Introduction
Since its invention, the internet has in so many ways revolutionized many aspects of human life from communication and how we socialize to how business transactions are done improving the productivity of people and organizations. Despite all these, one area which has seen very little growth or development is on mechanics of how businesses organizations execute transactions amongst themselves. Challenges such as inefficiencies, slow, costly and manipulation of business transactions have affected asset ownership and transfer of businesses. Every business unit has its own ledger where inconsistency between transacting business parties usually ends up increasing the settlement times. To rectify these inconsistencies, and bring about accountability trust and transparency blockchain technology was introduced to enable smooth transaction of businesses in today’s internet-age market (Waters, 2016).
Waters (2016) argues that using secure electronic ledgers among related or consenting firms, the blockchain technology will build records of transactions carried out on the online platforms in such a way that the registered transaction cannot be altered hence removing the characteristic of infinite reproducibility from digital asset. By confirming that each unit of cryptocurrency was spent only once hence help to solve the challenge of double spending. Considering all these, the aim of this research paper would be to analyze what blockchain is, its current state i.e. what it entails, how it works and its importance. In particular, this research will explore the future of this technology in the current digital space on how it will impact supply chain and other business transactions today and in the future.
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Description of Blockchain
Blockchain is a distributed or a decentralized digital ledger which provides an unalterable public record of digital or Bitcoin transaction (Waters, 2016). Its database is made of two kinds of records, transactions, and blocks. Valid transactions are recordings and put together to form a block. Once transactions are completed, the block goes into the blockchain as a permanent database. Each block will contain the hash of the preceding block in the blockchain to link the two. The blocks are then added to the chain in chronological and linear manner . Those computers connected to the Bitcoin network i.e. nodes then get a copy of the blockchain which gets downloaded the moment one joins the digital network. This blockchain provides complete information about the transactions made, their addresses and balances from the original block to the most recent block. This traceability is made possible by the back linkages of the blocks. A new block will refer to the signature of the previous block in the chain. It is through this repetitive process of joining blocks containing a hash of the preceding block that that assures the integrity of the previous block all the way to the original block. As the blockchain continues to grow its height also increases hence the block chain is structured by separation of layers dined by well-defined formats i.e. cryptographic signature. From this, a blockchain contains all un-editable records of transactions made.
Technology of Blockchain
Blockchain is built on the platform of the shared or decentralized database. This is to say that the database is not controlled from the main server but exist in the different nodes of across the multiple computers in the peer-to-peer network. The transactions recorded in the blocks are signed digitally using public key cryptography. These public keys present a measure of security as they are used to sign and encrypt messages that can only be decrypted by the designated recipient the using their private key. Another aspect of security provided by the public key cryptography is that it is used to authenticate, identify and verify that the transaction in the blockchain has not been altered (Waters, 2016).
Another feature of blockchain technology is that owing to its decentralization or the distributed ledger, all new transactions are usually propagated to all nodes in the network hence enhances synchronization of data. This means that to change or update the blockchain, data in the particular block must be reconciled across all the nodes. To achieve this all the players in the network must come to a consensus to do the same. There are usually other synchronization methods but in the blockchain, the act of consensus has come out as an innovation, emerging out of need as different new transaction and block is computationally (IBM, 2016).
As we already know, within a block is the list of transactions. Each of these blocks in the chain must contain a header which describes three sets of metadata. The header will include prepared data about the transactions in the block, the timestamp and data showing the proof-of-work algorithm and finally a reference to the previous block . It is this linkage to the previous block that creates the chain element of the blockchain. New blocks are created every ten minutes through a process known as ‘mining’. The mining process validates the transaction then joins it to the chain before rewarding of the miner which regarding Bitcoins receives 25 Bitcoin per block. The mining process entails, competition by miners in the network to solve unique difficult math conundrum and a ‘proof of work’ of the solution of the puzzle must be provided to allow the block to be verified. The complexity of the mathematical puzzles helps to ensure security with people operating personal computers not able to mine the Bitcoin (IBM, 2016).
Concept of Blockchain
Following the description and Analysis of blockchain technology, there are various things or the key concepts that emanate from the technology. These concepts include shared ledger, the creation of a business network, use of smart contracts, consensus and finally privacy and confidentiality (IBM, 2016).The first key concept is that of the creation of a business network which can be used by business organizations among peer-to-peer participants who are enabled to work in a network validating and committing transactions to reach a consensus. The second concept of blockchain which can improve the productivity of participants within the business network is the use of shared ledger which acts a foundation of truth for organizations transacting in the network. From the shared ledger, all transactions across the network are recorded and shared among participants and replicated for every member of the network. The records are accessed with permission hence participants are only able to see the appropriate transactions only.
Blockchain also has smart contracts embedded in it providing the condition of transferring digital assets. Another aspect of blockchain is that of consensus before any adjustment in the block can be made . Consensus guarantees that these shared ledgers are the accurate copies, hence minimizes the risk of fraudulent transactions as interference would have to occur across many nodes at the exact same time. Consensus ensures that all parties concur with the transaction and is validated using the peer network. This breeds trust within the network which makes commitment possible and at low costs. Finally, blockchain technology ensures privacy and confidentiality of data and the network. Using the public keys, the blockchain help protects records with a personal digital signature. Unique IDs are given to customers, reference numbers and invoices (IBM, 2016).
The State of Blockchain in Today’s Operations
The use of blockchain on chain supply management is rampant within the banking sector. According to the estimates by the World Economic Forum, nearly 80% of banks are currently developing blockchain projects (Rometty, 2016). The technology has become visible in the financial industry along the multicurrency cash settlement which is incorporating forex market to the blockchain. A good example is the Chinese Union Pay which has begun using blockchain to build loyalty programs across their banks. Out of this, it’s speculated that blockchain is set to take over most of the world transactions by 2020. This speculation is based on the fact that the technology can be used in virtually all kinds of business as the buyer-seller relationship will always be in any business. Also, this technology has the potential to revolutionize the internal financial processes of small and medium enterprises (Rometty, 2016).
Other industries involved in this technology include IBM and the Mahindra Group from India. Visa in association with DocuSign is developing a blockchain system which will allow a vehicle buyer to enter a car configure the features of the lease from within the car without necessarily talking to an intermediary and drive away immediately. An Israel company, La’Zooz is operating blockchain ride-sharing application which connects drivers to consumers, unlike Uber and Lyft which uses middlemen. Venture capitalists are also investing in Bitcoin or blockchain ventures supplying more than $2.5million to the ventures (Jennings, 2016).
Effects of Blockchain on the Supply Chain
One key area where the blockchain has affected the supply chain is on the transfer of ownership of the asset in this case goods and materials. An example of assets within the supply chain affected by the technology includes purchase orders, certificate of origin, bill of lading and a pallet of goods. The direct responsibilities, processes or duties associated with these assets within the supply chain docket include procurement of goods and services, production, manufacturing and delivery of products and logistics management plus warehousing (Jennings, 2016).
Procurement of Goods and Services
Within the procurement goods use of blockchain has helped to smoothen the process of procurement limiting incidents of rejection of products and the inevitable disputes caused by a mismatch of what was ordered and what was received. When procuring goods and services, it is usually important for the buyer to know certification and validation of the supplier. Using the blockchain technology, buyers are able to access this information from a single source. From the blocks, a buyer can access the time stamped certificates and other credentials on the supplier. This information is irrevocable and cannot be altered maybe until the coming audit. After accessing this information the buyer and the supplier will negotiate the contract, sign them and are time stamped hence becoming irrevocable. The contract will then be coded in a smart contract where it will be controlled by the blockchain during the carrying out of the actual business process. At the ordering stage, blockchain has impacted the supply chain in that buyers are able to ascertain various issues about a supplier before placing their orders. Some of the issues a buyer could consider include the quotes made by various vendors, also they will ascertain whether the original information on the supplier has not been altered which will help minimize rejections of goods. When goods reach the buyer’s store, blockchain provides a control measure, ensuring provenance of the goods and that they correspond to the contractual settings and render irrevocable the recorded delivery data (Rometty, 2016).
Warehousing and Logistics Management
Blockchain has affected supply chain management along warehousing and logistics management by its ability to inimitably prove the ownership of a particular good. Another way to which it has affected supply chain is its ability to track the possession of the goods and determining their provenance. This has helped to reduce the challenge of counterfeit materials in the market as one can trace the material back to its origin. Another area the blockchain has had a significant impact is on tracing residue levels in agricultural products. By all these, the technology has affected supply chain by helping to improve quality and value of goods handled improving contractual clauses which activate prompt payment of handling and logistics services. Of note is that transaction related to warehousing are the one shared while confidential data are protected (Rometty, 2016).
Production or Delivery of Goods
Within the production or delivery function of the supply chain, the blockchain plays an important role in proving ownership or rather tracing a product back to the producer and throughout the supply chain. With this ability, companies have been able to provide up to date reports proving to auditors that their products are made of materials which come from socially and environmentally certified areas. (Rometty, 2016). This enables a company to raise their reputation within the market attracting more clients and competitive prices. Concerning delivery and shipment of products blockchain technology help to prove the adherence of the company to measures and conditions set either by the client or regulatory bodies. Concerning delivery of goods and production of goods, only information related to them will be shared with confidential matters such as price remaining protected (Rometty, 2016).
Significance of Blockchain in the Supply Chain
Given the height of globalization, technological advancement and the level of international trade, the process of exchanging information, documents and methods of payments amongst dealers, buyers and financial service providers have become quite vital for the different participants in the system. Today, blockchain technology has become a crucial part of corporate supply chain management especially within the financial supply chain space bring along several positive impacts (Camerinelli, 2016). So far the only challenge associated with the use of blockchain within these corporate is the fact that most of the corporate people have very limited knowledge and understanding of blockchain.
Camerinelli (2016) points out that f or those entities which have invested in the blockchain, mostly financial institutions and venture capitalists, blockchain has impacted their supply chain in several ways. One area in which the blockchain has impacted the supply chain is in the creation of reputation or trust among participants. Faith in the company’s products by customers will be improved as they will be sure of the authenticity and origin of the company’s products. By steadily keeping track of the making and amendment time of documents has enabled interested parties to track and without the need of an intermediary know the status of documents required or in question at a particular date and time. This technology has also eased title transfers among participants. Blockchain technology has allowed smart properties, digital assets such as bonds whose ownership are controlled by blockchain to be easily transferred. Other tangible assets such as buildings, vehicles, and phones amongst others to be easily transferred greatly reducing the cost of the transaction.
Use of the blockchain technology has also helped to minimize recalls and supply of defective materials or goods since every physical product comes with means of proving their authenticity. From the proof of working one can authenticate whether the good supplied is what it claims to be and also authenticate where the good originated from. Also following the traceability capacity of the technology, an auditable record of the journey of the particular product can be found by checking the preceding blocks. The ownership of separately held documents and their uniqueness has further strengthened the authenticity of product dealt with in the supply chain. Blockchain has allowed business organizations to exchange documents with the certainty and trust that whatever documents they are exchanging are valid and true. Also, business organizations will be able to receive direct feedback from their customers as such the business organizations out of the use of this technology are able to accurately forecast for future production in real time (Camerinelli, 2016).
Another crucial impact of the technology to supply chain is that of smart contract where contracts are self-executing helping the participating business organizations to avoid the long and tedious process of contract negotiations (Camerinelli, 2016). This ability is intently programmed into the system and nobody has control over it hence the participants trust the contracts. The trust is founded on the fact that the blockchain information cannot be altered or amended and nobody is able to bi-pass the smart contract permitting logic. As such, smart contract ensures restrictions exist on which accounts can generate or update the data. Due to the fact that transactions within the blockchain are not made from a centralized place, the technology has helped eliminate middlemen and intermediaries. This has helped a great deal to lower the cost of doing business among participants minimizing chances of fraud and even hacking of the system.
Challenges of Using the Blockchain
Despite its importance and the capacity to revolutionize the financial supply chain, this technology has its fair share of challenges. The main challenge involved with the use of the technology is that of legacy infrastructure. This challenge is brought by difficulty in understanding how the system works by many corporate and the practicality of implementing such a shared cryptosystem. The technology will require the development of different skills which today are outside the scope of traditional IT skill set (Graham, 2016). Some of the revolving challenges that are already outside the skill set of IT include things such as how to work on or improve transaction speed, data limits which are crucial in making blockchain and other means of verifying data. Another challenge involves the regulation of the Bitcoin. To generate a block or validate a transaction, the technology attempts 450 thousand trillion per second to validate one transaction. The amount of power used just for this one solution can support a household for a day or two. If one calculates the total amount of energy used per year on this technology then energy sources will be strained if the technology was to be widely adopted.
Despite having several cost benefits regarding lowering cost of transaction and time taken to complete a transaction, the high initial capital required to join the network is a big disadvantage. The issue of adjustment of record is also another challenge as replacements and adjustments are usually necessary for business transactions. I order for companies to make the move and embrace the technology, companies must first consider the how they will perfect their transactions to be accommodated by the system (Graham, 2016).
How Blockchain Will Affect Supply Chain In The Future
Today, the supply chains of business organizations are heavily interlinked and intertwined spinning over hundreds of stages across vast geographical distances hence making it too difficult to investigate incidents and trace events (Dickson, 2016). Buyers of products have no reliable means of verifying and validating the real value of products and services they purchase due to the widespread lack of transparency across most of the supply chain. From this, most of customers and buyers are reduced to only price takers. Customers are unable to effectively ascertain that the prices they are paying for the products are accurate reflecting the true cost of production. Other things which customers are unable to verify also include the extent to which production of a particular product has hurt the environment or the kind of labor used to produce it or the working condition of employees. Investigations and traceability of things such as counterfeit, or how money from a particular organization is used to support terrorist elements and funding war crimes among other are also difficult given the current state of the supply chain (Dickson, 2016).
According to Dickson (2016), the introduction and extended use of blockchain will tremendously rectify these challenges totally transforming the supply chain across the world today. Blockchain will increase security, traceability and transparency in the supply chain. This will help reduce the number of counterfeit material in the market making the economy much more reliable and quite safe. It will reduce moral hazards and implementation of questionable practices in production. The technology will also stabilize economies by reducing the use of counterfeit products. The technology also has the potential to completely automate filling system out of the decentralized ledgers.
This technology will greatly improve the payment and auditing processes by reducing errors made today by banks or missed by auditors. Once in a while, auditors may fail to notice errors on overbilling or overpayment but following the finite paper trail created by the technology such errors will be easily isolated whenever they happen. Companies will be in driving position being able to verify the all the transactions and make any necessary adjustment to prevent a similar problem from occurring (Robinson, 2016). This technology will also to a great deal minimize or eliminate the function of auditors as it will be able to identify any attempt of fraud quite easily. For instance any change on a past transaction of event force one to alter the coding of that particular event. But as the altered codes will stand out so different than the others, it will be easy to detect the fraud. Apart from simply detecting fraud with ease, the technology will help identify the culprit involved. From this capability, the technology will help companies drive down costs which may emanate from malpractice from employees or possible frauds committed by customers.
By virtue of the system allowing both the buyer and the seller to monitor their transactions, suppliers will be able to monitor their buyers hence will be in a good position in knowing the ability of the buyer to pay for their products or services in time. Also, the technology will speed up paying process as the participants have more control in the transaction with near perfect information. This will subsequently help to build stronger ties and robust supply chains. Another significant thing which we should expect from the wide use of blockchain is that the cost of the transaction will be greatly lowered due to the removal of several inefficiencies from the market. Online businesses are also set to develop and expand due to the presence of things such as e-invoice which are supported by the technology. The spread of using e-invoice will dramatically reduce the need for organizations to have administrations. Companies will be forced to have compacted and lean work staffs who are technically sound (Robinson, 2016).
Robinson (2016) further notes that with the benefit of receiving real-time feedback from customers will enable business organizations to properly budget and predict production levels accurately. As such blockchain technology will help several organizations scale their production way in advance i.e. prepare for changes in the market even before they happen. This is informed from the technology’s ability to identify a potential trend. Another way through which this technology will affect supply chain in the future is that it will break down the influence of politics to enter a specific market. From the online platforms, buyers and sellers will be interacting independently regardless of where they are coming from.
In the end, this technology has the ability to completely eliminate law contracts or written agreements replacing them with computer codes. Also by eliminating middlemen or intermediaries the several trusted third parties businesses such as the eBay, Uber taxi, and the Amazon might be eliminated as customers will be able to directly link with sellers without using the above named online platforms (Robinson, 2016).
Conclusion
Blockchain is still a new technology in today’s market but is expected to be widely used by the year 2020. Though not the solution for all problems or challenges of the supply chain, blockchain present a unique opportunity to improve a lot of business transactions across the world. Business organizations will definitely benefit from the unique concepts and features of the technology. It has the potential to completely revolutionize business transactions in the world. Owing to some of the challenges that the technology presents, more research on its viability and acceptability is required.
References
Camerinelli, E (2016). Blockchain in the supply chain . Retrieved from https://www.finextra.com/blogposting/12597/blockchain-in-the-supply-chain
Dickson, B (2016). Blockchain has the potential to revolutionize the supply chain . Retrieved from https://techcrunch.com/2016/11/24/blockchain-has-the-potential-to-revolutionize-the-supply-chain/
IBM (2016). What is blockchain ? Retrieved from http://www.ibm.com/blockchain/what_is_blockchain.html
Jennings, S (2016) Blockchain – The Future of Supply Chain Finance? Retrieved from http://www.selbyjennings.com/in-the-media/latest-news/posts/2016/blockchain-%E2%80%93-the-future-of-supply-chain-finance/
Rometty, G (2016). How Blockchain Will Change Your Life. Wall Street Journal . Retrieved from http://www.wsj.com/articles/how-blockchain-will-change-your-life-1478564751
Robinson, A. (2016). What Is Blockchain Technology, and What Is Its Potential Impact on the Supply Chain? Retrieved from http://cerasis.com/2016/06/29/blockchain-technology/
Watters, A. (2016). The Blockchain for Education: An Introduction . Retrieved from http://hackeducation.com/2016/04/07/blockchain-education-guide
