Everyone’s jumping on the blockchain bandwagon, but what is the real potential of blockchain for shipping? Writing exclusively for Futurenautics, blockchain experts Deanna MacDonald, Karim Jabbar and Simon Ousager give the CEO briefing.
The maritime industry is facing a tough and unpredictable future. Overcapacity, trust issues, decreasing rates and increasing competition from non-traditional players and outdated systems will have a fundamental impact on the industry’s long term prospects.
These challenges, along with stricter demands from society and cargo owners for transparency, traceability and accountability in the logistics chain, will drive the industry towards exploring and implementing new solutions. Blockchain has recently been hyped as one of those solutions due to the claims being made about its ability to deliver against these demands and enable frictionless trade.
There is a big pull from the industry in wanting to explore what blockchain is as well as the opportunities it brings, and to dive deeper into finding solutions for the many challenges facing the maritime industry today.
Yet, with all of the hype that surrounds blockchain and the rampant theoretical use cases covered in the media, there remains limited understanding as to what it is, the opportunities and challenges it brings and, most importantly, when it is or is not advantageous to invest in and implement blockchain-based solutions in the shipping industry.
In view of that we’ve set out to explain the loose concept of blockchain, from both its historical and present day developments, to provide a set of critical questions to examine before jumping on the blockchain hype train and, finally, to provide concrete use cases and examples of blockchain applications within the shipping industry today.
From Bitcoin to Blockchain: Blockchain infrastructure is still in its infancy. In 2009, in the immediate aftermath of the financial crisis, an anonymous source under the pseudonym Satoshi Nakamoto shared a protocol with the world that allowed for peer-to-peer exchange of digital cash—now known as Bitcoin—without the need for trusted third parties.
Over the next years this protocol and its small underground userbase developed into an infrastructure in its own right, now with a current market cap of almost USD20 billion. After its inception, Bitcoin gained materiality in the real world through the entrepreneurial activities of self-driven actors who made the affordances of the protocol available to broader and broader user segments.
Highly industrialised Bitcoin mining farms and mining pools, exchanges where one can buy and sell Bitcoin for fiat currency, software wallets and hardware vaults that store one’s private keys, Bitcoin ATMs (BTMs), Bitcoin Point of Sales (PoS) systems, integrations to Payment Service Providers (PSP), and international remittance platforms are all examples of products and services building on Bitcoin and aiming at consolidating Bitcoin into an infrastructure with real world applications.
The very properties that allow Bitcoin to solve the problem for which it was designed, i.e. eliminating the need for trust in a middle man, and empowering pseudonymous transactions of digital money, are also constraints for the application in other settings, or what is now referred to as Blockchain technology.
The term ‘block chain’ was originally coined by Nakamoto when describing the process of Bitcoin mining. To paraphrase Nakamoto, “a block chain is a collection of transactions that cryptographically merge with the solution to a mathematical problem that is so complicated that it takes about 10 minutes resource-consuming calculations to solve”.
From there, essentially the term ‘block chain’ became ‘blockchain’ and has since been used as an umbrella term for the development of alternative applications of Bitcoin in other settings. In other words, ‘blockchain’ originated from protocols in combination with a shared database of transactions for uses beyond cryptocurrency. In Bitcoin there is a strong emphasis on making the process of validating transactions as secure as possible. This is extremely important when the use of the network is open and public, and it is therefore assumed that the users transacting on the network are unfamiliar with each others’ identities.
Transaction validation in Bitcoin therefore relies on so called proof-of-work whereby Bitcoin miners compete to solve cryptographic puzzles in exchange for the possibility of winning a block reward paid out in Bitcoins.
This process results in the Bitcoin network today being tremendously secure, but also slow (a block takes ten minutes to create) and very expensive to maintain when measured by the sheer amount of energy needed to validate the transactions. The Bitcoin network requires more energy than a major international city.
In addition to these speed and cost downsides, there are also, at least for certain potential use cases of Blockchain technology, some fundamental concerns about the value of empowering pseudonymous transactions. In some cases, would it not be better to make the transacted parties known and identified? This would particularly apply for the financial sector where Blockchain is being investigated as a solution for trading settlements and other specific banking uses, but where validated identity is a requirement in accordance with AML/KYC rules (Know Your Customer / Anti-Money Laundering).
Based on these observations it is clear that for other uses than direct monetary exchanges between pseudonymous peers, proof of work in the form hardcoded into the Bitcoin protocol, is not an ideal solution.
Start-ups and other entrepreneurial actors have set out to create their own version of a customised blockchain, sparking an explosion in creative interpretations
Addressing this shortcoming start-ups and other entrepreneurial actors have set out to create their own version of a blockchain customized to other use cases. This has sparked an explosion in creative interpretations of blockchain technology, and the emergence of a whole ecology of co-existing blockchains, coins, sidechains, payment channels and multi-chain frameworks supporting interoperability between diverse blockchains.
As part of this development, the ‘scriptability’ feature of Bitcoin became of interest. In a nutshell this means that one can annotate each transaction with any kind of digital data. This opens up the possibility of using the Blockchain to store records of any kind in a distributed fashion.
As a natural next step towards purposeful use of these data records, lines of self-executable code based on a “if, then” logic are embedded into the database. These are the basis of the so-called Smart Contracts, around which a lot of the current blockchain solutions are centered.
These newly conceived uses of blockchain were not achievable within the boundaries of the Bitcoin protocol, and as a result we today have a whole range of new co-existing blockchains.
Some of these emerging blockchains are permissioned, and others are permissionless. Some of them are structured as platforms on which applications can be built, and others are operational software for specific use cases.
Blockchain in Shipping: Many grand statements have been made within the ‘Maritime-Blockchain’ space—from the predictions of blockchain’s potential to save the industry billions, to the recent announcement from IBM and Mærsk declaring that they would put 10 million containers on the blockchain by year’s end.
There have also been many organisations and start-ups that have staked their claim in this space by tackling more specific cases, with a clear cut problem to solve. Some of these solutions remain within the proof-of-concept phase (e.g. Mærsk) whilst others have been built and tested and are operating on pilot scale (i.e. Solas VGM/MTI), we have sought to map out the current landscape of the blockchain projects with the most traction in the table below.
The table shows how specific elements of the shipping supply chain have been identified as potential problems to be solved by a blockchain solution. The attempts to solve these problems come from a range of different actors, be they established industry players, start-ups, banks, consortia, or tech vendors.
These initiatives are funded very differently. Some have gone the classical start-up to incubator/accelerator, to seed/VC funding route. Others have mobilised funds from private and public sources, and others again are bootstrapping their efforts. Similarly, and very interestingly, the underlying blockchain technology that these companies have decided to build their solutions upon, is very different e.g. Tendermint, Hyperledger, Ethereum, or custom blockchains or DLT systems (Distributed Ledger Technology).
So, what we are seeing here is a fragmented landscape addressing the identified challenges in the shipping industry from different angles, with different blockchain technologies, and different avenues of funding.
It is therefore difficult right now to say what the full potential of blockchain is for the shipping industry, and there are many more steps required to be undertaken by the industry as a whole before we can.
In order to get there, it will require that the various players in the industry start asking some of the critical questions highlighted in this article (Read 8 critical questions to ask before investing in blockchain solutions, below). They also must begin working towards strengthening their knowledge of blockchain and its potential industry use cases before they commit to spending large sums on uncertain projects driven by a generalised tech hype.
Blockchain is a technology that is inherently based on multi-stakeholder engagement, and requires a clear identification of a common problem to be addressed. Players in the shipping industry must work towards understanding the collective needs of the industry, and realise that the potential advantages of blockchain deployment on an industry-wide scale is not about gaining an advantage over one’s immediate competitors, but rather an opportunity to create a technological bedrock on which future opportunities for the industry as a whole can be developed. In order to achieve this, it is important that the various current blockchain initiatives in shipping find a way to converge. They will need to be interoperable in order for the prospect of truly frictionless trade to be unleashed.
In other words, we are arguing that the future of blockchain in shipping will not be a race towards creating the “one ring to rule them all” solution. Rather it will be a multifaceted future comprised of many interoperable blockchains and legacy systems.
In other words, we are arguing that the future of blockchain in shipping will not be a race towards creating the “one ring to rule them all” solution. Rather it will be a multifaceted future comprised of many interoperable blockchains and legacy systems. In this future the players in the industry will need to find ways to collaboratively work towards the goal of incrementally phasing in blockchain applications, one sub-domain at the time. This will require knowledge of blockchain, but most of all knowledge of the limitations of blockchain.
In summary, not all companies need blockchains, and not everything a company does needs to be put on a blockchain. Only the transactions that involve an exchange with other entities, that have high social, economic and environmental costs, or that are liable to become corrupted or tampered with, are those that stand to benefit from being put on a blockchain.
It is important to remember that some of the principles and applications of blockchain can still be designed into less costly digital solutions and algorithms in an internal database within a company and do not necessarily need to be stored in a global shared database.
This is the point of departure for the feasibility study undertaken by BLOC, funded by the Danish Maritime Fund, whose study will assess precisely these aspects, and the feasibility of creating interoperable blockchain-based solutions for the global maritime industry.
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About the Authors: Karim Jabbar is an Industrial PhD Fellow at the Department of Computer Science at the University of Copenhagen, and co-founder of Blockchain Academy, which aims at bridging the gap between technology and business strategy through applied industry-specific courses and workshops using the principles of digital fabrication, prototyping and lean start-up.
Deanna MacDonald is the co-founder and CEO of Blockchain Labs for Open Collaboration (BLOC), an expert network and organisation investigating the feasibility of a Global Blockchain Maritime Hub and co-founder together with Karim Jabbar of the Blockchain Academy.
Simon Ousager is a Bitcoin & blockchain consultant at Paradigm Consult, one of the leading Danish providers for Bitcoin & blockchain talks and strategic consulting.