Blog archive: July 2017
July 25, 2017 by Bo Weidema and Manuel Klarmann, Eaternity
Distributed Ledger Technology, informally nicknamed “blockchain” or “hashgraph” depending on its core database concept, is a new decentralised digital network technology that has the power to disrupt many existing business practices, including banking, insurance, government services and trade, by radically reducing the cost of financial transactions and contract enforcement.
In this blog-post, we investigate how the Distributed Ledger Technology may disrupt the way businesses supply consumers with information on the social or ecosystem impacts of their products – information that is currently provided by eco-labels, fair trade labels and product footprint information, often – or at least ideally – based on product life cycle assessments (LCAs).
A distributed ledger is a chain of time-stamped, cryptographically secured, immutable blocks of consensus-validated digital data, existing in multiple synchronised, geographically distributed copies. Together, these properties make the data practically impossible to tamper with. The technology was first implemented in 2009 as a core component of the crypto-currency Bitcoin.
The Distributed Ledger Technology promises solutions to a number of the current barriers to consumer influence on the sustainability of business practices:
- The difficulty for consumers to express their requirements in a simple way, without the need for all consumers to agree on exactly the same requirements.
- The cost of verifying that the producers live up to the requirements, and the risk that the verification is corrupted.
- The cost of verifying the chain of custody, so that no more certified products are sold than produced.
On the consumer side, the Distributed Ledger Technology offers so-called “smart contracts”: self-executing digital contracts verified for authenticity on the distributed ledger. This means that consumers need not agree on a specific certification scheme. One consumer may want to buy only from supply chains that adhere to a specified fair wage policy, while another consumer may be concerned only with climate-forcing emissions. Both consumers can place their demands (and their time-limited willingness to pay for each requirement) on the digital marketplace in the form of a “smart contract”, promising to release their (premium) payment as soon as a verified supplier has been found. In this way, consumers can make requirements even if there is no current supply chain that fulfils these requirements. In fact, the consumer demands do not even need to be linked to product purchases, but may be seen as separately purchased services. In this way, consumers do not need to look for the certification of every separate product they purchase, but can once and for all (or for example, once a year) decide what demands they want to place on their suppliers and how much they are willing to pay in premium price for each of their requirements. Software apps can help the consumers make informed choices about (adjustments to) their purchasing profile.
For verification, Distributed Ledger Technology can replace costly and corruptible auditors by a crowd-based reporting mechanism, as already implemented in prediction market schemes (see e.g., https://www.augur.net), where verification is converted into a digital asset. The reputation of verifiers is a valuable resource that it takes time and good behaviour to build up, and which it is therefore very costly for a verifier to loose. Any attempt to influence the verification outcomes can furthermore be revealed and intercepted by an economically incentivized whistleblower function. Such decentralised verification does not need to be 100% accurate, as long as the likelihood of being caught lying is high enough and the punishment is expensive enough to discourage the bad behaviour. The higher the desired accuracy, the more costly the verification scheme, but it will still be much less costly than e.g. a physical audit scheme based on accredited accountants or similar schemes that are currently used to verify the integrity of e.g. ecological farming practices. We still need to develop the coarse global reporting mechanisms of the emerging prediction markets into a more granular community-controlled approach that can draw both on expert-knowledge (like Max Havelaar) or people who are just at the right spot (e.g. neighbours to the producers).
It is possible to place requirements on every step in the supply chain. It is relevant to do so, not only to guarantee the chain of custody (ensuring that the amount of certified products sold do not exceed those bought), but also because every step has its own emissions and its own employees. While the behaviour of every supplier needs to be verified by the above procedure of “smart contracts” verified by distributed betting, the distributed ledger ensures the traceability of certified inputs and outputs. With Distributed Ledger Technology, the chain of custody can be ensured without the need for expensive and corruptible paper trails and physical audits. Schemes for authentication of supply chains have already been launched, e.g. by Everledger for diamonds, or more generally by www.provenance.org.
If the consumers are not concerned with the specific origin of each specific product, but only with the overall amount of required behaviour (for example that a fair wage has been paid to the farmer of 10 kg coffee somewhere, rather than that coffee that I buy has been grown by this specific farmer), then the system could be simplified, since the chain of custody would not be needed. It is enough to ensure that there is some enterprise somewhere that has fulfilled the certification requirement for the amount of product or service purchased. For this purpose, there are already nascent initiatives, see e.g. https://medium.com/giveth.
In conclusion, the Distributed Ledger Technology is likely to bring increased quality, credibility and ease of use to sustainability information on products, radically changing the role of formal LCAs in providing this information. From a sustainable development perspective, the largest challenge may be that the new technology does not in itself exclude “greenwashing” – situations as known from some current environmental product declarations where a beneficial location, past good behaviour, or the past efforts of others, are used to market a product as superior, without any guarantees that improvements will be made as a consequence of the purchase. So LCA, which focuses on the consequences of (purchase) decisions, may continue to have an important role to play in educating consumers to know what to look for in a smart contract to ensure that their purchase will lead to actual improvements.