Blockchain is a basic technology. Just like the internet, it has technological properties that can be used in many different ways, and its future uses and applications are not yet clear. At its core, a blockchain is a list of data records that is continuously expanded. These blocks of data records are linked together using cryptographic methods and contain a timestamp, transaction data, and a cryptographic hash function. These elementary components of a blockchain ensure that subsequent transactions always build on previous transactions and confirm the correctness of the previous ones by proving knowledge of the previous transactions. This makes it impossible to manipulate or delete the existence or content of past transactions without destroying all subsequent transactions.

What makes blockchain technology so special, its greatest advantage, so to speak, is that it does not rely on the coordination of a trusted third party.

Blockchain: decentralized infrastructure

As a rule, every transaction on the Internet is an agreement between unknown or anonymous parties, as there is no concrete counterpart. For this reason, the parties involved in the transaction cannot trust each other and require a third party who is trusted or formally agreed to be trusted in order to carry out the transaction. Any type of transaction on the Internet (selling, buying, streaming, transferring, or sending) requires one or more intermediary platforms that act as intermediaries; countless amounts of data are collected, processed, stored, and used in their data centers. Blockchain technology counters such platform systems with a decentralized infrastructure. In such a decentralized network, intermediaries (the third party) become superfluous, as transactions are carried out between the participants themselves (peer-to-peer).

Control over your own data

In a blockchain, each participant has a kind of account book in which all transactions are listed. As already explained, this allows all participants to check or verify new transactions, which prevents misuse. This eliminates the need to entrust one’s own data to an intermediary, where it could be misused or forwarded without permission. Instead, the participants in a blockchain retain control over the data without compromising security and data protection (see the two videos).

 

 

Blockchain and the current status

Blockchain technology is explicitly not synonymous with cryptocurrencies, which are only one of its possible applications, albeit the best known. In contrast, general development is currently being determined by two perspectives of decentralization:

• Where is decentralization increasing? This perspective deals with areas of industry, society, and politics that are transforming from a centralized structure to a decentralized one. Blockchain technology can be used more extensively here.
• Where can third parties be dispensed with? Numerous use cases deal with solutions that make intermediaries superfluous.

Example – Blockchain

The power supply is absolutely centralized and subject to correspondingly rigid regulations and dependencies, as electricity is produced and fed into the grid centrally by large power plants. Nowadays, however, every private household can generate its own electricity. This is where the smart contracts of a blockchain come into play, making it possible to dispense with a central operator who coordinates and bills everything. If neighbors join together via blockchain, they can supply each other with electricity and thus trade among themselves.

Blockchain in logistics

More and more sectors of the economy are discovering and internalizing the principle of blockchain in order to reap its benefits. In logistics, for example, it can increase the transparency of supply chains (see Logistics Management) and speed up tracking. While individual means of transport (containers/pallets) are now standardized and normalized, the individual transfer stations (interfaces) are still far from being homogeneous; rather, they are technically very different and hinder the smooth flow of goods. In this context, for example, a consortium consisting of Kühne + Nagel and partners has developed a blockchain replacement for the consignment note (CMR), which, in the traditional manner, accompanies every shipment, is stamped at each station, and serves as security for banks; if it is defective or incorrect, it can cause a ship to be stuck in port for days. However, a consignment note in the form of a blockchain is digitally stamped and every party involved can view the location and status of the shipment at any time (see also the CPFR model).

This results in considerable time savings, increased efficiency, and reduced costs. Logistical processes become cheaper and faster by using blockchain technology to increase transparency and integration, while increasing the degree of automation.

• A typical field of application for blockchain is supply chain management (SCM), which involves all parties involved in the value chain, such as suppliers, manufacturers, retailers, logistics and financial service providers. The key factor here is the link to the Internet of Things (IoT), which allows the location and status of inventory to be accessed at any time by everyone involved in the network.
• The immutability of the data records in a blockchain also contributes enormously to ensuring that absolutely valid data and information are always available, which also benefits master data management in the logistics industry.
• Blockchain will lead to the increased use of smart contracts, which will raise the level of automation in companies. The validity of the data in a blockchain allows reliable if-then scenarios to be implemented that are triggered automatically when the condition is met, reliably and without the involvement or confirmation of a human control authority. Example: If machine X still has Y cooling fluid, then quantity Z of the fluid is reordered.

Disadvantages of blockchain (source: Computerwoche & Joachim Arrasz/synyx)

• Environmental costs
• Traffic costs (Ethereum wallet, Bitcoin)
• Low data throughput
• Private blockchains no longer offer the security that should actually be provided
• Little individual scalability
• Storage space limitations
• Difficult to manage permissions
• Difficult integration with existing legacy systems in the company

The German Logistics Association (BVL) has written a nice summary that sums up the above-mentioned disadvantages:

• This means that it hardly works under heavy data loads. “Today, niche processes could be handled via blockchain, but not mass data along the supply chain.
• Data queries are significantly slower in blockchain than in a normal database. The encryption and decryption process for a blockchain-based Bitcoin transaction currently takes 10 minutes. This does not meet the logistics industry’s requirement for real-time data exchange.
• A Bitcoin transaction currently costs around €30 in electricity (source: faz.net). This suggests that blockchain is not yet an alternative for processing mass transactions, e.g., in tracking, even if the prices are lower.
• As with any new technology, there are still hurdles to overcome in integrating blockchain into contract law.

Summary of blockchain (source: Fraunhofer Institute IML)

The characteristic features of a blockchain are decentralization, immutability, and transparency. It enables new forms of software integration and, as a basic technology, represents another component for connecting multiple actors in a new way by changing or replacing existing types of interfaces, which makes an intermediary party superfluous. This makes it particularly suitable for logistics processes in which several participants in a supply chain, without knowing each other, can rely completely on the correctness of the process flow and the corresponding data thanks to blockchain technology.

The blockchain is therefore a decentralized form of information storage. Individual pieces of information are bundled into blocks that are linked together like a chain via so-called hashes. These hashes ensure that the blocks created so far cannot be manipulated. Blockchain technology also derives its high level of security from the fact that the information is encrypted and not stored centrally in one place. Everyone in the respective blockchain network receives a complete copy of all information. If third parties want to manipulate the blockchain, they would have to do so simultaneously for all participants in the network.

The use of smart contracts makes it possible to conclude contracts in real time and validate their current status. These are not contracts in the traditional sense, but program codes based on if-then conditions that trigger agreed actions. The necessary conditions are agreed upon in advance by the partners and are binding. For example, a container with refrigerated goods is automatically sorted out if the cold chain is interrupted. The combination of smart contracts and blockchain technology ensures complete transparency of automated workflows and processes, which can run faster and more securely than with traditional contracts.

However, the disadvantages are obvious: These include: limited individual scalability, low data throughput, storage space restrictions, difficult-to-manage permissions, and difficult integration with existing legacy systems in the company.

Image source: iLexx / Thinkstock

If you are interested in the topic of blockchain, then read the articles Goods flow control for products and materials and Logistics management and the supply chain.