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The "Blockchain" to reintegrate social and environmental externalities into the value of the final product ?

Can we imagine a virtuous economic paradigm in which social and environmental externalities are integrated into the value of the final product ?

Social and environmental limits of our economic system

Let us take the example of coltan, an ore used in the manufacture of electronic equipment and mainly extracted in the Democratic Republic of Congo under deplorable working conditions. According to UNICEF and Amnesty International, 40,000 children work in these mines, up to 12 hours a day and without protective equipment[1]. The extraction of coltan under these conditions obviously defies all competition, especially since a cascade of intermediaries makes it possible to hide its origin from the final consumer.

Despite the goodwill and perseverance of NGOs on the ground, this system is unlikely to change if the dubious coltan markets continue to exist. With major economic challenges at stake, it is also unlikely that the international community will reach a political agreement followed by significant concrete action to eradicate the poor working conditions in many countries.

Let us now imagine that the conditions for extracting coltan are an integral part of the characteristics of the traded coltan, and that successive transactions are made transparent, immutable and incorruptible. With this traceability, any citizen or state could verify the origin of coltan from phone manufacturers, encouraging or forcing them to redirect their supply towards more ethical solutions.

Let us also imagine that this system is capable of generating and maintaining a consensus between a large number of parties who have no a priori reason to trust each other. This system could then follow a bottom-up development, bypassing the need for an unlikely multilateral top-down decision.

In any case, it is the promise of experiments based on block chain technology. Before presenting some of these projects, let us clarify this concept that appeared in 2008.

Block chain technology as a tool

A block chain - called Blockchain - is a secure and decentralized database that contains the history of all transactions - grouped by blocks - made between its users since its creation. Each user has the possibility to check the validity of the chain without having to trust a third party.

These properties are made possible by the combination of cryptography and game theory. On the one hand, each new block of transactions is linked to the rest of the chain by a cryptographic hash depending on the previous block. In this way, the alteration of a past block would require modifying all the blocks that follow it. On the other hand, block chains rely on incentive systems to find and maintain consensus, even in cases where a minority of participants would send incorrect or malicious information. The two most commonly used methods of consensus building are "proof of work" and "proof of issues". Proof of work - used by the Bitcoin block chain, the most famous cryptocurrency - puts users in competition and pays them to perform complex calculations to validate blocks. Considered too energy consuming, it is replaced in other block chains by evidence of stakes that favour the stick over the carrot: rather than rewarding a valid result, it is enough to financially discourage invalid results.

Through these mechanisms, block chain technology has the ability to certify transactions in a decentralized manner. More ambitious, some block chains such as Ethereum go further by certifying "intelligent contracts" that will automatically execute instructions according to predefined conditions. Once registered in the block chain, the terms of these contracts cannot be modified. This foundation has made it possible to create notary projects, collaborative economy projects without intermediaries (for example, the rental of apartments whose connected locks could only be unlocked from a date indicated in an intelligent contract[2]), traceability of food and industrial products.

Some examples of projects based on the block chain

Among the block chain traceability experiments is the Kimberley Process initiative to use this technology to prevent conflict diamonds, or blood diamonds, from entering the market through false certificates[3]. Also in the mining sector, the world leader BHP Billiton has just announced its intention to migrate the management of its production chain to the Ethereum block chain, in order to improve the efficiency of its operational processes[4]. It is also about facilitating collaboration with its many partners who will need to adopt this technology to continue working with BHP Billiton. In the long term, this phenomenon of "contagion" throughout the chain will be reflected in an optimized follow-up from producer to consumer.

The agri-food industry is not to be outdone with Walmart's recent announcement that it is partnering with IBM to track pork in China[5]. In this example, it is the block chain technology developed by Hyperledger that will ensure food safety by keeping data on the origin of the meat, its processing in the factory, its storage and shipping temperatures and its expiry date. For its part, the technology startup Provenance has already experimented with monitoring Indonesian fishermen's tuna at the British supermarket[6]. The objective is to curb overfishing, illegal fishing and human rights abuses, by promoting ethical and ecological practices directly to consumers through certificates integrated into the Ethereum block chain.

Trust beyond the block chain

However, the use of block chains cannot guarantee the complete elimination of fraud in the projects mentioned above. Indeed, the link between the digital world and the real world will always require the intervention of trusted third parties to certify the transcription of reality into the digital register. This transcribed reality concerns both the characteristics of the real objects or services, and the identification of natural and legal persons.

In the language of the Ethereum block chain, these trusted third parties are called "oracles". They are responsible for entering information reliably into the block chain to ensure that certificate contracts are executed correctly. In practice, an oracle can be either a formally identified natural or legal person (such as a State, a company, an association or a citizen), or a decentralized group of people involved in consensus building (as proposed in the Oraclize project[7]). This last possibility opens the way to new modes of governance close to participatory democracy.

In the example of traceability of tuna caught in Indonesia, it is a local NGO that acts as a trusted third party guaranteeing the origin and conditions of fishing, as well as the identity of the fisherman. In the case of diamonds, Kimberley Process certifications are carried out directly by sovereign states or by accredited organizations representing them.

In some cases, certification is based on several trusted third parties, each of whom has a specific scope. More concretely, it is possible to allow a company to certify the characteristics of an object, while reserving the privilege of identifying persons to the State concerned.

Moreover, identification by States is already a reality. Estonia, since 2002, has been acting as a trusted third party certifying the digital identity of its citizens through the use of electronic identity cards. It has even extended this service to 12,000 e-residents who are not Estonian citizens over the past two years. This means that the identity of Estonian citizens or e-residents involved in a digital contract of a block chain can already be guaranteed by the Estonian State[8].

The value of a product, whose social and environmental footprints have been certified, depends not only on these footprints, but also on the reliability of trusted third parties who have certified the various stages of manufacture and transport of the product. Competition between trusted third parties encourages them to be honest if they want to maintain their reputation and credibility.

Restoring social and environmental responsibility

The notion of liability is ensured by the very nature of block chains because it is not possible to avoid a transaction or an intelligent contract when the latter has been validated by the distributed network. On the other hand, the scope of responsibility is very clearly defined between the various trusted third parties certifying the social and environmental footprint of a product traced in the block chain.

Last but not least, such a traceability system on a chain of blocks makes it possible to restore consumer responsibility by lifting the veil on the working conditions and environmental practices of the various intermediaries up to the producers.

Block chains are and will remain digital tools at the service of citizens. The interfaces between the digital and real worlds require trusted third parties whose responsibility can be verified by all citizens. This system is thus virtuous, in particular because it limits fraud and reveals the social and environmental externalities that can gradually be reintegrated into the value of products.

 

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[1] https://www.amnesty.org/en/latest/news/2016/01/child-labour-behind-smar…

[2] https://slock.it

[3] https://www.kimberleyprocess.com/en/system/files/documents/kimberley_pr…

[4] http://www.bloomberg.com/news/articles/2016-10-18/from-bhp-to-nasdaq-bl…

[5] http://fortune.com/2016/10/19/walmart-ibm-blockchain-china-pork

[6] https://www.provenance.org/news/technology/tracking-tuna-catch-customer

[7] http://www.oraclize.it/

[8] https://dapps.oraclize.it/proof-of-identity/

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