Blockchain - a Game Changer for Logistics

Blockchain Adoption in the Shipping Business

1. What is Blockchain?

Blockchain technology is emerging as a new wave of technological innovation. The first blockchain was conceptualized by Satoshi Nakamoto in 2009, in order to solve the double spending problem of the digital currency, bitcoin. A block records all of the recent transactions executed during a given period of time. Each time a block gets completed, a new block is generated. These blocks are linked to each other in a linear and chronological order. And the blocks are replicated across a number of computers, rather than being stored on a central server. Therefore, if someone attempts to alter or forge a transaction, they may need to attack computers of all participants to the transaction, instead of attacking the server. Thus, the larger blockchain network becomes, the harder it gets to hack, making it practically impossible to forge or alter transactions.
Blockchain technology is designed to record transactions on the internet in the most reliable way, which is why it is being adopted in the financial services sector first. As a way to ensure security of the ever-increasing number online financial transactions, a decentralized management system using blockchain technology has been suggested without the need for a financial institution to mediate and verify the exchanges. Before blockchain, transactions were recorded on one central ledger. With blockchain technology, however, each participant has a ledger which records all transactions. A blockchain is thus commonly referred to as a distributed ledger.

2. Blockchain in Logistics

Because transaction data on blocks cannot be altered or forged, the transaction information is very trustworthy. Also, by adopting smart contracts which can automate transaction execution under certain prearranged conditions, Speed of work can be significantly improved. In the logistics sector which involve a lot of documentation, innovation is happening using blockchain technology. In 2016, the Denmark-based shipping giant Maersk Line carried out a blockchain proof of concept. And the carrier expects a 20 percent reduction in transportation costs if the blockchain is used for a shipment of goods from East Africa to Europe.

Blockchain is not just another new technology. It is expected to play a key role in achieving a steady growth in logistics businesses. Therefore, there needs to be a discussion about what role the blockchain technology is going to play in the logistics sector.

How will Blockchain Benefit Logistics?
In logistics, numerous parties engaged to transporting raw materials, intermediary goods or final products to partners and customers. All transactions in logistics are carried out based on multiple documents to ensure trustworthiness of the transactions. In global trade, in particular, the work is execute using standard trade documents. In local, face-to-face exchanges, there are usually no trust issues as the buyer would pay after seeing the product for himself. However, in global trade, because transactions are solely dependent on documents, the risk is often high as parties cannot always be certain that the other party has fulfilled the contract properly before payment. Plus, in the case of global trade where documents guaranteeing the quality of products are required, there is a possibility that these documents could be altered or forged. There is also no way of knowing what tasks or process the other party is working on right now without inconvenient follow up. However, blockchain technology creates a trusted environment by ensuring that transaction information on blocks are resistant to forgery or modification.

Benefits of Blockchain - Visibility
One of the major benefits blockchain can offer in logistics is enhanced visibility. Here, visibility means displaying the current status of the good being transported and the parties engaged in the supply chain. In traditional transactions, visibility was only provided to the two parties of a particular transaction. For instance, there was no way a wholesale operator would know if raw materials had been delivered to the manufacturer or when the finished products would be delivered. Using blockchain technology, however, end-to-end visibility has become possible. If all participants on the supply chain record their transactions on the blockchain, all transaction information can be shared with all the other participants in the network, and this offers an end-to-end supply chain visibility.

Indeed, many logistics providers have been promoting that they can provide this end-to-end supply chain visibility through their logistics information system. However, as explained earlier, it is more common that this supply chain visibility is provided to the two parties only. Furthermore, the data is often unstandardized and thus less compatible on other devices. From an return on investment (ROI) perspective, it is not worthwhile for logistics companies to create a platform which enables data sharing across all parties involved in a supply chain as each party produces visibility information to suit their own needs. Only those logistics providers with enough technical expertise and capital can provide this end-to-end supply chain visibility from sourcing of raw materials to delivery of finished products.

There are three different types of flows in supply chain management: information, material and money. Information flow (also called orders) drives material flow (delivery). Transactions come to an end after money flow (payment). Blockchain recognizes each of these flows as one transaction. Transactions that take place over a certain period of time are then grouped into a block. Since all participants share a series of blocks, the information, material and money flows are updated and shared in real time among the participants.

However, this public blockchain can hardly be put into use in the actual supply chain because transactions are typically bilateral3) in nature. For instance, manufacturers purchase raw materials at different terms and conditions from each vendor. This is why one’s terms and conditions should be strictly protected for supply chain sustainability. Thus, transactions on a supply chain requires a permissioned blockchain in which only the entities participating in a particular transaction will have access to it.

On information systems, it is generally the system administrator account that grants an access rights. This approach, however, cannot be adopted in a distributed network of blockchain. Instead, blockchain uses a channel which connects a node (Participant A) to another node (Participant B). Nodes on the same channel have access to each other. For instance, if a manufacturer and an importer are on the same channel, their transaction records are shared with all the other participants connected to the channel. However, manufacturers usually do not want to disclose their transaction information because the terms and conditions of their sales differ from customer to customer. To accommodate this, separate channels called multi-channels are created to manage access rights.

Among a series of logistics transactions recorded on multiple channels, you can check the current status of a shipment or see if a certain process has been completed on a particular channel. It is possible by obtaining the consent of all participants to providing information to a channel to enhance visibility. Here, the data compatibility issue mentioned earlier doesn’t happen because data on blocks have all been standardized already. All participants can therefore get an update on the current status of their transactions. This leads to more transparency in transactions, helping to create trustworthy trade relations.

Benefits of Blockchain - Trustworthy Transactions
In the logistics sector, global trade business usually does not involve face-to-face contacts. Transactions are mostly executed over the phone or by e-mail. If you’ve been working with your trading partner long enough, the risk of refusal of the cargo handover or the risk of non-payment is low. However, if it involves new partner that you have not worked with before, trust is a major and valid issue. This trust issue happens all the time in the global trade business. Indeed, it was estimated that the Korea Trade Insurance Corporation paid more than six hundred million US dollars as insurance coverage for the accounts receivable becoming uncollectible in 2011.
TTrustworthy transactions on blockchain not only guarantee payment and product handover. They also create a virtuous cycle in the global economy by further increasing the size and volume of global trade. In the global trade business, trust is a major issue as most fraud relates to forgery or modification of documents. Thus, if we can create an environment where documents cannot be altered in the first place, people will trust transactions significantly more. This is why we need to adopt blockchain across the logistics sector as soon as possible.
Once a document is recorded or registered on a block, it is no longer possible to modify the details, thus making it possible to verify the accuracy of all documents. However, in global trade, the shipping business in particular, some documents need frequent amendments. Blockchain solves this issue by registering amended documents to the blockchain while recognizing the chronologically oldest one as the original. This way, participants can see what amendments have been made in chronological order.
Blockchain offers end-to-end visibility. Because of the nature of blockchain, all parties can immediately observe what process other parties have completed and at which time. As such, blockchain enhances transaction transparency thus greatly improving trust among participants.
We can expect the following benefits from a trusted blockchain environment.
First, transactions costs will be significantly reduced. Under the current structure of trade, it costs a lot to find new trading partners, mainly because of credit checks conducted on potential partners. In addition, verification and the authentication of documents at each stage is very expensive. With blockchain technology, however, these transaction costs will be reduced as it will resolve trust issues by guaranteeing that all transactions are resistant to modification.
Second, the size and volume of global trade will increase. Reduction in transaction costs leads to more transactions. If it takes less to find a new trading partner than before, you would want to do business with more partners. As a result, global trade will be on the rise.

Benefits of Blockchain - Automated Transactions
In the logistics sector, global trade business usually does not involve face-to-face contacts. Transactions are mostly executed over the phone or by e-mail. If you’ve been working with your trading partner long enough, the risk of refusal of the cargo handover or the risk of non-payment is low. However, if it involves new partner that you have not worked with before, trust is a major and valid issue. This trust issue happens all the time in the global trade business. Indeed, it was estimated that the Korea Trade Insurance Corporation paid more than six hundred million US dollars as insurance coverage for the accounts receivable becoming uncollectible in 2011.
Trustworthy transactions on blockchain not only guarantee payment and product handover. They also create a virtuous cycle in the global economy by further increasing the size and volume of global trade. In the global trade business, trust is a major issue as most fraud relates to forgery or modification of documents. Thus, if we can create an environment where documents cannot be altered in the first place, people will trust transactions significantly more. This is why we need to adopt blockchain across the logistics sector as soon as possible.
Once a document is recorded or registered on a block, it is no longer possible to modify the details, thus making it possible to verify the accuracy of all documents. However, in global trade, the shipping business in particular, some documents need frequent amendments. Blockchain solves this issue by registering amended documents to the blockchain while recognizing the chronologically oldest one as the original. This way, participants can see what amendments have been made in chronological order.
Blockchain offers end-to-end visibility. Because of the nature of blockchain, all parties can immediately observe what process other parties have completed and at which time. As such, blockchain enhances transaction transparency thus greatly improving trust among participants.

3. Blockchain Consortium for the Shipping Industry

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