ADB issues paper on blockchain use cases in the context of development finance
The Asian Development Bank (ADB) has issued a paper, ‘Distributed Ledger Technologies for Developing Asia’ (“the Paper”), exploring feasible areas of practical implementation for Distributed Ledger Technologies (DLTs) or blockchain, mainly in the context of development finance.
The Paper attempts to provide preliminary answers to two questions:
- Where in a developing country context have DLTs been successfully applied and what are further areas for practical implementation in developing Asia?
- What are the limitations of DLT implementation and what are the steps required to further their development for broader applicability?
The Paper assesses the potential and implementation limits in five use cases: Digital Identity; Trade finance; Project aid monitoring and results; Smart energy and smart mobility; and Sustainable supply chain management.
Based on its analysis, ADB recommends that development lenders such as itself take into consideration underlying infrastructure requirements, such as electrification and connectivity, before embarking on overly ambitious DLT proof of concepts. Appropriate DLT architecture must be selected for each case based on conditions on the ground. End-user limitations (as in user might only be able to make partial use of what the technology is capable) have to be factored in.
For projects involving IoT sensors and automatic data reporting and analysis, the development of broadly shared standards and definitions should be a priority before starting DLT projects.
ADB also expresses a preference for investment in self-sovereign digital identity solutions (for individuals and for legal entities) as it is a gateway for other DLT use cases.
The Paper describes Digital identity as a Gateway to All Other Use Cases. For instance, DLT could help provide financial system access to excluded populations.
The Paper notes that many globally focused startups are building DLT solutions for real-time self-sovereign digital identity management, which means that individuals fully own and manage their own identities.
According to the Paper, the self-sovereign identity approach is ideal for adoption in developing country contexts where there are significant gaps in official state recordkeeping. In developed countries, large sunk investments in traditional and entrenched recordkeeping systems could be a barrier.
But three requirements must be met to realise the benefits: 1) Security (the identity information must be kept secure); 2) Controllability (user must be in control of who can see and access their data); and 3) Portability (user must be able to use their identity data wherever they want and not be tied to a single provider).
Data portability requires platform neutrality, but several solutions are being designed for use on specific DLT platforms, sometimes driven by hype on them. ADB recommends that development funders adopt a policy of publishing public tenders for all DLT-based proof of concepts, even if they fall below the usual budget threshold for a mandatory public tender call.
The paper also points out that quantum computing could pose a risk to the currently used cryptographic functions. Quantum-proof alternatives are available but building these into a self-sovereign identity wallet in a user-friendly manner (no requirement of technical knowledge) poses nontrivial design challenges.
The paper also cautions that digital identity might not be enough on its own to realise the full potential and complementary reforms might be required.
Trade Finance for Improved Accessibility of Small and Medium Enterprises
DLT based trade finance platforms can significantly reduce processing times, improve transparency and boost financial inclusion.
But for a trade finance platform to fully leverage DLT and the automaticity of smart contracts, it would have to bring on board not only banks, but also shipping agents, freight forwarders, ports, customs, and insurance companies, which presents imposing coordination challenges.
Furthermore, trade finance continues to be heavily paper-based in many parts of the world. Digitisation of all aspects is a pre-requisite for DLT trade finance. Global harmonised digital identities for companies worldwide would be an important step forward. G20 mandated the Financial Stability Board to create the Global Legal Entity Identifier Foundation (GLEIF). Established in 2014, GLEIF has since enrolled nearly 500,000 companies with a Legal Entity Identifier (LEI) against a small fee. The paper also points out the World Trade Board’s Digital Standards in Trade (DST) initiative, due for launch in January 2018. It aims to fill the lack of common standards in the trade system by providing a fully digitised and seamless end-to-end throughput in trade transactions worldwide.
Project Aid Monitoring and Results-Based Disbursements
Collecting the information via a DLT would allow dedicated nodes to perform automated data analytics and/or employ machine learning to monitor and analyze the data sent by cameras or sensors in real time. This reduces the time lags and costs associated with data collection and analysis. once the data have been collected and evaluated, they can be passed through smart contracts that generate automatic payments and send them back to the project participants in accordance with predefined instructions.
In the case of the forest preservation project, the smart contract could be programmed to make payments contingent on the slowing down of deforestation in the region as seen from satellite images. All sorts of IoT sensors could be deployed to capture performance data and payments would be made accord to benchmarks and thresholds.
For this to succeed, robust sensors would be required. For instance, they might have to withstand adverse weather for extended periods. It must be difficult to tamper with them or tricking them into recording false data. Hardware costs and connectivity infrastructure gaps are important factors here. DAG-based DLTs (“tangle”) could help here.
(DAG stands for Directed Acyclic Graphs. Transactions are transmitted and confirmed in an asynchronous rather than ‘chained’ way. Conceived as a lightweight protocol for IoT environment to facilitate microscale machine-to-machine transactions among billions of connected devices, it becomes faster and more secure as network traffic grows. In contrast to blockchains, the tangle has no dedicated ‘miners.’ Instead, each IoT connected device that transmits a new transaction to the network must perform the computational calculations necessary to confirm two other transactions as a precondition for having its own transaction confirmed. The tangle’s distributed consensus protocol means portions of the network’s traffic can split off from the main tangle for extended periods of time and continue to operate without internet connectivity (e.g., over Bluetooth, or theoretically even TV or radio bandwidth).)
Smart Energy and Smart Mobility
Meters of various kinds can be integrated into DLT. The paper explains how it might work:
“Community members contribute to local renewable energy production by installing solar panels on their rooftops. A device called a transactive grid element continuously measures their energy production and consumption. This information is shared with other participants over a DLT—in this case a private permissioned blockchain—which in turn enables them to act upon the information in concert in response to changing energy conditions within the grid. At any given time, a microgrid participant might be producing more energy than it consumes, in which case it sells its excess energy to others, or consuming more than it produces, in which case it purchases the shortfall from others.”
This can eliminate the need for meter checks and post-consumption billing and drive renewable energy growth by facilitating financing and boosting adoption.
DLTs can also be used to connect electric car owners and private charging station owners, enabling electric vehicles to be recharged in places where public charging stations are not available.
But it is expensive and inefficient to send energy across large distances, due to energy loss in transit. Connecting noncorrelated microgrids to balance out each other’s load patterns is only practicable in regions where they are located in close proximity. Connecting microgrids to main grids could be an alternative. But here too distance poses a barrier, especially for remote and/or difficult to reach places. Therefore, for microgrids connected through DLTs to provide a sustainable solution for remote areas of developing Asia, investment in battery capacity improvements will be required.
Access to the private finance needed to purchase electric vehicles and electric charging stations is the primary barrier for peer-to-peer mobility markets.
The paper notes that ADB, which gives out around $5 billion every year to energy projects (with around 50% for renewable and energy efficiency projects) is in a good position to facilitate the introduction of DLT to its energy sector operations.
Sustainable Supply Chain Management
DLTs can help manage global supply chains in a way that ensures products and services are produced in accordance with recognized human rights principles, sound consumer safety norms, and environmental best practices.
DLT-based global supply chains could even include smart contracts to automatically adjust the prices paid to each supplier along the way in accordance with the supplier’s demonstrated labor, environmental, or consumer protection performance in each case.
But considerations of IoT device robustness and tamper proofness, electrification and connectivity barriers, user design challenges, come into play. And sometimes, basic questions of what to measure and how to measure need to be resolved. Here, development lenders can partner with, participate in, and/or provide technical and financial support to standards-making bodies to develop broad-based consensus around and adoption of sensible sustainable development-related standards. The invention of new tracking methods and devices might also be required.
Read the paper here.