In an interview at the end of last year, SupplyOn Group blockchain expert Ralf Knobloch spoke about the potential offered by blockchain technology in the area of supply chain management. This time we talked to him about the criteria he uses to carry out an advance assessment regarding the suitability and cost-effectiveness of a possible blockchain use case.
Trust is the key
Ralf, to pick up the thread again: you said in the last interview that you critically scrutinized the benefits of the technology in each individual case. So when does such a distributed ledger application (DLT) make sense?
When we use blockchain technology, it should be possible to achieve a functional or economic added value that we can’t achieve with conventional central IT systems. The key is the level of trust in the various business partners along the value chain. Or the effort that has to be put into gaining and securing that trust.
If this effort is less using blockchain than using a central database solution, for example, then the use of distributed ledger technology is very likely to be worthwhile from a purely economic point of view. Of course, functional requirements have to be met as well. You might also say that blockchain is useful wherever we cross the boundaries between domains of trust.
What does this mean in terms of supply chain management?
In supply chain management, high-quality data is indispensable for an efficient flow of materials and information. The data has to be accurate, up-to-date, consistent and complete. Among other things, it provides information on the availability of goods and services and on the reliability of the respective participant within the value-added process.
The central question is therefore: do I know all the participants, do I have all the important information – and what is more, do I know that I can trust them? If this is the case, I don’t need blockchain technology.
But if I want to open up as a company to new cooperation partners who I am not familiar with in terms of all the important details, then there is an effort involved because I have to check them first to be on the safe side. As a rule, I assign this task to an intermediary such as SupplyOn, who requests the data, checks it, feeds it into a central database that is accessible to me, manages it there and organizes the necessary agreements or contracts with the new partner. For example, the SupplyOn platform stores the current master data of more than 65,000 companies that conduct their business with each other via the platform.
Digital identity secures trust
Depending on the complexity of the supply chain processes or the criteria for potential new business partners, however, it may make sense to use a decentralized blockchain solution instead of a central database. In the blockchain solution, availability, reliability, etc. are already stored and secured based on the digital identity of participants. This means that the potential new business partner has already passed through an authentication process, so their data is checked and valid. This is enshrined in the digital identity.
In this case, a distributed ledger application (DLT) may be more cost-effective, potentially offering additional functionalities to help increase process efficiency. This might take the form of automated contracts – so-called smart contracts – or automated data release mechanisms that would have to be specially programmed in a cloud-based system, a conventional user portal or a company-specific architecture.
Evaluating the use of blockchain in a specific case
In the last blog post, you mentioned that you used a ramified decision tree to evaluate the concrete use cases according to whether they were suitable for blockchain. How is this structured?
It consists of several questions that can be answered with yes or no and then either lead to the next question or else finish with the decision in favor of or against the blockchain. Criteria under consideration here include data equality, distributed access to the data, the ability to automate trust and do without central instances and the decentralized validation of information.
Key questions that would all have to be answered in the affirmative in order to favor blockchain technology are as follows:
- Can clearly defined data structures be created for the application?
- Do different parties need independent access to this data?
- Is data processing carried out by several parties on an equal footing or are the data updated independently of each other?
- Can the process of “confidence building” be automated? That is, can business rules be defined by consensus without manual or human interaction?
- Is the data history to be complete traceable and stored unalterably on a decentralized basis?
- Is the validation of data or transactions to be carried out on a decentralized basis?
The following decision tree developed by ETH Zurich can also serve as a rough guide:
Data can be protected from unauthorized viewing
This model created by the ETH Swiss Federal Institute of Technology distinguishes between public and private blockchains. In private blockchains the participants are known, in contrast to the public version. How flexible is the technology?
It’s very flexible. Depending on its technical configuration, a blockchain can be completely public or only open to a certain user group, i.e. a consortium. And there are also hybrid forms that combine both. Based on a special data encryption system, the participants only see the data that is relevant to them and for which they are authorized. This makes sense, for example, if too much transparency might give competitors a competitive edge.
So my data is not necessarily visible to all participants in the blockchain?
Exactly. If, for example, I manage my master data in the blockchain, I can always decide for myself who I want to access a certain selection of data – when, for what period and under what circumstances. In other words: blockchain technology makes it possible for me to remain in control of my own data at all times.
You said that when deciding in favor of blockchain technology, it was important to be able to define fixed business rules by consensus. Might that not be very difficult if there were a very large number of participants? If a software update were not supported by everyone, for example, wouldn’t there be a risk of the chain splitting?
This risk is there, both in the public blockchain and in a closed consortium blockchain. A split in a public blockchain has in fact occurred, for example in the public Ethereum blockchain. In this case, different independent chains emerge that do not correspond with each other.
This is rather unlikely with a consortium blockchain that is only open to a limited number of participants. Nevertheless, it is possible in principle if no consensus can be arrived at between those participants who decide on the governance of a consortium blockchain.
So the governance rules – as supported and observed by all participants – have a very important role to play. Consensus algorithms are implemented in the blockchain to ensure compliance with these rules. If something has to be changed, such as installing a new software, everyone has to go along with it. This might be carried out automatically if this has been agreed on in advance. Or there is a voting procedure for the planned change. In this case, voting mechanisms are used to decide whether or not it should happen.
This range of participation potential in the blockchain is fascinating and is currently the subject of intense investigation by a SupplyOn customer, for example. Completely new rules for digital cooperation between companies might eventually emerge. It might even be possible to use this to overcome monopoly structures and platforms such as Google, Facebook and Amazon – up to now, it is them who have been telling us what to do so as not to be cut off from business. So as far as digital business is concerned, cooperative, democratic and voting-based approaches could well gain in importance.
Decentralized transaction platform planned
In the interview at the end of 2018, you announced the first concepts in connection with pilot projects. What’s the current status here?
Among other things, we are currently building a prototype to store supplier collaboration data in the blockchain and make it available. For this purpose we maintain validated data and encrypt it: we could then make it available to specific target groups via the blockchain free of charge or for a fee.
It is important for us to find an incentive system so that companies can use this service or else ensure their own data is available and up-to-date. One incentive might be to generate new business.
Useful functions will also be integrated: automated processes, for example, as well as existing SupplyOn services such as electronic order processing and transport management. As companies enter additional data here, an extensive decentralized transaction platform on a blockchain basis will emerge over time.
There are other ideas, too, but we want to gain experience first.
Thank you very much for these fascinating insights, Ralf. We look forward to reporting on how things develop in the future.