Blockchain: revolutionising the agriculture industry
This edition of the Agribusiness Bulletin takes a look at blockchain and its potential to revolutionise the Australian agriculture industry.
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Blockchain: revolutionising the agriculture industry
The benefits of blockchain, and what the technology is, can seem daunting to the uninitiated. Yet this rapidly evolving and disruptive technology will fundamentally change the way we do business. Blockchain technology will touch every industry in various ways, and in this edition of our Agribusiness Bulletin, we take a look at blockchain, its application in agribusiness – and we ask the question, can it live up to expectations?
What is blockchain?
Blockchain technology is a distributed secure database, a digital ledger that provides a way for value to be permanently recorded. This continuously growing list of chronologically ordered records is accepted by a method of consensus and secured via cryptography.
This “value” is not limited to monetary transactions – it also applies to assets, property titles, the rights to a song, a vote, and even a person’s identity – and its application extends far beyond the realm of financial services.
Using a single transaction as an example, when a transaction is created on the blockchain, it will be submitted to a global network of computers. These computers will either verify the transactions instantly or it will be placed in a queue of pending transactions for nodes to validate based on the rules set by the network. The responsibility falls upon all the individual nodes of the network and the process used to verify the transaction. Once verified, the transaction is recorded chronologically and cannot be changed.
This network consensus is the basis of the blockchain network architecture. There are several different consensus algorithms but they all consist of the following primary objectives — coming to an agreement, collaboration, co-operation, equal rights, participation and activity.
At its core, blockchain is a trust machine enabling transparency through collaborated efforts.
Blockchain possesses important characteristics to transform existing products and services, and enable new innovative solutions:
- Disintermediation: enables peer-to-peer interactions which can be trusted based on public & private key enabled signatures
- Auditability: provides a full audit trail of data, creating a means of record keeping
- Immutability: all blockchain transactions are timestamped and tamper-proof providing a single source of data integrity
- Smart contracts: continuous near real-time tracking of data through the use of smart contracts.
Blockchain can be public, permissioned, or private, referring primarily to the accessibility and permissions of the network. Public blockchains are fully decentralised requiring very low trust (volume dependent), allowing anyone to read and send transactions and participate in the consensus process. Permissioned blockchains are quasi-decentralised; a hybrid approach. The consensus process is controlled by a preselected set of nodes with a greater degree of privacy protections. Private blockchains are centralised and only the centralised authority has the capability to agree to rule changes, transaction reversals and modification.
One important feature of blockchain technology is smart contracts, which are set to play a major role across all industries in a shared marketplace. Simply put, smart contracts are digital codes that enable the automated execution of specified actions based on contractual conditions as validated by all the parties. Essentially, smart contracts are self-governing and operate on the blockchain to automate business processes.
For example, consider insurance for certain weather events. Traditional methods result in delays while the claims are being processed, impeding the insurance holder. With a smart contract in place, the ‘code’ on the ledger would automatically trigger the benefit payment when the terms of the agreement are met.
An increasingly important issue for Australia’s agricultural sector, that will benefit greatly from the adoption of blockchain, is food provenance. A major trend in food at the global level is that consumers are interacting more with their food and are demanding to know more about where their food has come from, who produced it and how they produced it. Increasingly the question of what is produced is also important, for example, with the emergence of plant-based or lab-grown artificial meat. This increased consumer awareness is driving food consumption decisions. Producers who are able to answer these questions and deliver what the consumer wants are receiving a premium for their produce.
Provenance attributes are communicated on food labels or other marketing means as these attributes are not easily recognised by inspecting the food itself. As premiums are possible for products that demonstrate particular attributes (i.e. quality, safety, sustainability or geographical location), this opens the door for food fraud. Food fraud is a rapidly emerging risk to global supply chains, and has the potential to undermine Australia’s reputation as a provider of high-quality produce.
This is where blockchain technology comes in.
A supply chain application, for example, could offer consumers a holistic understanding of their food, providing a complete food provenance story. Consider, for example, the recent safety security scare around Australia’s strawberry industry, the time and location of such crimes could be identified more readily given the end-to-end traceability offered by blockchain technology.
Trade finance is another exciting application in agribusiness – with companies able to leverage blockchain to improve efficiency in what is typically a “clunky” process. We’re already seeing global trade transactions utilising the efficiencies of blockchain to deliver real world benefits. In one example from the Commonwealth Bank of Australia, a bale of cotton was traded using a private distributed ledger between the buyer and seller, and their respective banks (CBA in Australia, and Wells Fargo in the US). Utilising a smart contract, automatic settlement occurs as terms of the trade are met, replacing the previous multi-step process and labour intensive process involving Bills of Lading and Letters of Credit. Additionally, in the case of some Australian cotton producers, environmental certification (such as the Better Cotton Initiative certification) is validated using blockchain technology.
The use of blockchain technology provides full transparency in the delivery and ownership of the order, removing manual processes and transaction costs, and returning these costs back to the supply chain.
Ultimately, when thinking about blockchain we can think about trust – whether it relates to food provenance or trading products, the underlying premise behind block chain is trust, and the ability to trust without necessarily having to trust the counterparty in a deal.
Certainly, early indications have shown that blockchain can transform the way we connect, transact and do business. The real question will be how quickly the agribusiness sector can identify applications for, and embrace utilisation of, this emerging and exciting technology.
Benjamin Haire, Financial Advisory
Published: October 2018