Blockchain use case tracking precious wine and building a community around it (Netmi Blockchain Labs)

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In my latest tour through China to find the most promising use cases for blockchain technology, I needed to come to Hangzhou. In this article I will share my learnings about the Blockchain use case tracking wine with you.

Hangzhou is one of the most beautiful cities in China. When Venetian merchant Marco Polo visited Hangzhou in the late 13th century he called the city “greater than any in the world”. If you have not been there you need to go and see the West Lake (西湖) area and the lovely surrounding parks and temples.

Besides its natural beauty, Hangzhou is also home to some of the most fascinating Chinese companies. The most well-known of these is Alibaba. Started by the Chinese internet pioneer Jack Ma, the Alibaba empire resides on the triangle of: E-Commerce, Logistics, and Finance. As a starter to understand the story behind Alibaba I highly recommend Duncan Clark’s 《Alibaba: The House That Jack Ma Built》from 2016.

With the IPO of Alibaba in 2014, a lot of early Alibaba employees got enough capital together to start to invest into new and promising startups. It is thus not surprising that in the Alibaba ecosystem also a lot of blockchain companies were born. Either founded by Alibaba alumni or financed by them.

Blockchain use case tracking wine and creating a community around it

In this article I want to reflect on what I learned from visiting NetMi Blockchain Labs, a company in Hangzhou that is developing Blockchain applications for corporates. Here are some of my learning from sitting down with Evan, the CEO of NetMi Blockchain Labs.

Lesson 1: The ban of ICOs in China was a good thing – in contrast to Europe, Chinese blockchain entrepreneurs need to earn their money with real-life use cases

The first topic I was curious about was: how did the Chinese Blockchain ecosystem change after the government stepped in and banned ICOs to protect ordinary investors, aka retail investors, from scams? Interestingly, Evan pointed out that this was even a good step, as Chinese blockchain entrepreneurs now need to think about a real business model for their companies. Simply raising money though an ICO is for most teams out of reach. Therefore, real-life use cases need to be developed. While everyone outside China is busy preparing an ICO, China already arrived at what I call the “post-ICO” area.

How can one build a serious business on top of blockchain technology?

 

With Evan, the CEO of NetMi Blockchain labs in HangZhou, China

Lesson 2: Supply chain is still one of the killer-applications of the blockchain

Evan helps me to walk through some of the projects that they were doing recently. All of them are very interesting and very well thought out. I guess this is because the goal is not to produce a marketing whitepaper for an ICO but to convince a corporate to embark on a transformative blockchain project. One of the examples we discuss in detail is the blockchain use case tracking wine.

  • Background: a large wine company is integrating blockchain technology into their century old business model – producing and selling wine.

The way it works is an interesting combination of supply chain use case, community engagement, and gamification.

  • Every bottle of wine produced gets equipped with two different QR codes
    • A first QR code visible for everyone on the outside of the bottle. This QR code acts as unique ID for the bottle and is stored in the blockchain.
    • A second, secretly hidden QR code is inside the cap of the bottle. The code is not visible unless you open the bottle. This acts as verification for the end user to prevent counterfeiting along the supply chain.
  • For every new bottle produced a digital representation of the bottle on the blockchain is generated. In blockchain language, this means a new non-fungible token is mined for every bottle. For insiders: this is similar to what Cryptokitties (a blockchain gaming project out of Canada) and Hyperdragons (project out of China) are using to represent their digital avatars in the game. Each token is different, which is different to traditional cryptocurrencies where 1 Bitcoin is worth the same as any other 1 Bitcoin. One popular standard that emerged to represent such tokens on the blockchain is the ERC721 token standard from the Ethereum community.
  • Buyers of the wine now hold a digital representation of their purchase, one unique token for bottle they bought. The token holder gets a promise from the wine producer: anytime he wants he can redeem the token for the specific bottle of wine.
  • The physical location of the wine is a professional storage facility at the site of the producer.
  • The tokens now allow for a secondary market for the wine bottles. Instead of holding the token the buyer can decide to trade the “wine” token with other users. Even a futures market is possible. Example: I’m buying a bottle of 2009 Bordeaux wine from your for 10.000 RMB in on May 1st 2020.
  • This agreement translates into as a smart contract and lives on the blockchain.

NetMi Blockchain labs is not the only one betting on the supply chain as one of the game changing use cases for the blockchain – Vitalik Buterin, founder of Ethereum, is bullish on this use case too.

Lesson 3: Integrating blockchain technology into your traditional business has many merits

Lastly, Evan helps me to understand the primary motivation of corporates in China to integrate blockchain technology into their products. “It is a mix of different factors for them to start working on blockchain technology”, Evan explains. First, there is an obvious problem such as transparency along the supply chain they need to solve where blockchain can make a difference. But that is not everything, as other factors are also in play here. Some are going to adopt blockchain technology to prove to their employees that they are also a technology company, thus helping them with their digital transformation. Lastly, the same logic applies externally – it makes a nice story for investors if you report the use of blockchain in the annual report.

To learn more about NetMi, check out their website: http://www.netmi.com.cn/index.html 

About the author

Dr. Thomas Reinbacher is former computer scientist and McKinsey management consultant and works as independent adviser in Munich and Beijing. If you want to work with me on the blockchain use case of tracking wine or other precious goods on the blockchain,  please find my contact data here http://dr-reinbacher.com

Disclaimer: This analysis on Blockchain use case tracking wine is  provided without warranty or any claim for completeness. All opinions expressed about Blockchain use case tracking wine are my own. All information on Blockchain use case tracking wine is given strictly on a non-reliance basis and under the exclusion of any responsibility or liability, in particular with regard to loss or damages and/or administrative and regulatory sanctions.

Blockchain use case analysis on tracking diamonds from mine to jewelry retailers (De Beers Sa)

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Blockchain use case analysis on tracking diamonds

De Beers Sa is an international corporation with USD 6.1 bn in revenues specializing in everything about diamonds: exploration, mining, retail, and trading. Chances are high that your engagement ring comes from one of their mines. Diamonds require at least a billion years under extremely high pressure to form naturally. How can a 10 year old technology such as the blockchain make a difference here? De Beers Sa announced that they started to track diamonds on their way from the mine to the retail outlets using the blockchain. This is my blockchain use case analysis on tracking diamonds.

WHAT is this about?

De Beers Sa tracks diamonds from mines to jewelry retailers on the blockchain.

HOW is it done ?

A unique ID, a fingerprint is calculated from the physical properties of the diamond. One such ID is generated for each diamond. Physical properties of the diamond include weight, color, clarity, size, etc. When combining all these generating an ID is similar to a hash function, every single diamond will result to a different ID. Calculating the ID from the same diamond will always yield the same ID. In computer science this property is called deterministic. To illustrate, the ID 261b152862d1d614014496a63 is generated for the parameters [clarity=2, color=6, weight=245, mine=294]. This ID is then registered on the blockchain. Registered means that a transaction is written to the blockchain and that this transaction included the ID 261b152862d1d614014496a63 in on one of the fields of the transaction. The blockchain itself is a concatenation of such transactions.

Since the individual blocks on the blockchain are in deterministic order to each other, the blockchain itself takes care of the time-stamping. For example, if the transaction including the ID of the diamond was included in block 5633148 of the Ethereum blockchain we can use https://etherscan.io/blocks to check at what time this block was generated.

Blockchain use case analysis on tracking diamonds how does it work

Suppose all diamonds mined by De Beers Sa are documented this way. It is then an easy exercise to trace the diamond back from the retail outlet to the mine. Whenever a diamond shows up in the supply chain everybody can measures the physical properties re-calculate the ID and checks if that diamond (i.e. that ID) was registered before with the blockchain. If not, the diamond was injected into the supply chain from an unknown source.

WHY this makes sense?

Supply chains can become complex, especially when sourcing from different countries. The gemstone industry has an painstakingly complex supply chain. Among other ethical considerations, small-scale mining has been tainted with rumors of child labor. The industry is working on different fronts to clean up its image and rebuild its reputation. Regarding additional transparency, this blockchain use case makes sense because

  • The blockchain acts as a tamper proof digital record in this case. Once a diamond is recorded on the blockchain it will remain there forever. Due to the technical foundations of blockchain technology it is extremely hard to change these records. While you can perform a “DROP TABLE X FROM Y” to remove a database on your standard corporate IT setup, deleting the blockchain is almost impossible.
  • Not only De Beer Sa can use the information. Each supplier and even customer does not need to rely on the information given by De Beer Sa. Instead, they can check by themselves if the diamond was registered on the chain before. In current supply chains this is often not possible as the data resides in proprietary IT backends that are controlled by one company. Not so with a (public) blockchain,  where everyone can read all entries and append new information.
REALITY CHECK

Supply chain use cases have to deal with the oracle problem. How do you know if the real-word data, in this case the physical properties of the diamond, were entered correctly? Garbage in, garbage out still holds true in the blockchain age. It is true that the blockchain creates trust among participates due to the consensus algorithm that ultimately decides on a single version of the truth. That promise quickly ends when the blockchain reaches out to the physical world. In the De Beer Sa use case this is what you need to believe in to make it work

  • The personnel registering the diamonds on the blockchain are trustworthy. How can De Beer Sa prevent that wrong information intentionally or unintentionally was used as inputs to the function that generates the ID? For example, if the diamond was registered with the property “mine=281” how can we be sure that the diamond really comes from this particular mine? While the blockchain helps to minimized the required trust once registration is done, a few weak links will still remain.
  • Everyone in the supply chain needs to agree on how the ID is calculated. In complex supply chains, a few dozen suppliers are working together and aligning them on one methodology is easier said than done.
  • If the primary goal is to be transparent to end customers we are also facing the educate the customer problem. To convince customers that the diamonds of their engagement rings aren’t fake or were used to finance war, De Beer needs to educate its customers about the blockchain and why this information ca be trusted. A simple “Checked by Ethereum” sticker will not do the trick.

Interestingly, most of these points hold true for all use cases of the blockchain that deal with digital representations of real-world items. Everyone needs to agree on how the link from the trust-less blockchain to real-life works.

COST estimation (outside-in)

I would assume that the following team-setup is required to implement this use case (without integration into existing legacy IT systems)

  • 1 Experienced product owner with understanding of blockchain and the business of De Beer Sa
  • 2 Blockchain developers to (i) develop the smart contract that represents the diamond and (ii) come up with the deterministic ID function
  • 1 Diamond supply chain expert (part-time)
  • 1 Diamond measurement expert that assists in selecting the parameters to generate ID from
  • 2 front-end developers, 2 backend developers

Duration to develop pilot-use case: 4-5 months.

Blockchain use case analysis on tracking diamonds further data points
  • Idea, Pilot, or in Production: Pilot, 100 diamonds were tracked through manufacturing process to a final retailer. Plan to go into production in 2018.
  • Blockchain technology used: Ethereum (assumption)
  • Industry | Function : Mining | Supply Chain
  • First time use case was reported: May 2018
  • Link to announcement: https://www.bloomberg.com/news/articles/2018-05-10/de-beers-tracks-first-gems-from-mine-to-shop-using-blockchain
  • Included industry players: De Beers Sa (https://en.wikipedia.org/wiki/De_Beers). The De Beers Group of Companies is an international corporation, operating in 45 countries, and specialises in diamond exploration, diamond mining, diamond retail, diamond trading and industrial diamond manufacturing sectors. The company is currently active in open-pit, large-scale alluvial, coastal and deep sea mining.
  • Internal project name: Tracr
  • Related projects: Everledger  (https://www.everledger.io) – at least they started in the earlier days with a similar value proposition, now expanded to different asset classes
About the author

Dr. Thomas Reinbacher is computer scientist and management consultant and works as independent adviser in Munich and Beijing. If you want to work with me or have more information on that particular use case,  please find me on http://dr-reinbacher.com/

Disclaimer: This Blockchain use case analysis on tracking diamonds is an outside-in analysis, provided without warranty or any claim for completeness. All information presented herein is given strictly on a non-reliance basis and under the exclusion of any responsibility or liability, in particular with regard to loss or damages and/or administrative and regulatory sanctions.