Blockchain in the Chemical Industry

The original motivation of the blockchain technology

Digital currencies based on the blockchain technology[1] that started with Bitcoin have gained high interest in various sectors. They present ways of digitally transferring value without the usual necessary intermediaries, i.e., clearinghouses, banks, or other service providers. For example, cutting out the intermediaries in money transfer operations alone enables double-digit cost savings in processing fees.

Blockchain beyond digital store of value

Different to a few years ago, many experts today consider the underlying blockchain technology as the largest potential to disrupt industries far beyond banking. The products of large infrastructure providers (e.g., Microsoft, IBM, SAP), large interdisciplinary consortia[2], venture capital (VC) activities (e.g., Andreessen Horowitz LLC, Digital Currency Group, Robert Bosch Venture Capital), and large amounts of startup funding via the concept of initial token offerings (ICOs) provide an indication that blockchain is quickly taking over various areas. While venture investments have been purely turned to digital currencies related projects up until 2013, flows are now redirected towards blockchain technologies instead of currencies and the finance industry. These are indicators that blockchain projects with the primary focus on general-purpose technology and other applications are on the verge of disrupting other industries instead of being a pure store of value.

Essential features of blockchain for industrial applications

With respect to the chemical industry, we want to emphasize four main blockchain features that can be combined to enable new functionality:

Industrial relevance of blockchain technology

The potential impact of blockchains beyond digital currencies is impressive: Reports project efficiency gains ranging anywhere from an estimate of $20 billion per year for payments, trading, and compliance[3] to more than $176 billion per year in business value-add across industries[4].

Table 1: Blockchain applications in various sectors

Extended digital transformation in the chemical industry

While for a long time the focus in the chemical industry has been on collecting and using the vast amounts of available data in a more structured and efficient manner, blockchain will enable the next step towards jointly using data with business partners, such as suppliers, customers, equipment manufacturers, etc.

A shift from a technology-oriented to a value-driven approach for blockchain implementation is required

In the following, we present a guide on how leaders in the chemical industry can pilot and implement blockchain technology to test the potential and leverage positive returns. Analyzing multiple blockchain projects across industries, the authors have identified that blockchain applications are largely implemented from a technology rather than business value perspective.

Leaders should launch blockchain pilots where the three technologies enable the highest returns

Our Value-driven Blockchain in Chemicals (VDBC) framework navigates the blockchain applications along the entire chemical value chain.

Figure 1: Three-step process for economically efficient application of blockchain

Seven blockchain use cases for the chemical industry provide a starting ground

To give you some ideas to start with, the first step of the indicated process is explained using valuable examples that can, and partially are already implemented with currently available technology. We begin by selecting possible applications along the value chain, which can be seen in Figure 2.

Figure 2: Value-driven Blockchain in Chemicals (VDBC) matrix

1. Industrial symbiosis [Procurement, Operation/Maintenance, Marketing/Sales]

In chemicals, size matters. Larger chemical parks enable synergies such as a shared infrastructure (steam networks, electricity generation, wastewater treatment, etc.) and the use of intermediary as well as byproducts, enables a waste-free production. Tremendous scale benefits drive the many mergers and acquisitions and justify the highly consolidated industry. At the same time, the complexity of large companies sets efficiency at risk.

2. Cross border payments using digital currencies [Logistics, Controlling/Finance]

In companies that are doing business all over the world, there is always the challenge that many currencies have to be used. Even though ERP systems help to organize the flows of money, in many cases dealing with different currencies obfuscates the underlying transactions (Fraud).

3. Supply chain organization [Logistics, Procurement, Marketing/Sales]

One of the most obvious use cases for blockchain application is the efficient management of supply chains. Different partners can access the distributed ledger with the necessary permissions (Fraud). The blockchain enables tracking of where (intermediate-) products were produced, which quality standards were applied and where they are on their way to the end customer. Additionally, a blockchain enabled supply chain can handle the complete payment process, including triggering higher fees for the delay, etc. (Throughput, Stable data).

4. Distributed direct sales platform [Procurement, Marketing/Sales]

Smart contracts enable autonomous sales platforms for (intermediate-) products. Centralized platforms like Alibaba (where chemical products are already traded) are trying to take over customer insights from chemical companies (Intermediaries). Decentralized, smart contract enabled sales platforms, on the other hand, allow chemical companies to keep their valuable data and possible implementation of a two-sided marketplace would simplify the work of marketing since supply and demand would be much more transparent (Stable data, Fraud).

5. Tokenization of plants/units [Controlling/Finance, R&D]

As mentioned in the beginning, this new and highly scalable form of distributed tokens can be used for new approaches to financing projects. It not only simplifies the process of selling the shares but also enables new ways to communicate with the owners (Throughput). Distributing stocks comes with high administrative efforts to maintain records of your shareholders, how diversified the holdings are, to be able to keep them informed about general assembly, etc. If ownership is distributed and held fully digital, owners of the tokens can access necessary information, maintain their records of information by themselves, and vote on decisions, such as displaying their opinions digitally instead of holding a stockholders’ meeting (Stable data, Intermediaries).

6. Internet-of-Things data integrity [Operation/Maintenance, R&D]

For Internet-of-Things, data integrity is key. Data from sensors and other devices along the production and logistics chain needs to be compatible and secured to derive business value and avoid harm. While most chemical industries have made progress in protecting their server landscapes from cyber breaches, the field and bus-level data are often transmitted without authentication and encryption. Considering the growing number of wireless connected devices, there is a need for a suitable, standardized, and scalable solution. Furthermore, the increasing number of vendors that provide hardware as a service create the need for data to flow directly from the plant to the vendors (Stable data).

7. Corruption free tendering processes [Logistics, Operation/Maintenance]

When building new or debottlenecking chemical plants, tendering processes are often used to find the best and cheapest manufacturer. Similar processes are used for purchasing software and other services. Blockchain technology can be used to reduce corruption by digitizing the process in the following manner: Instead of bids, interested parties only submit a digital fingerprint (hash) of their offers using a smart contract that manages the date of receipt. Once the bidding phase is over, companies can reveal their bids and the company that issued the bidding can verify the validity of the bids (Stable data). This avoids that any person or intermediate company gets to see the bids before the process is completed and hence no illegal agreements can be made (Intermediaries, Fraud).

Leaders can start the blockchain transformation tomorrow by engaging in four steps

Blockchain technologies are unlikely to pass the chemical industry. To not miss a huge opportunity and avoid getting disrupted technology companies, we recommend starting by engaging in the following four steps:

Remarks

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  • Blockchain knowledge: We wrote a Medium article on how to acquire the necessary blockchain knowledge within a workload of 10 working days.
  • Our two blockchain books: We have edited two books on how blockchain will change our society (Amazon link) in general and the everything related to finance (Amazon link) in particular. Both books are available in print and for Kindle — currently in German and soon in English. The authors have been more than 20 well-known blockchain experts in startups, corporations and the government from Germany, Austria, Switzerland and Liechtenstein — all contributing their expertise to these two books.
Our two books: the first one on blockchain and the society and the second one on blockchain and finance

Authors

Lukas Samuel Maxeiner is a research assistant at the Process Dynamics and Operations group at TU Dortmund. You can contact him via mail (lukas.maxeiner@tu-dortmund.de) or on LinkedIn (https://www.linkedin.com/in/lukas-samuel-maxeiner/).

Endnotes

[1] In this article, the term blockchain technology is used for distributed systems, which operate on a peer-to-peer basis, where information and/or its change is cryptographically linked over time and access to the system is based on public and private key cryptography. This includes ledgers as well as other concepts as for example the tangle.

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Philipp Sandner

Philipp Sandner

Professor | Lecturer | Author | Investor | Frankfurt School Blockchain Center