This is partly because – as is often the case with forward-looking topics – we have not yet succeeded in bringing the exciting new opportunities linked to blockchain technology from the virtual realm to the real economy. This development can partly be blamed on bitcoin.
Bitcoin and blockchain are not the same thing
It is true that bitcoin is based on blockchain technology. However, with bitcoin being so frequently covered in the news, and with its value undergoing dramatic fluctuations – skyrocketing even – and with it increasingly becoming the object of speculation, many now consider bitcoin and blockchain to mean the same. However, in reality, bitcoin and many of the wide range of other cryptocurrencies that have emerged are only one of the uses of blockchain technology. Beyond cryptocurrencies, blockchain technology can also be used in the business sector, in supply chain (finance), in procurement, logistics and trade – but there are still only very few pilot projects or concrete examples showing how the technology can be used in practice. This means that 2018 will be the year in which we will need to demonstrate blockchain’s practical use. All partners across the value chain networks are called upon to start pilot projects. This is why the team from Fraunhofer IML – which is also part of the Logistics Digital Hub – has joined forces with start-ups and start-ins to develop new applications based on blockchain. We are building on our own existing blockchain solutions and projects and are seeking to roll these out to value creation networks, by working together with industrial partners.
SOFiA
The development of blockchain technology has advanced further than many may think. Did you know, for example, that Fraunhofer IML is running blockchain-based applications on its servers as part of one of its research projects? And did you know that we have worked with companies Diebold, Nixdorf and Claas as part of the Smart Objects and Smart Finance (SOFiA) project to install a blockchain testing environment? This environment allows us to trace the entire agricultural harvesting process – including not only the crops, but also the finances – to keep it transparent and, most importantly, secure. The necessary payments can be made digitally via a connected bank using an integrated payment cloud. This brings me to my second topic: smart payment. No more money changing hands, no more coins jingling in your pocket – all financial transactions are controlled entirely via a computer or mobile device and are executed quickly and absolutely securely.
Smart payment
Smart payment solutions are making it a lot easier for partners in the supply chain network to interact with one another and make financial transactions. They benefit all players in financial supply chain management: suppliers obtain their money more quickly, procurement departments can order products faster, and the bank wins a new customer. However, the problem with supply chain finance solutions today is that even though they benefit everyone involved, they are only very rarely used in supply networks. This also means that the ideas behind and the options provided by supply chain finance are being spread less quickly than they could be. We at IML are convinced that the uptake of supply chain finance solutions would happen far more quickly if these were based on blockchain technology, which would ensure the security and transparency of entire supply networks. This would also put an end to the allegation that supply chain finance is nothing more than reverse factoring. Reverse factoring can only be used in situations where three partners are involved (the supplier, the company buying the product, and the bank), but not for entire supply networks. These require end-to-end solutions that only blockchain-based supply-chain finance combined with smart payment solutions can provide in the B2B sector. But the next step is what’s really exciting.
Smart contracting
Up until now, we have looked at supply chain finance and smart payment. But the next exciting step is to use these instruments to integrate blockchain technology into specific operations along the supply chain: from the finance sector to the real economy. The technology for this is already there, as shown, for example, by our use of cyber-physical systems. The true vision behind the Internet of Things is that devices will be able to interact with one another completely autonomously and ultimately interact with people to control the entire value creation process in a decentralized manner. However, controlling the value creation process autonomously and decentrally will only work well if autonomous systems not only deliver material based on the information available, but are also able to autonomously control financial transactions. This also includes things negotiating with one another and signing contracts without any human interaction. This smart contracting is only possible and can only be done securely through the use of blockchain technology. This is why we are currently building a smart contracting platform at the Fraunhofer IML. Companies buying products can use this platform to work with suppliers, financial institutes and insurance companies to sign contracts, make payments and buy insurance. The establishment of such a platform helps come closer to the full realization of the vision behind the Internet of Things: whilst cyber-physical systems can be enhanced ever further, if they are not able to conclude contracts autonomously, they will always remain isolated solutions that are not fully connected in economic terms.
Confidence and trust instead of power
Our goal is to build a smart contracting platform over the next few months by working with a number of selected industrial partners, including a number from the digital ecosystem developed around the Logistics Hub Dortmund, as part of a number of applied research projects that are being conducted. By doing so, we also seek to make a substantial contribution to the development of the much-heralded platform economy. Even though many companies that are leading innovation are waiting to use such smart contracting platforms, none have been launched thus far. And this despite the fact that these platforms are crucial for responding to the key questions linked to the future of supply chain management and trade: what will trade be like in the future if all transactions are handled entirely autonomously and fully transparently by using blockchain technology? As transactions become more transparent, the risk of information asymmetry along many supply chains is reduced and supplier management is put on a whole new basis as all partners suddenly have the same level of reliable information available. Consequently, trade will be marked more by trust and confidence than by power – as is often the case today. The view that business, procurement, trade and logistics practices are becoming ever more hostile and cutthroat as a result of the use of digital technology is a modern myth. In fact, the opposite is true: blockchain, cyber-physical systems and smart contracting platforms are making the passing on of information, financial transactions and the flow of goods not only more secure but are also making trade fairer and helping markets take better account of the needs of the people.
It seems that policymakers are also beginning to realize the huge value of blockchain technology, with the word being mentioned as often as seven times in the coalition agreement of the new German government. In addition, the designated Head of the Federal Chancellery, Helge Braun, has underlined the importance of the technology for future supply chains and the banks located in Frankfurt’s financial district.
The author Prof. Dr Michael Henke heads the Fraunhofer IML and holds the Chair of Enterprise Logistics at the faculty of Mechanical Engineering at TU Dortmund University. His research focuses on the areas of procurement and supply management, logistics and supply chain management, supply chain risk management and financial supply chain management, and management of Industry 4.0.
