27 Feb 2018

Tracking trees with blockchain technology

Robert writes:*

Illegal trading of various resources is considered a highly lucrative business in the black markets and authorities are having a hard time trying to deal with the issues it creates. It was estimated that $51-152 billion was made globally on trading illegally harvested timber. For companies it is getting increasingly important that they obtain more information on where their resources come from and how they were acquired. There is a growing number of regulations like the European Timber Regulation which require European companies to conduct due diligence and investigate where their imported timber comes from exactly and if it is not acquired illegally. The prominent way of gaining insight on how and where the resources are acquired is through eco-labels like Forest Stewardship Council (FSC) but they rely on their paper-based database system. How can we be absolutely sure that this data is not tampered with or outdated?

The problem of tracking resources is that it is usually non-transparent, slow and controlled by a few large parties. This problem has to be solved to gain a more trustworthy and user-friendly system. In 2008 Sathoshi Nakamoto described the system of transactions and record keeping without the need of a trusted third party for the first time. He proposed “Bitcoin”, a system of a distributed database which is characterized by decentralization, consensus, validity, immutability and authenticity. These characteristics are used in the much wider application of “Blockchain Technology”, a system of nodes which validate new blocks by attempting to solve cryptographic puzzles.

But now you are probably wondering how the data could be stored in the blockchain and provide information for the future. The products, whether it is timber or diamonds can be logged into the database via a smart contract. A smart contract can be seen as a digital price tag which contains information about the origin, previous seller, value, quality etc. The product will have a specific barcode which is linked into the smart contract in the blockchain and can be retrieved at any time. When a sale is made a new smart contract will have to be made but the information of the old smart contract will always be linked to be able to track the product through its lifetime. So if you are building a table out of a certain parcel of wood you have to link the smart contract of the table to the smart contract of the pieces of wood which it is built from. This process has already been put into practice by Everledger which uses blockchain to track diamonds. By tracking of the diamonds from its origin they want to make sure that no blood diamonds enter the diamond markets and consumers are protected from buying counterfeit diamonds. The figure below illustrates how the system would work for timber. All legal timber gets logged into the blockchain and the illegal timber from country A does not. By using the blockchain for verification of imported timber country D could identify the illegal timber because it does not exist in the blockchain and decide not to buy the specific parcel (Düdder & Ross, 2017).

Blockchain technology is almost the equivalent of a notary which ensures that the data which is put into the system is correct, immutable and transparent. An authority will still be required to supervise and certify the product which gets entered into the system but thereafter its digital DNA will be stored forever. Of course, this system is not 100% foolproof, it is still possible that illegal products are entered into the system by the authority as legally acquired products, but the entry of product into the system will be the only step where forgery is possible. The blockchain will enable companies and consumers to check whether the timber used in their bench at home was harvested and processed sustainably with just a simple scan of a barcode.

Bottom line: Blockchain could add more security and producer-consumer trust to high-value products by tracking it from cradle to grave. The peer-to-peer database will be available quickly and worldwide to enable transparent markets.

* Please help my environmental economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)


Jesse said...

Interesting idea to track the flows of materials. For wood, this might be a good idea. However, I am struggling with the smallest unit to choose. How can we track something that reacts/is combined with other substances, or in the case of biomass, is burned and generates energy? And, is it worth to track substances when the energy requirement associated with the data is high?

JeroenL said...

This sounds super interesting! I'm not very familiar with the ins and outs of tje blockchain system, but couldn't illegal harvesters relatively simply forge the entry data? Supervision is needed from the government, but if i believe correctly, the countries where these problems occur have a relative high corruption rate right? Is there a way that that part could also be made foolproof?

Daniel said...

Hey Robert, very interesting topic-idea. I have some remarks that you may want to consider.
1. The large critique to certified products are that these become really expensive, not because producers are getting better paid (which happens to some extent). But as result of the certification cost that necessarily goes to the consultant. This was one of the major failures of the Kyoto Protocol and it is one the larger "issues" for FSC, Rainforest Alliance, RSPO, MSC, Fairtrade, etc.

2. You gave a nice example of diamonds, but the questions are what was the price for such a system? Who paid for it? Diamonds are very different than wood. The former are quite expensive whereas only a few hardwoods from tropical countries can achieve similar prices. So the question is then, who will be bear the costs, the interested party (consumer) or the producer? This will be define pretty much the success or failure of such an implementation. I can bet that wood producers wouldn't pay for such a system unless the expected revenue is quite high.

3. As already pointed out above (previous comments) what would happen if wood is mixed with illegal one. This has happened before with FSC and RSPO. The results are that the companies lose some stocks but the producers suffer most of the sanctions.

4. What about the energy requirements for data centers and blockchain? Would not happen that we may have a rebound effect as result of such technologies?

Now some "good comments". In Lean Manufacturing (Toyota business model) there is a philosophy that can be implemented here. This is keeping track at every stage of the process. In this case from cradle-to-gradle -as you propose- but by simpler ways. For instance, empowering consumers to truly track their goods.

Robert Altena said...

Hi Jesse, Jeroen and Daniel! Thanks for you comments and remarks, they are very helpful. I will try to answer you questions the best I can.

@ Jesse; It is true that the unit you want to track is very hard to define and probably different for every product. I believe that it is better to track larger quantities of for example wood and food in the amount which they are shipped in. So for example track a pallet of wheat or vegetables at a time with one barcode. It is also dependent on the type of product where you stop the tracking, most of the time it is less useful to track when it is at the local consumer.

@JeroenL; Corruption is certainly a problem and it will not be solved with just the addition of blockchain technology. It is better to see blockchain as a tool which enables better tracking of resources. For instance if an authority allows X amount of tonnes of forest to be cut in a certain region they could register and release that amount for sale from the region and everything which is harvested additionally does not exist in the system. This could then be a signal to wood importers that the pallet might be illegally harvested. Human errors or forgery will always be possible but it might be limited by a larger transparent database.

@Daniel; I agree that the certification or tracking will cost additional money, but I think there are also gains which cannot be overlooked. Producers will be able to get into contact directly via the blockchain with their consumers and therefore skip some intermediaries who earn a lot of money just for connecting producers and consumers. This might be a part where the expenditures for the network could come from hypothetically. But as you mentioned as well it is harder to see blockchain developing in sectors with low value products. The final point about the energy requirements is something that is also hard for me to answer. There are numerous reports that Bitcoin is using massive amounts of energy, but that is for a very big and inefficient protocol. There are already advancements being made by other blockchain developers to refrain from the proof-of-work principle to other principles which demand less energy for the computation and maintenance of the network (Ethereum and the Lightning Network). The evolution of more sustainable protocols will also define whether blockchain is a useful tool.

Hasse said...

Robert, there are indeed less to possibly almost no energy consuming "blockchain consensus protocols". It's an ongoing evolution!

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