts to create a digital currency for the internet (DigiCash,
PayPal, E-Gold)
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Turns out digital currencies are hard
• Why? The ‘double spend’ problem.
• It’s exceptionally easy to copy things on the internet, but this is a
terrible characteristic for a digital currency. Users might try to
buy two goods with one currency unit, i.e. counterfeiting.
• Early attempts to solve the double spend problem used centralised
parties (a firm holding gold, banks, etc.). These trusted sources
verified transactions and checked for double spending.
• There are some obvious problems with centralization: single point
of security weakness, need to trust central third party.
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Bitcoin solved the
double spend
problem without a
central authority
using a
blockchain.
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What is a blockchain?
• Blockchain is a governance technology that allows the
creation of a distributed and decentralised ledger of
information maintained by a network through the use of
economic incentives.
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How does a blockchain come to
consensus?
• There are many consensus mechanisms. They all use economic
incentives to encourage good behaviour and discourage bad
behaviour.
• Bitcoin uses proof of work consensus mechanism.
o Miners play a puzzle using brute computing force. Those puzzles
involve validating the transactions on the bitcoin ledger.
o Every 10 minutes one miner solves the puzzle and is rewarded
with bitcoin.
o That block of transactions is chained to the previous block –
making a blockchain of all transactions.
• We can also program some blockchains with additional features like
smart contracts (see Ethereum, invented in 2015).
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But who cares if we can now have
decentralised ledgers?
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Ledgers matter
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When ledger technologies change,
so does the world
Market
society
5000 BCE
Early
capitalism
14th
century
Empire
capitalism
18th century
Global
financial
capitalism
20th
century
The
cryptoeconomy
> 2009
Ledgers and
writing emerge
to record
production,
trade, and debt
Invention of
double entry
bookkeeping
(verification,
auditable
organisations)
Centralised
distributed
ledgers – trust in
centralised
institutions
(government,
large firms)
Analog to digital
ledgers
(databases,
computable,
searchable,
complex global
organizations)
Decentralised
(P2P) distributed
ledgers (digital,
trustless)
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Institutional cryptoeconomics
• We’re developing the foundational theory to understand how this
new ledger technology will change our society and economy.
• Applying existing economic theory to examine how blockchain
competes with firms, markets and governments to govern ledgers
and solve economic problems.
Markets Firms Governments
Blockchains
After 2009:
Before 2009:
Markets Firms Governments
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Some applications
• Money and finance.
• Land titles and digital asset registries (e.g. intellectual
property)
• Democratic voting/collective decision making
• Healthcare (and data markets generally)
• Gambling/online gaming.
• Decentralised identity (e.g. for displaced peoples)
• Sharing economy.
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What about blockchain supply chains?
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Supply chains and trade costs
• We use supply chains to get goods and services from A to B.
• Supply chains are made up of suppliers, distributors,
shippers, pilots, customs officials, retailers, warehouses…
• Trade costs are frictions in supply chains.
• Trade costs include the costs of transportation, tariffs, finding
trading partners, negotiating agreements, branding.
• Trade costs are bad because they prevent trades.
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SS Ideal X, 1956
Lowering transportation costs
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Meeting of the General Agreement on Trade and Tariffs, 1947
Lowering political costs
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Information costs
• Blockchains will act on the information costs of trade.
• As transportation costs and political costs have fallen, and as
supply chains have become longer and more complex, the
information costs of trade have increased.
• Information costs are the costs of coordinating trusted
information between a distributed parties who may not trust
each other.
• When physical goods move, information about those goods must
move too.
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Consumers want information
• Consumers want to know where goods are from (provenance), their
characteristics, how they were transported:
o Where was this fish caught?
o Is my lobster organic?
o Is this diamond real?
o Was this product produced ethically?
• This information isn’t easily observable by looking at the product.
• Determines how much consumers will pay.
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Governments want information
• Governments want information to comply with domestic regulations
o Biosecurity risks
o Ethical standards
o Import duties, etc
• This problem is worse in a world of regulatory states and information
requirements.
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Producers want information
• Producers and suppliers also want information:
o Is there fraudulent activity up or down the supply chain?
o Are there missing markets I’m not taking advantage of?
o Can I optimise my supply chain? (e.g. predicting demand)
o Who are my final consumers? (e.g. entertainment industry)
• This problem is worse in a world of complex supply chains on
intermediate goods.
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How do we produce the information?
• This supply chain information isn’t produced for free –
someone needs to note and verify the information.
• In a modern economy we use a mixture of different forms of
centralised economic organisation:
o Brands
o Paper trails (e.g. bills of lading) + with modern attempts to
digitise them.
• Generally we see centralised hierarchies passing information
between each other – this is not only costly, but leads to issues
of error and fraud.
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Blockchain as an alternative
• Can we use blockchain as a technology to store and govern
information about supply chains?
• Yes. Companies like IBM, Everledger, Agridigital, Walmart, Alibaba
are working on this.
• The central idea is that blockchain becomes a new economic
infrastructure for trade – an alternative to paper-based
information sharing within and between hierarchies.
• Blockchain becomes a decentralised ledger for all actors to
view supply chain information (such as time stamped data
about quality, location, ownership and so on).
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Many different futures
Supply chain participants scan and upload (e.g. QR codes)
• Update dynamic information through scanning events at different
stages of the supply chain, updating a blockchain-based ledger.
Leverage Internet of Things (IoT)
• Might better overcome the issue of human fraud or error, but requires
more complex technological solutions.
Use smart contracts
• For example, container too hot leads to insurance payout.
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Where will we see application first?
• Markets for differentiated goods where information about the
good really matters:
o Pharmaceuticals
o Seafood
o High-end manufacturing
• Effective policy settings for the trial and testing of these
solutions (this is an experimental technology)
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More than cost reductions
• There will be more radical impacts of blockchain than simply cost
reductions:
1. More markets and premium prices
2. Shifts in the value capture along supply chains
3. Less reliance on quality proxies (brands, borders)
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More differentiated goods
• Goods have attributes and those attributes differentiate goods and
determine their price.
• Currently we sell many goods for the same price because it was too
costly or hard to differentiate them.
• Blockchain-based information might enable us to differentiate goods
more effectively, and have different markets for different goods.
o More premium/non-premium pricing
o More markets
o Better market coordination
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Shifts in economic power
• Supply chains have lots of information asymmetries where some
parties hold more information than others and use it to
their advantage.
• Better information about supply chains means fewer information
asymmetries.
• More bargaining power towards the ends of supply chains for both
consumers and producers.
• Important impact on developing economies.
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Fewer quality proxies
• Now we regularly rely on brands and national borders as proxies
for quality.
• Better supply chain information means the actual quality and
provenance of goods is visible, therefore:
o Less of a reliance on proxies; and
o Different economies start producing different things because
of breakdowns in path dependencies of production.
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How do we get from here to there?
• Private entrepreneurs will build this economic infrastructure,
but we need to pay attention to policy.
• Will governments recognise blockchain-based supply chain
information?
• How will different blockchains and regulatory systems interact?
What about interoperability?
• Perhaps a regional or global policy forum focusing on open
standards and new crypto free trade zone.
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References
• Allen, D W E, Berg, C, Davidson, S, Novak, M, Potts, J, ‘Blockchain TradeTech’,
16 May 2018. Presented to the APEC Study Centres’ Consortium Conference,
Papua New Guinea.
• Allen, D W E, Berg, A, Markey-Towler, B, ‘Blockchain and supply chains: V-form
organisations, value redistributions, de-commoditisation and quality proxies’ The
Journal of the British Blockchain Association.
• Allen, D W E, Berg A and Markey-Towler, B, ‘Predictions for trade in a blockchain
world’, Machine Lawyering, Chinese University of Hong Kong, 28 January 2019.
• Berg, C, Davidson, S and Potts, J, ‘Outsourcing vertical integration: Distributed
ledgers and the v-form organisation’, RMIT University Working Paper. 31
December 2018.
