Blockchain electrifies the economy: banks, logistics and transport companies experiment with the new technology
With Blockchain any exchange can be organized that can be digitally mapped
The hyped technology that fans say will be responsible for the next digital revolution, and that is supposed to shake just about any business model, is used here in a rather mundane way: to speed up business processes. Since autumn 2016, von Bonin’s team has been working on it; 120 possible applications have been played through, a handful of them implemented. One application in the energy sector has been in operation for a year. Hardly any other company in Germany has reached this point – but the railway is not alone in its experiments.
While the public is still wondering about Bitcoin’s crazy price swings and doesn’t really know how it all works, the technology behind it has long since emancipated itself from its most prominent application. Because block chaining not only guarantees the largely smooth operation of a digital monetary system – in principle it can be used to organize any conceivable exchange that can somehow be digitally mapped. Which also means that it is not only banks and financial service providers that deal with it, but companies from all kinds of industries.
All over the country, IT departments and innovation labs are testing the use of the technology, pushing field tests and pilot projects. Companies are forming consortia to agree on standards and test joint applications. Specialist conferences take place every week. Even politics is listening: the term Blockchain appears six times in the coalition agreement, the newly founded Federal Association Blockchain has proudly counted.
A lot of noise is being made around the chains. But how far is the revolution really? Where can it still go? And what exactly can be done with it? Time to take stock.
Philipp Sandner, Professor of Business Administration at the Frankfurt School of Finance & Management and head of the Blockchain Centre there, is someone who is right in the middle of it all and yet can maintain the necessary distance. “Potential and promise are huge,” says Sandner. But: “We are in an early testing and experimental stage, there are many plans, ideas and prototypes.” Real applications are rare.
And the technology is not so new. The first blockchain was sketched in 2008 by the unknown Bitcoin inventor, who hides behind the pseudonym Satoshi Nakamoto. He wanted to create a digital currency – but without centralized supervision. In doing so, he was faced with the so-called double spend problem: Without centralized supervision, how do you ensure that no one is spending more or more than once?
The solution: Blockchain. Here, all transactions are registered, the data is bundled in blocks and inseparably linked with each other using encryption technology. However, this register is not kept in a central location, but by all those who participate in this network. New transactions are simply appended to the chain and stored. Above all, however, past transactions cannot be changed – they are securely packed in the blocks that have already been formed. This makes the chain practically immune to manipulation and attacks. The sophisticated system has resulted in the digital currency Bitcoin surviving for almost a decade. Trading places may have been hacked and emptied – an attack against the core of the system, the block chain, has never succeeded.
More than just operating a currency
Early on, crypto-fans realized that more could be done with the distributed database than just operating a currency. With the first Bitcoin boom in 2013, interest also grew outside the scene. Alternative blockchains like Ethereum were created, but also the first solutions suitable for companies: private blockchains.
They solve the double-spend problem, even outside of a currency. Anyone who has ever worked with several people on a Word document, for example, knows the problem that changes quickly overlap in virtual space and at some point nobody knows which document is actually the original. In the simplest case, blockchains therefore simply serve as a credible and fail-safe information store in a complex environment – as in the case of the first project at the railway.
The railway is one of the largest electricity consumers in Europe and therefore employs its own electricity traders. Up to now, the various business units of the railway have reported their planned consumption by fax, telephone and e-mail, one day in advance. This was radically simplified by a block chain solution that collects these reports. The users operate a normal computer program – many are not even aware that it runs on a distributed block chain and not on a central server. From a purely technical point of view, this could have been built on the basis of a normal database – but the advantage of the block chain variant is that the entries are unchangeable. No administrator can correct bookings anymore. The clean documentation also pleases accountants and auditors.
Feels like 1993
For von Bonin’s team, building the trading platform was an unusual experience: “With such raw technology, there are no blueprints. Everyone is always talking about prototypes, but nobody has anything operationally up and running. You have to do it yourself.” Only about 20 percent of the effort would have affected the block chain itself, and the rest of the work would have involved connecting existing IT systems. But once that’s done, the next applications can quickly follow. “Of course we would like to block-chain all processes!”
The euphoria, the first steps – experienced observers feel reminded of the early years of the Internet. “We are roughly at the level of 1993,” says Alexander von Frankenberg, head of High-Tech Gründerfonds, Germany’s most active venture capitalist. The analogy fits well. Just like the Internet, Blockchain is a basic technology, a foundation on which other applications become possible. And just like 25 years ago, the foundations are only just being laid. It is completely open what will be possible with the help of block chains. And incredibly difficult to predict.
Old Economy wide awake
Even in 1993, hardly anyone could imagine that people would order refrigerators over the Internet, maintain friendships or rent into the homes of strangers. In 1993, Microsoft CEO Bill Gates still advised his people to take care of other things: “The Internet is just hype.”
But there is one crucial difference: Unlike back then, the old economy is wide awake today. This wave of digitalization, it can be felt, nobody wants to miss. What new technologies can do to the power structure of entire industries, that market leaders can become dwarfs and small attackers can become powerful platforms, has been seen by the company’s leaders over the past two decades. They are now on their guard. They have every reason to be.
Early April, a crypto-conference in the former Postbahnhof at the Berlin Gleisdreieck. Dozens of start-ups present themselves in the anteroom: Blockchain asset managers, bonus programs, messengers, erotic providers and, of course, Blockchain management consultants. Hardly anyone here has market-ready products. The method of choice are Initial Coin Offerings, in which the start-ups spend their own currencies and receive money in return. Even start-ups whose business model is not to operate their own currency use this new form of crowdfunding. Since September alone, around 11 billion dollars have been raised worldwide. The mood is upbeat. On stage, a crypto-investor wearing hipster glasses and a worn-out leather jacket announces: “Hundreds of industries will be disrupted!
One week later, a congress hotel in Düsseldorf-Seestern, another block chain conference, but one with dress code – it’s clearly more sedate. Sebastian Kraft, a young Schlaks with cleanly polished shoes, presents the strategy of Commerzbank. To start off, he shows a slide showing the music industry’s wobbling turnover over the past 20 years. “Kraft says, “We are basically afraid that the banks might feel the same way. Up to now, the institutions have acted as trustworthy middlemen in financial transactions, but this could become superfluous with technology.
The industry is facing this danger with an open mind. Commerzbank, along with more than 200 other banks, is a member of the R3 consortium founded in 2014, which develops block chain software for the financial world. Kraft says: “We definitely see opportunities for us. For one thing, there are the well-known efficiency gains through leaner processes. But it can also be a reduced risk if, when a security is issued, it no longer takes two days for the money to arrive in the bank’s account – the bank must deposit equity capital during this time.
Commerzbank has examined more than 80 applications in its own block chain laboratory since 2015, and half a dozen have reached the proof of concept stage. One example: In September 2017, the bank simulated a securities transaction together with KfW and MEAG, the asset manager of Munich Re and Ergo. The money market security issued by KfW with a value of EUR 100,000 and a term of five days was sold to MEAG – a comparatively simple task.
Restrictive legal situation as biggest hurdle
Nevertheless, the procedure was revolutionary: because middlemen such as paying agents and clearing services were no longer needed, the processing no longer took two days but ran virtually in real time, and the cost savings were also significant. The downside is that this application is not yet allowed to be used in regular operations because the legal requirements for purely digital processing are not in place. During the test in September, a notary public had to have the responsible board members sign the contract, and then the contract was put into the safe – as before – as a paper document.
Philipp Sandner sees the restrictive legal situation, especially in the financial sector, as a major hurdle for the implementation of block chain projects. He therefore does not believe that the banks will be the first victims of the crypto-wave. “We will see the first use cases in other industries.” But even there, the necessary specialists were often lacking and the necessary understanding in the boardrooms. “There must be a cultural change,” Sandner says.
“Sure, it’s hype – just like 3D printing”
Hamburg-Hafencity, a spacious meeting room glazed on three sides with spectacular views of the harbour and city centre. At the head of the conference table, Martin Kolbe, Chief Information Officer of Kuehne + Nagel, a freight forwarder with 125 years of history and 76,000 employees, is seated. With all due respect, one would not necessarily expect this company to be among the early adopters of Blockchain.
Kolbe also takes some air out of the subject for the time being: “Of course it’s hype. I have seen many of them come and go.” He remembers the last one well: 3D printing. “In the beginning they said it would make the harbour superfluous, because now everything is printed in Hamburg.” It didn’t quite come to that.
Shit in, shit out
“We see this as one technology issue among many,” says Kolbe. “But one that also needs to be mastered.” It’s another tool in the technology kit, helpful in the mammoth task of digitization, which freight forwarders still mostly have to face. It starts with the fact that there are hardly any common standards in the industry on the basis of which digital platforms could be built, for example for tracking containers through several participants in a supply chain. “People think,” says Kolbe, “that the container is a highly standardized industrial good, standardized to the millimeter, so the way it is handled should also be standardized. But it’s not.”
Kuehne + Nagel’s IT department has been working on block chains since 2016, looking for possible partners and exploring potential applications. Finally, an old document was identified as a suitable problem case: the consignment note. It accompanies every shipment, in the original of course, it is stamped at every station, serves as security for banks and, if it is held up somewhere, can tie up a ship to the port for days on end.
Together with partners, Kuehne + Nagel developed a block chain replacement for the document. In spring, the first shipments will complete the complicated supply chain – almost 20 stations in all. All of them are connected to the system, “stamping” the consignment note digitally. Each of the parties involved can see where the shipment is at any time and what its status is.
At the moment, the consortium is building a prototype of the solution, which should be ready by the end of the year. In addition, the consortium is trying to expand – after all, a platform like this makes all the more sense the more companies participate. Competitors of Kuehne + Nagel should also be able to participate.
Stage 2: fully automated contracts
And there are already other functions involved. For example, so-called Smart Contracts, the second expansion stage of the block chains: fully automated contracts that come into effect when certain events occur. In the case of the digital bill of lading, for example, this would mean that when a container is landed, a trucker would automatically be hired to transport the consignment. But that is still a dream of the future. (Just like the third expansion stage, by the way, so-called decentralized autonomous organizations – companies or institutions that only exist or function in the block chain).
Instead, Kolbe thinks about a dilemma that is sometimes overlooked in the enthusiasm for the new technology. In the IT world the problem is memorably called “Shit in, shit out”. Data is passed on unaltered and unalterable by block chains – there is no guarantee that the data is valid and correct when it is entered. “If we are missing data, if we have wrong or fragmented data, we still have to look for other methods to improve it,” says Kolbe. To do this, Kuehne + Nagel relies on masses of sensors, on container scales – on interfaces with reality, which should be more reliable overall. After all, block chaining may be a promising technology. But humans remain a source of error.