Blockchain in AgriFood Supply Chain
Welcome to the first edition of August 2021 of The Future of AgriFood Supply Chain.
This newsletter is for the professionals working in the agrifood sector. In these articles, we look at different technologies, emerging and established, taking a deeper look at the implementation, dispelling myths, providing real-world use cases and an independent, unfiltered view on return on investment (RoI) on technology.
What Do You Think of Blockchain?
This is the question I get asked in roughly half of my conversations with the agrifood industry leaders. In the age of soundbites and buzzwords, Blockchain gets tossed around a lot so I decided to write about it.
It also emerged, what business leaders were looking for, by asking that one question, is answers to following questions:
What is Blockchain?
Does my business need it? If yes, why?
What will be the return on investment?
I will answer above questions in the sections below and hopefully provide some clarity on the subject.
Before you begin, I suggest you read this article on Web 3.0: Powering Innovation in the AgriFood Supply Chain to help clear some concepts used in this article.
What is Blockchain?
In order to understand what Blockchain is, we need to understand what Distributed Ledger Technology (DLT) is.
Distributed Ledger Technology (DLT)
“ DLT refers to the protocols and supporting infrastructure that allow computers in different locations to propose and validate transactions and update records in a synchronised way across a network.”
BIS Quarterly Review, September 2017
Let’s try and break this down.
First and foremost, it is a “protocol”, i.e., set of rules and guidelines for transmitting the data.
Secondly, it is an “infrastructure”, i.e., to store the data.
Lastly, it is “decentralised”, i.e., without a centralised authority to validate and update the records.
In short, DLT is a synchronised, decentralised, persistent data store for processing and sharing the data.
If you would like to know more about DLT then please head to the DLT Systems: A Conceptual Framework published by Cambridge Centre for Alternative Finance at the Judge Business School.
Now we know what DLT is so let’s go ahead and understand what Blockchain is.
Blockchain
Blockchain is one type of DLT. The other types of DLT are: Directed Acyclic Graph (DAG) and a Hybrid type.
A blockchain is a decentralised, shared database with entries that must be confirmed and encrypted. Each entry or a transaction is stored on a block.
Blocks have a certain storage capacity.
When the storage capacity of the block is filled, it is chained to the previously filled block, forming a chain of data known as the blockchain.
To facilitate this, the technology uses cryptographic signatures called a hash.
A hash or a digital fingerprint is a unique cryptographic value containing characters and numbers generated through a complex computational algorithm. Each block in the blockchain contains the hash value that validated the transaction before it followed by its own hash value.
Hashes confirm transactions on the blockchain.
The schematic below describes the sequence of events that takes place to confirm the transaction on a blockchain:
Types of Blockchain
The blockchain platform types are differentiated through the access rights and the rights to read and write to the ledger.
The different types are:
Public: The public blockchain platforms are also called permissionless because no permission from a central authority is needed to participate in the network. The network is open for participation to everyone and everyone can access the transaction data, validate them, and participate in the consensus process (more on the consensus methods below).
Private: The private blockchain platforms are mainly used by enterprises and one needs an approval and authorisation from the central authority to participate in the network. The consensus remains with the central authority and it also coordinates the permissioned access and validation of transactions.
Consortium: This type of blockchain is like a private network with the difference that the network is controlled by a group of entities having equal rights. The consortium network promotes collaboration rather than competition and allows these entities to share the risk and reduce the cost.
Consensus Methods
As described earlier, blockchain is a decentralised system and in the absence of a central authority, the decisions are arrived at through a common agreement or consensus.
This consensus mechanism ensures all nodes on a network are synchronised and the transactions recorded on the block are legitimate.
There are a number of different methods or mechanisms to achieve this consensus. Below are some of the methods used:
Proof of Work (PoW)
Proof of Stake (PoS)
Delegated Proof of Stake (DPoS)
Byzantine Fault Tolerance (BFT)
Practical Byzantine Fault Tolerance (PBFT)
Proof of Activity
Proof of Authority (PoA)
Proof of History (PoH)
Proof of Elapsed Time (PoET)
Blockchain Generations
First Generation
The first generation blockchain technology began with Bitcoin. It was designed mainly to process the financial transactions (peer-to-peer) using PoW and to maintain the time stamped records.
Second Generation
The second generation blockchains have wider functionality like Smart Contracts, Distributed Apps (dApps) and are primarily used to facilitate management of the digital assets. The blockchains in this generation are like a platform hosting application ecosystem.
Third Generation
The first and second generation blockchains have issues like scalability and are computationally expensive. The third generation blockchains resolve these by providing higher scalability, higher speed of transactions and consuming less energy. Besides, they also provide interoperability across different blockchain platforms.
Blockchain Applications in the AgriFood Supply Chain
The blockchain applications in the agrifood sector can be grouped under following:
Traceability
Efficiency in the supply chain
Payments
Crop insurance
There are number of companies who are using blockchain to track the fresh produce or food products from their store back to their origin in a few minutes. By far, the end-to-end traceability, in a tamper-evident environment, is most widely cited use case for the blockchain technology.
Although this level of traceability can be provided by any other software system, provided it collects the data, showing in a tamper-evident environment to provide confidence to consumers is blockchain’s USP.
The schematic below shows how blockchain can capture different transactions in the supply chain. Over time it will become an essential component of the enterprise’s software architecture.
Agrotrust with Sahyadri Farms in India, has done extensive work in implementing blockchain technology for traceability and providing end to end transparency of their fresh produce to the consumers. What I like about this solution is the financial transparency which they provide to the farmers. Farmers receive near real-time updates about revenue, wastage and selling price of their produce.
AgroTrust platform also provides safe food certifications to the consumers who buy produce from Sahyadri Farms’s affiliated stores. Consumers get farmer’s information, food journey and safety, and price distribution via a QR code scan which is attached to the pack.
Another example is AgriDigital in Australia and United States. They are transforming grain supply chains by providing tracking of grain as it moves from their fields, to bins, and eventually on to the buyers.
Some of the other areas where blockchain technology is used in the sector:
Digital identity: creating a digital identity for growers, farms and fields with data privacy and control with growers. In this category, BanQu has partnered with AB InBev to provide supply chain solution to their farmers in Uganda and Zambia. The project has helped AB InBev to connect with their local farmers providing them visibility in the supply chain.
Payments and financing: agri-food supply chain is a multi-trillion industry and currently payments are often decoupled from the delivery of the produce or a commodity, often taking weeks to arrive. This could be changed by real-time payments using smart contracts. The transaction costs will be lower as well. In a same way, trade financing options in both developed and emerging economies will improve through some of the innovations happening in decentralised finance (DeFi) and also in centralised finance (CeFi) space like open banking API.
Smart contract based crop insurance: Parametric crop insurance with automated pay-offs when certain weather conditions occur will transform the crop insurance and insurance markets in general. Arbol in United States is providing smart contract based insurance solutions to protect farmers from excess or insufficient rainfall, snow and crop losses.
Traceability using NFTs: Non-fungible Tokens, a.k.a., NFTs, will allow to create unique tokens attached to a farm, field and/or even a particular tree in an orchard or a particular livestock. Retailers, consumers demand traceability of the produce and through the smart use of NFTs this can be provided for fresh produce, combinable commodity as well as livestock.
Sustainability, net zero, carbon footprint dashboards: There is no question that we need to change the way we grow the food and the way we supply it to the end consumers. This means we have to move to regenerative farming, make farms more biodiverse, learn to look after soils, optimise agri-inputs, and make the growers all over the world financially independent by providing them access to knowledges, skills and education. This also means that the data needs to be captured, measured and the supply chains are monitored. The blockchain technology will allow to capture the data in a tamper-evident environment and provide full validity and visibility of such data. This will allow supply chain players to create and share the sustainability and carbon footprint dashboards in an impartial way. This information will be readily available to consumers by simply scanning the QR code or a bar code on the product or the fresh produce pack.
RoI
“ Despite the increasing attention that blockchain is receiving, there is still limited scientific research about its economic effects on firms and supply chains. Some scientific literature categorises blockchain as a disruptive technology, others as institutional technology, or it is being declared as foundational or even as general-purpose technology (GPT) that has the potential to fundamentally change economies and societies, creating a new type of economy. “
Kramer et al., sum this up nicely in their February 2021 paper titled Blockchain and Its Impacts on Agri-Food Supply Chain Network Management.
Blockchain technology is still in its early days. The companies involved are still learning about it and still getting a better understanding of its economic benefits.
Over time, I feel this will become one of the building blocks of the enterprise technology - just like relational/non-relational databases are a building block for any enterprise. The agrifood companies and farmers will start using it without knowing they are using blockchain to complete certain transactions. In order for this to happen, I feel that the consortium blockchain model will have to evolve and offer the solution to number of different players in the industry.
The industry will start seeing the RoI with implementation of smart contract based payments and crop insurance solutions. These transactions will also help us create the sustainability and carbon footprint dashboards in order for the supply chain to operate efficiently.
Conclusions
The main driver for the blockchain adoption so far in the agrifood sector is supply chain transparency, traceability and information on food safety. The technology needs to be matured further for the wide scale adoption in the industry. In particular, I am looking at the consortium led and/or public blockchain solutions evolving to provide scalable, secure, cost effective platform to the entire industry.
Currently, there is no specific implementation of the blockchain which is leading the way or has created a network effect so far. The third generation blockchain solutions have a clear advantage. In my opinion, a consortium led solution with lower transaction costs and high interoperability across different blockchain implementations and ability to combine on-chain/off-chain data will drive up the adoption in the market.
In order to have a blockchain enabled solution and get returns the enterprises still need integrated software systems through which data can be moved seamlessly and used across the systems where it is needed. This plumbing system for the seamless data flow across the organisation and outside is an essential condition for the successful implementation of any blockchain technology.
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We would love to hear your feedback.
Excellent Sachin, This article is one of the best articles on Blockchain with excellent diagram examples. Very impressive.