How Blockchain + IoT Will Enable Autonomous Negotiation
The use cases for blockchain in logistics, supply chain, and provenance are starting to mount up, but these are only specific instances where blockchain can provide significant cost and time savings to industry. In this article, I provide a more general analysis of how blockchain in combination with IoT should be positioned to revolutionize all of these areas. I even give it a name.
An IoT Overview
An explosion in the reliability, robustness, and affordability of a wide range of sensors, combined with significant improvements in power consumption, processor power, and data connectivity has resulted in the possibility of tracking, tagging, monitoring and identifying pretty much anything we produce these days. We’ve come some way from from slapping a bar code on a can and scanning it manually in the shop.
I would encourage IoT practitioners to explore how blockchain can apply to their data flows and specific use cases to determine whether blockchain is the right tool to solve their problems — and whether it is truly the missing link in their IoT deployment. — Maciej Kranz
Similarly, factories are being upgraded all the time. IoT devices can often be bolted on to existing machinery, and linked together to provide essential data for optimizing production processes and mitigating equipment failure or malfunctions.
However, having “all the data” at your disposal is not enough. A supermarket may, through a forensic process of sifting through shipping and production manifests, be able to work out exactly when and how the potato salad they wanted to sell was contaminated with salmonella, but it is a time consuming and costly process. Similarly, sensors in a factory may report that an assembly line is producing at half the expected rate, but ultimately an engineer has to determine and then authorize what action should be taken. When you drill down into the processes taking place, you eventually reach the assessment that a trade-off is being made: Do I investigate the potato salad situation, or just dump the spoiled stock? Do I fix or replace a machine part, or shut down the whole line and re-route raw material inputs?
A trade-off essentially comprises a form of negotiation or bartering. And key to the concept of negotiation or bartering in any society, ecosystem or environment is fundamentally a marketplace. This is where we move away from engineering and into the philosophy and sociology of economics.
The Relevance of Markets
Identity, reputation, a medium of exchange, contracts, reliable bookkeeping, and the authority to act are all separate and yet essential components in the provision of a corruption-free, fair and accountable marketplace. Those of you who have already spent a significant amount of time thinking about blockchain’s capabilities will already see where I am going with this.
To give real service you must add something which cannot be bought or measured with money, and that is sincerity and integrity — Douglas Adams
Identity: You need to know who you are trading with. A blockchain provides the possibility for IoT devices to register their digital certificate simply by publishing it on the chain in an initial registration transaction, allowing other parties to subsequently verify that they are indeed dealing with the device they think they are, and to determine who the owner of the device actually is. The registration can happen in a fully automated manner, as I’ve discussed in a previous Linkedin video.
Reputation: You need to be able to identify bad actors and rank good actors in the marketplace. This is therefore an enhancement of the identity component, together with some form of voting system that allows parties in the system to label individual devices as positive contributors or drains on the system. Votes can easily be provided in a blockchain ecosystem by essentially issuing tokens for them.
Medium of exchange: Probably the most obvious application of a blockchain, and certainly the most successful to date, the concept of cryptocurrency has been well-examined. In a blockchain system where all parties are identified there is no need for proof-of-work, and hence micropayments are feasible.
Contracts: Although I have previously asserted that I cannot see smart contracts replacing lawyers in the near or even distant future, for simple agreements at the level of the “direct debit” or “standing order” current smart contract technology is eminently suitable for an automated implementation. Moving on from these simple proven smart contracts, in the realistic future we can envisage slightly more complicated standing orders in which payment is only made on receipt of a service. A parallel with the real world would be an enhanced standing order for a magazine subscription based on detection by a device in your house that this month’s issue had actually been delivered. Parallels into supply chain and logistics are fairly obvious.
Reliable bookkeeping: Due to the fact that the blockchain ledger is immutable, it is feasible to perform regular automated audits of all transactions that have taken place. Furthermore, analytics run on the ledger would allow for further optimizations of the system, resulting in further cost savings. Blockchain provides the next step forward in double-entry accounting.
If you look at the history of the American capital market, there’s probably no innovation more important than the idea of generally accepted accountancy principles — Lawrence Summers
Authority to act: It is not enough just to know who you are dealing with, you also need to know that they have the authority to make the decisions they are proposing. In the computer technology world this is known as IAM (identity and access management), and it is traditionally managed by having a user database with associated permissions. For example, a system administrator account has a much higher authority to act on the system (it may be allowed to delete or update all data entries) than a standard user account (which may only be allowed to read data entries made by others). Again, functioning as a distributed database, a blockchain can track IAM and the consensus protocol of the system can enforce the permitted actions.
Putting It All Together
When you consider all the above components in isolation, you are left with a collection of interesting components. But as is usually the case for blockchain, it is only in combination that it becomes apparent that a ecosystem can function like a bazaar or a confederation of guilds. That is to say, it is effectively a virtual network of “merchants”, “bankers” and “craftsmen” realized in software, working in a specific area. In the blockchain example, “bankers” are the combination of the medium of exchange and the ledger, “craftsmen” constitutes the IoT devices and the data they produce, and “merchants” consists of the companies and software services that allow the system to produce useful work.
And the beauty of a virtual bazaar is that swathes of activity can be automated.
The Automatic Bazaar
Now we’re ready to make the final leap, dig in to the fun part, and really start playing with ideas. What could be done with an automatic bazaar? What if there was a possibility of a simple, truly rational market, because the participants have no emotion, and are just looking to optimize their returns, and are able to take the big picture into account (and profit from that).
Markets can remain irrational longer than you can remain solvent — John Maynard Keynes
For starters, devices can join, receive funding for work that they perform, purchase , and pass the profits on the the device owner. A basic example would be fitness bracelets that can submit anonymized data to aggregators, who sell it on to research institutions, pharmaceutical companies or insurance companies, and pass part of the profit back to the bracelet owners. There are hundreds, if not thousands of cases like this. Permissioned data sharing in an automated manner allows data analytics to be performed in an ethical way, which should increase data accuracy and therefore the real value of the data shared.
Factory devices can bargain with each other in an open marketplace, deciding which machines should receive raw materials, more electricity, determine maintenance priorities, order replacement parts, all without manual intervention.
Supply chains can not only be interrogated for product integrity at any stage, but sales and routing could be determined algorithmically, with raw materials being produced, transferred and transformed in the most market-optimized manner. Automated bidding, for example through a Dutch auction on a blockchain, would allow for an improved general production lifecycle, with each stage of the production and shipping process being involved. As a result the whole chain can be optimized (and some of the value of the improvements being passed back as compensation to participants losing out due to the loss of a local optimization maximum), for the benefit of all.
And that last example should give you an insight into the true value of an automatic bazaar. At the moment trades are done for a locally maximized profit. There are some financial instruments out there (hedging or insurance, or derivatives) that allow for two-step transactions, in which one of the transactions is made at a lower profit, but the second transaction results in a substantially higher profit that offsets the first loss. With an automated bazaar the potential for multiple transactions to be packaged and optimized for an overall gain would become a reality.
And on that note, I’ll leave you to do some brainstorming of your own. Let me know what you come up with!
About the author
Keir Finlow-Bates is an inventor and CEO of Chainfrog, Finland’s first blockchain startup, focusing on IoT/blockchain innovation. Chainfrog develops blockchain components providing provenance, identity, data permissioning and other IoT relevant innovations. Feel free to contact me to find out more.