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Questions About Blockchain in Industry

It may seem that blockchain is poised to proliferate in manufacturing and supply chain applications, but there remain several key technology issues to address before this can happen in a meaningful way.

'The current state of blockchain standards, governance models and regulatory oversight is immature to nonexistent,' says QAD's Dave Medina.
"The current state of blockchain standards, governance models and regulatory oversight is immature to nonexistent," says QAD's Dave Medina.

A technology once thought of principally as a means to secure cryptocurrency transactions appears ready to move into manufacturing and supply chain. Over the past couple of years, we’ve covered announcements related to blockchain, including offerings designed to improve industrial process efficiencies and reduce costs; how blockchain is being used in food, beverage and pharmaceutical supply chains; and blockchain’s application in industrial control system cybersecurity.

While blockchain is clearly making inroads into industrial use, Dave Medina, vice president of industry verticals at QAD—a supplier of enterprise resource planning software—argues that blockchain requires three things to become a cryptographically secure, trusted network for industry: a public key cryptography, a distributed peer-to-peer network with a shared ledger, and a governing program that contains the controlling blockchain protocol.

Though each of these three aspects are technically achievable, Medina says they each face challenges with respect to maturity, resource requirements and scalability. This is particularly evident in the current lack of accepted standards and governance models for the technology, as well as the lack of regulatory oversight and understanding of the appropriate use cases for blockchain versus existing technologies, he says.

“The current state of blockchain standards, governance models and regulatory oversight is immature to nonexistent,” says Medina. “Commonly accepted blockchain or distributed ledger standards do not exist and are only now being discussed by industry groups. Though more technically related standards like enterprise security and interoperability are needed, the business and regulatory issues such as legal, tax and regulatory compliant accounting standards are equally important.”

Medina explains the legal and taxation related issues as being critically important because a blockchain will, by its distributed nature, consist of geographically dispersed nodes that will very likely reside under different legal and tax jurisdictions.

“Supply chain traceability is often cited as a potential use case [for blockchain] as all links in the supply chain must post their transactions to the blockchain, thereby ensuring a secure, highly visible chain of custody,” notes Medina. “But, what happens if a member of the supply chain posts fraudulent activity, such as substituting counterfeit product, to the blockchain? How would other members of the supply chain vouch for the validity of the transaction if they weren’t physically there? Clearly, internal processes are needed to ensure that posted transactions, such as a quality inspection, occurred. Does that require a blockchain within a blockchain to validate that inspection?”

Networking and scalability
Explaining that cryptographic security in a blockchain is achieved through use of an algorithm that no party controls and is distributed throughout the blockchain, Medina notes that this process requires large amounts of computing power. “For example, the power used in one bitcoin transaction is roughly five times greater than what Visa uses to process 100,000 transactions. This level of CPU usage represents a significant energy and environmental cost that can’t be ignored,” he says.

This means that, when compared to other electronic transactions, blockchain transactions can be very slow. “Consider bitcoin, where it can take anywhere from 60 minutes to several hours to process a transaction,” Medina says. “Due to the distributed nature of blockchain, the time for processing a transaction would grow longer as more computers are added, resulting in much slower and cumbersome blockchain transactions. This trait does not fit well with the idea of an agile, sustainable supply chain.”

Medina notes that his positions on blockchain are not meant to imply that the technology is unsuitable for industry. He realizes the technology is in its early stages of use in manufacturing and supply chain and he expects that many of the challenges he noted will likely be solved by advances in engineering and science. As such, his points are intended to focus on processes that are truly blockchain worthy, versus problems that may be just as easily solved using current technology, he says.

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