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 How can we be absolutely sure that this data is not tampered with or outdated?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 :)