Blockchain is an enabling technology. Just like the Internet, it harbors technological properties that can be used in a variety of ways and whose future uses and applications are not yet definite. At its core, a blockchain is a list of data records that is continuously being expanded. These blocks of datasets are chained together using cryptographic techniques, containing a timestamp and transaction data, as well as a cryptographic hash function. These elementary components of a blockchain mean that subsequent transactions always build on previous transactions and, in the process, confirm the correctness of the previous ones by providing evidence of knowledge of the previous transactions. This makes it impossible to manipulate or delete the existence or content of past transactions without destroying all subsequent transactions.
What makes blockchain technology work, is that its greatest advantage so to speak is that it does not rely on coordination by a trusted third party.
Blockchain: decentralized infrastructure
As a rule, every business (transaction) on the Internet is an agreement between strangers or anonymous parties, since there is no tangible counterpart. For this reason, transaction participants cannot trust each other and require a third party to be trusted or formally agreed to be trusted in order to complete the transaction. Any type of transaction on the Internet (selling, buying, streaming, transferring, or sending) requires one or more middleman platforms that act as intermediaries; countless data are collected, processed, stored, and used in these platforms’ data centers. Blockchain technology counters such platform systems with a decentralized infrastructure. In such a decentralized network, intermediaries (the third party) become redundant, as transactions are carried out between the participants themselves (peer-to-peer).
Control over ones own data
In a blockchain, each participant has a kind of account book in which all transactions are listed. As already explained, this allows all participants to check or verify new transactions, which prevents misuse. This makes it unnecessary to entrust one’s own data to an intermediary body from where it could be misused or forwarded without authorization. Instead, participants in a blockchain retain control over the data without sacrificing security and privacy (see the two videos (German) for more insights).
Blockchain and its current status
Blockchain technology is explicitly not synonymous with cryptocurrencies, which is only one type of its possible applications, however, it is also the most well-known. In contrast, the general development is currently determined by two perspectives of decentralization:
- Where is it becoming increasingly decentralized? This view addresses the areas in industry, society and politics that are changing from a centralized structure to a decentralized one. This is where blockchain technology can be increasingly used.
- Where can a third party be omitted? Numerous use cases deal with solutions that eliminate the need for an intermediary.
Example – Blockchain
The power supply is solved centrally and is subject to the corresponding rigid regulations and dependencies since electricity is produced and fed into the grind by large power plants. However, in today’s world, any private home can theoretically generate its own electricity. This is where the smart contracts of a blockchain now take effect and make it possible to do without a central operator who coordinates and invoices everything. This is because if neighbors join together using blockchain, they can supply each other with electricity and use it to trade with each other.
Blockchain in logistics
More and more business sectors are discovering and internalizing the principle of blockchain to take advantage of its benefits. In logistics, this can increase the transparency of supply chains (see logistics management) and accelerate tracking. While individual means of transport (containers/pallets) are now mostly standardized, the individual transfer stations (interfaces) are still far from homogeneous; on the contrary, they often are technologically very different and thus hinder the smooth movement of goods. In this context, for example, a consortium of Kuehne + Nagel and partners has developed a blockchain replacement for the consignment note (CMR), which usually accompanies each shipment, is stamped at each station and serves as a security for banks; and if it is unreadable or faulty, can be the cause for the stranding of a ship in port for multiple days. A consignment note, however, in the form of a blockchain is digitally stamped and any party involved can view the location and status of the shipment at any time (see also the CPFR model).
This results in considerable time savings, increased efficiency and cost reductions. This allows logistics processes to become cheaper and faster by using blockchain technology to increase transparency and strengthen integration towards an increased level of automation.
- Supply chain management (SCM) represents a significant application area for blockchain, with all parties involved in the value chain such as suppliers, manufacturers, retailers, and logistics and financial service providers. A key factor here is the interconnection with the Internet of Things (IoT), whereby the location and status of an inventory can be called up at any time by anyone involved in the network.
- Due to the immutability of the data records of a blockchain, it also contributes enormously to always providing absolutely valid data or information, which also benefits master data management in the logistics industry.
- By means of the blockchain, the so-called smart contracts will increasingly be used and increase the degree of automation of companies. The validity of the data in a blockchain makes it possible to implement reliable if-this-then-that scenarios which are triggered automatically and reliably when the condition occurs, without the involvement or confirmation of a human controller. Example: If machine X still has Y coolant, then quantity Z of the liquid is reordered.
Disadvantages of the Blockchain (Source: Computerwoche & Joachim Arrasz/synyx)
- Environmental costs
- Traffic Costs (Ethereum Wallet, Bitcoin)
- Low data throughput
- Private blockchains no longer provide the security they should
- Wenig individuelle Skalierbarkeit
- Storage space limitations
- Hard-to-manage permissions
- Difficult integration with existing legacy technology in the enterprise
The German Logistics Association, BVL for short, has written a nice summary on this subject, which once again sums up the disadvantages mentioned above:
- Thus, it hardly works under heavy data load. “So today, niche processes but not massed data along the supply chain could be handled via blockchain.
- A data query works much slower in the blockchain than in a normal database. The encryption and decryption process for a blockchain-based Bitcoin transaction today takes 10 minutes. This does not fit in with logistics’ demand for real-time data exchange.
- Today, a Bitcoin transaction costs electricity worth about 30 euros (source faz.net). This suggests that blockchain is not yet an alternative for processing mass transactions, e.g., in tracking, even if prices are cheaper there.
- As with any new technology, blockchain still faces hurdles in its integration into contract law.
Summary Blockchain (with source Fraunhofer Institute IML)
The characteristic features of a blockchain are decentralization, immutability and transparency. It enables new forms of software integration and, as an enabling technology, provides another component to connect multiple actors in a new way by changing or replacing the previous types of interfaces, eliminating the need for an intermediate middleman party. That is why it is particularly suitable for logistical processes in which several participants in a supply chain, without knowing each other, can completely rely on the correctness of the process flow and the corresponding data due to blockchain technology.
A blockchain is therefore a decentralized form of storage for information. Individual pieces of information are bundled into blocks, which are connected to each other as in a chain via so-called hashes. These hashes ensure that the blocks created so far cannot be manipulated. Blockchain technology additionally gains its great degree of security from the fact that the information is encrypted and not stored centrally in one place. Everyone in the respective blockchain network receives a complete copy of all information. If such third parties want to manipulate the blockchain, they would have to do it simultaneously to all participants in the network.
The use of smart contracts makes it possible to conclude contracts in real-time and validate their current status. These are not contracts in the classical sense, but program codes based on if-this-then-that conditions that trigger agreed upon actions. The necessary conditions for this are agreed upon bindingly by the partners beforehand. For example, a container with chilled goods is automatically sorted out if the cold chain has been interrupted. By combining smart contracts with blockchain technology, there is complete transparency over the automated processes and processes can run faster and more securely as compared to using traditional contracts.
However, the disadvantages are close at hand: For example, there is still little individual scalability, low data throughput, storage space limitations, authorizations that are difficult to manage, and difficult integration with existing legacy technology in the company.
Image source: iLexx / Thinkstock
You are interested in the topics related to blockchain; then also read the articles Goods Flow Management for Product and Material as well as Logistics Management and the Supply Chain.
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