In my last post we explored what blockchain is, but how is it useful? Emerging and disruptive technologies can be embraced by companies to create new efficiencies within their operations and tackle challenges they are faced with. Blockchain has great potential to improve the mining industry’s digital effectiveness, contribute to combating rising costs through the use of smart contracts and peer-to-peer trading, and positively alter the perception of mining within society through transparency initiatives and supply chain management.
What’s so smart about smart contracts?
When completing a business transaction, there are conditions that need to be met by both parties before services can be rendered, products delivered and/or payment is made, with these conditions stipulated in a contract involving a mediating intermediary. A smart contract is essentially a piece of computer code that can be included in the blockchain which is able to automatically execute the terms of contract once a predetermined condition is met. The resulting action is completed automatically in a transparent manner (Crosby, et al., 2016), thereby removing a trusted intermediary or third party such as lawyers. An example would be a payment that is automatically completed once a certain regulation is met or a specific value is added to the product. The transaction then needs to be verified before being added to the ledger, with the validation conditions and consensus rules regulated by the decentralised network (Kouhizadeh & Sarkis, 2018).
Any digital data, asset or piece of information can be implanted in the blockchain and thereby traded; tangible and intangible assets alike can be digitally represented and securely registered opening up multiple applications (Cuccuru, 2017). Smart contracts are a major selling point of blockchain as they have the potential to remove the human error and trust in an intermediary from the equation. They can also reduce the risk of non-compliance during the life of a contract as the threat of sanction for non-compliance has been removed and no room is left for voluntary breaches of the agreement (Cuccuru, 2017) thus fostering certainty and security in online trading and amongst geographically and culturally disparate contract parties. This dependence on a technological framework instead of legal bingdingness and voluntary performance of involved parties allows blockchain to avoid some of the pitfalls faced by standard contracts as fraud is largely minimised and entrusting a network decreases the probability of expensive and time-consuming disputes, thereby essentially removing the need for penalty clauses and monitoring mechanisms contributing to contract cost reductions.
As we’re currently experiencing, global supply chains are complex and easily disrupted. Can blockchain simplify logistics and increase my confidence in the provenance of goods?
Globalisation has made supply chains significantly more complex over the past decades with supply and production networks now crossing numerous borders and connecting developed and developing economies, involving multiple players and a great deal of coordination. Resultantly this increases the cost of operating these international networks and (Niforos, 2017) notes that the cost of managing supply chains can make up to two-thirds of the ultimate cost of traded goods with 7% of the global value of trade trapped in documentation costs alone. Blockchain’s ability to track, record, monitor and transact assets without the need of an intermediary presents a disruptive solution to a lack of transparency along the chain, lack of interoperability, a high proportion of paperwork and limited information available on a product’s journey, significantly reducing logistical issues and costs for operators. Simplifying the movement of goods reduces governance costs, inherently increasing speed and reducing uncertainty through the value chain and increasing confidence in the provenance of products.
Within the supply chain, blockchain technology could be used in a number of ways. During purchasing, materials management and inbound logistics, blockchain has the capacity to trace sustainability by tracking materials and products and integrating information concerning warehousing relationships. During vendor selection blockchain can track a supplier’s historical sustainability performance, reduce costs and increase trust by removing intermediaries, and audit and measure the performance of supplier development programs (Kouhizadeh & Sarkis, 2018).
Assets would be registered to the blockchain using unique keys which prove ownership as well as a method of tracking the pattern of ownership over time. These assets could include physical assets such as diamonds or produce, or intangible assets such as title, or technical, environmental, social and regulatory attributes (BlockX Labs, 2018). These assets can then be traced through both intra- and inter-organisational activities such as upstream vendor/supplier concerns, inbound logistics and inventory management, internally, and then through downstream activities including distribution, green marketing and consumerism.
What does this mean for the mining industry?
The most immediate application for blockchain is in providing sustainable and transparent supply chains as the open, peer-to-peer and incorruptible nature of blockchain promotes trackability, transparency and security through the value chain. Within the mining industry BHP already uses blockchain with its vendors to secure real-time data generated during production and track movements of wellbore rock and fluid samples and in 2018 Barrick committed to invest $72 million in digital systems aimed at reducing operating costs and increasing productivity of which blockchain will play a large role (BlockX Labs, 2018).
Diamond companies use blockchain to track diamonds through the supply chain, providing today’s sustainable clued-up consumers a way of tracking the provenance of their diamond from mine to finger, assuring consumers their purchase is legitimate and conflict free. Companies such as Everledger and Tracr provide a permanent record for diamond certification and the asset’s related transaction history enabling a transparently recorded ownership history thereby reducing crime and increasing auditability of supply chains. Blockchain ensures authentic, immutable data, tamper-proof records and secure transactions thanks to asymmetric cryptography, execution of smart contracts throughout the process and collaboration throughout the peer-to-peer network. These properties can tackle some key challenges currently being faced in supply chains such as transparency, privacy, traceability, compliance and trust (Tracr, 2018).
Unfortunately as an emerging technology it can be difficult to determine if the implementation and operation of pilot projects as run by Everledger and Tracr are successful, but De Beers is confident that their project tracking 100 high-value diamonds through the value chain can be considered a success, even hailing it a “significant breakthrough” only achievable thanks to the close engagement of all participants in the trial (Shapshak & Toby, 2018). It is doubtful if De Beers, so heavily invested in the technology, would say otherwise though.
These initiatives have crossed over already into the gold industry where, due to the nature of gold provenance and changes in consumer sentiment within the jewellery industry, IBM and a consortium of leading diamond and jewellery companies are aiming to track not only diamonds but precious metals and jewellery through the supply chain from mine to consumer (Kharif, 2018). To date they have completed a proof of concept test that traced gold from a mine in South Dakota to a refinery in Utah, fabricator in Massachusetts, on to the Indian manufacturer that created rings and set diamonds, following which the rings were traced back to the US for sale (Blockchain Commission, 2018).
Could blockchain be as useful in other industries?
Absolutely! The previously mentioned inherent nature of blockchain makes it attractive for implementation in many industrial settings, not just the mining industry. In the railway industry blockchain could improve digital ticketing, logistics and supply chain processes and the distribution of data between disparate stakeholders within national rail networks. Blockchain could be used to create digital IDs and give people control over their digital identities or improve transparency in voting and reduce worries about voter fraud. Personally I’m most excited to see how blockchain can contribute to sustainable development and meeting the UN’s Sustainable Development Goals. I will devote a later post to this topic as I feel I’ve carried on enough for one day. Next up we will look at some of the drawbacks to blockchain.