The Simple is Never Simple

Simplification is a wonderful thing.  It makes that which is inaccessible accessible – it is usefully employed by those who understand that their specialism is not the specialism of the vast majority of the population, nor often the audience they are speaking with.

This blog is about immutability and supply networks.  The risk that is perceived by the proponents of distributed ledger technologies is that of deception in the supply network – tampering, substitution, and outright fraud.  Bitcoin is immutable – preventing double spending is a critical foundation block of any currency – and beyond currency, supply networks are an obvious ‘next domain’ in which immutability should be critical.

Let’s explore this for a moment.  I have a high value commodity – say diamonds – and they are produced in west Africa.  I know some diamonds are ‘ethically’ produced, yet others come from areas where forced labour and child soldiers are common – so I wish to ensure that I have full traceability of each diamond to confirm its provenance (and hopefully the methods used to produce it, and the beneficiaries of my customer).  Now there is no spot price for diamonds, but we can find data that indicates one carat of rough diamond (that’s 0.2 grams) will be of the order of $1,500 in Antwerp.  At that price per mass, significant expenditure on traceability may be a worthwhile exercise – and we can presuppose there will be very little wastage in the supply networks given the value of the good. 

Now let’s consider coal (to maintain the carbon-based theme).  Australian thermal coal was trading at $100.73 per tonne in November 2018. One tonne is one thousand thousand grams – or five million carats.  This means that thermal coal is 74.4 millionth of the value of rough diamond, by mass.  It suddenly doesn’t seem ‘worthwhile’ to trace it, perhaps?  In fact, this is not my main concern.  I am more concerned about loss in the supply networks.  Coal is very brittle, so is both prone to turning to dust during transportation and mechanical handling – as well as being so low value that it makes little sense to seek to ensure that all material is retained as it moves along supply routes, unless it is very easy to do so.

So we have two forms of carbon – one very high value, and one very low value – and it is clear that each commodity will be handled very differently as it moves to its final destination.  Now what would one want to make immutable here?  I touched on the ‘simple’ answer earlier: mass – but we can immediately see that we are setting ourselves up for failure in the case of coal.  The more complex answer might be the description of some kind of physical marker or indicator (such as a bar code or record of the precise chemical makeup), and that implies further cost – so is arguably only relevant for the diamonds. 

Let’s take this ‘value of commodity’ consideration further: it is important to note that the prior examples do not consider the transformation of the goods.  Many commodities do not end life as they started it – fish is processed into pies, timber is converted into furniture (and biomass!), palm oil becomes a food additive, and rubber becomes tires.  Transformation results in opacity – oil is blended, rubber is mixed with carbon black and sulphur – and one arguing for immutability of mass as a way of ensuring traceability should reflect how this can be effectively handled in a distributed ledger platform.

There are applications for facets of distributed ledger technology in supply networks – public inspectability and consensus bring considerable value, and in high value commodities without transformative stages immutability has a role to play.  But we return to our start point of the risk implicit in simplicity: supply chains are complex affairs, and the answer based on simplification of the issues will only generate part of the overall solution.

Miranda Meldrum