An open-source blockchain protocol for verifiable records
b_verify is a new protocol for issuing and transacting in verifiable records using a public blockchain. Focused on warehouse receipts as a first use case, its purpose is to improve access to credit and price discovery in supply chains, especially in emerging markets pursuing digitization of paper records.
Forthcoming in 2018 are academic and industry papers along with a “pilot kit” containing open-source reference code (Java), the system architecture for the b_verify protocol, template desktop and mobile applications, and additional considerations for real world experimentation. Once complete, the pilot kit and associated materials will be distributed to governments, multilateral organizations, and industry associations around the world; advisory to pilot implementations may be provided upon request.
The selected use case informing this research is the negotiable warehouse receipt for agricultural commodities. Warehouse receipts are legally defined title documents attesting to a particular quantity, type, and quality of a commodity at a specific storage facility. These instruments can be used to secure inventory as collateral for loans, to facilitate trade, and to settle expiring futures contracts.
Development agencies and multilaterals have championed the benefits of warehouse receipts for price discovery and access to credit for even the poorest of farmers. One USAID program in Tanzania produced a doubling of the prices farmers were able to command for their harvest immediately upon the installation of a storage and warehouse receipt program. Strengthening the agricultural sector also improves food security and competitiveness at a national level.
Three problems prevent warehouse receipts from realizing their full potential for farmers and society: forged documents, high transaction costs, and the potential for disparities between the receipt attestation and the physical goods. Applications using the b_verify protocol can help mitigate these problems.
First, high profile frauds involving forged or duplicated warehouse receipts have cost banks hundreds of millions of dollars; this makes banks wary of lending against them and traders wary of buying them. The b_verify protocol addresses this problem by posting warehouse receipt issuances as cryptographic commitments to the data structure of the Bitcoin blockchain as a secure, public source of record.
Second, assuming the receipts are authentic, the transaction costs involved in verifying and transporting paper records are extremely high, especially in countries with poor infrastructure. The b_verify protocol addresses this problem using a novel method of coordinating updates to the records using cryptographic proofs constructed by a designated server, which need not be trusted.
Third, again assuming authentic receipts, banks and traders worry about the quality and honesty of warehouse custodianship; perhaps the goods are removed illegally for example. While this problem cannot be completely eliminated by technology, access control measures and Internet of Things (IoT) integrations can combined with the b_verify protocol to reduce these risks. For example, outflows of grain from a silo could require authentication via a query of the blockchain record, while digital devices measuring the outflow can independently commit updates to the record without human interference.
An added feature the b_verify protocol is the opportunity for the programmatic enforcement of covenants and contracts (also known as “smart contracts”). For example, using an application servicing the b_verify protocol, the pledging of collateral with a warehouse receipt could automate the transfer of the collateral to the lender upon a hard loan default. Covenants such as maximum debt-to-asset ratios or minimum allowed commodity price fluctuations could also be constructed within the b_verify system.
The verifiable activities of a given business over time, such as inventory turnover and repayment history, can also provide valuable insight into the health of the business, which is the chief consideration in assessing creditworthiness.
Lastly, the transparency provided by this publicly accessible and verifiable system of record may contribute to safer, more transparent in asset-backed securities and derivatives markets as these develop in emerging economies.
Thus, we form the following hypothesis: the b_verify protocol can contribute to meaningful reductions in the aforementioned problems, thereby maximizing the potential for warehouse receipts to improve price discovery and access to finance, as well as national food security and competitiveness.
Progress to Date — From Mexico to Ukraine
This research began in 2016, and originally focused on blockchain-based land title. This grew into a knowledge partnership with the Mexican ministries of Finance and Economy, which in turn motivated a pivot to the warehouse receipt use case, per Mexico’s priorities and a compelling opportunity to promote financial inclusion. 2016 stakeholder interviews and warehouse visits in Mexico informed the development of the first b_verify prototype in 2017. Upon seeing a demo, the Inter-American Development Bank joined the Digital Currency Initiative and contributed funding to further research with the aim of piloting b_verify in Latin America. Meanwhile, new members to the research team from Ukraine motivated an examination of that country’s warehouse receipt system and potential as a pilot destination. 2018 stakeholder interviews and warehouse visits in Ukraine provided valuable insights, which are now informing the development of an updated protocol, pilot kit, and associated papers. This project has received funding from the Legatum Center for Entrepreneurship and Development.