Blockchain brings benefits to supply chains - even for off-chain products
A common use-case of blockchain technology is the recording of supply chains. Specifically, when an item moves between entities (e.g. from the producer, to a transporter, to a retailer, and to the client) a blockchain-based registry ensures that the recorded data is immutable. This brings about two (related) advantages: First, as any entity on the route may not trust another entity to manage the registration, blockchain provides transparency and removes the need to trust a data manager. For instance, suppose that Alice buys a sofa from Bob, which is transported to her by Charile’s company. Alice might fear that Charlie will steal the sofa on the way an then argue that he never got it. If Charlie manages the registration, he can manipulate it, but the decentralized registration prevents that. Second, when Alice wants to sell the sofa to someone else, she can prove that the origin of the sofa is Bob (and that Charlie was the transporter). This may prove useful, if the buyer from Alice cares about the supply chain.
For this reason, proponents of blockchain technology often tend to emphasize its distinct advantages for tracking supply chains.
Yet, as pointed out in a recent post by John Walsh, one issue is often overlooked: blockchain only allows to prove what is on it, not what is outside of it. For instance, suppose that Bob makes a mistake and enters the wrong serial number of the sofa upon production. As there will always be a mismatch between the tag on the sofa and the registration, the decentralization will not help much. Moreover, the existing incentive to manipulate the data may coincide with an incentive to tamper with the physical identifier. For example, if Charlie wants to argue that he never received the sofa – he can remove and replace the physical tag, so that no one will know that the sofa is the same as the one recorded on chain.
Walsh thus correctly point out that:
“whether it be a watch or a handbag, there will be ways to duplicate, replicate or steal the identifier on the real-world item allowing for fakes to enter the system and be sold.”
However, I respectfully have to disagree with his conclusion that blockchain technology is not a game-changer because of this limitation, for two reasons.
First, it is important to keep in mind that the benefits of any new technology must be evaluated on a “ceteris paribus” – all thinks equal – basis. Blockchain is indeed not a magic wand that solves every problem, and it cannot always solve the problem of off-chain tampering in the product itself. However, without blockchain there is a double concern of tampering: in the product and in the registration of its movement. Blockchain solves the second problem, and doesn’t make the first problem any worse. Blockchain thus has important value, just as a car has value because it allows you to move quickly from place to place, even though it doesn’t allow you to fly into space.
Second, there might be ways to track a product on-chain directly. For instance, suppose that a live video of the sofa’s transport is recorded directly on-chain. Even though the sofa itself is not on-chain, a documentation of the sofa is born on-chain with a time stamp. Then, it would be (somewhat) more difficult to manipulate the product.
In conclusion, while we should be careful not to overestimate the benefits of blockchain, we should also be careful not to underestimate the benefits just because not all problems are solved at once.