b_verify | Supply Chain Records
An open-source blockchain protocol for verifiable records
b_verify is a 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.
Warehouse receipts
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 from 2016 to 2019 — 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.
People:
Henry Aspegren, MIT Digital Currency Initiative
Mark Weber, MIT Digital Currency Initiative
Gert-Jaap Glasbergen, MIT Digital Currency Initiative
Robleh Ali, MIT Digital Currency Initiative
James Lovejoy, MIT Digital Currency Initiative
Outputs
Pilot kit
The Pilot kit contains 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.
b_verify: Scalable Non-Equivocation for Verifiable Management of Data
MIT DCI graduate thesis by Henry Aspegren (2017) - mentored by DCI Director Neha Narula.
Abstract: Equivocation allows attackers to present inconsistent data to users. This is not just a problem for Internet applications: the global economy relies heavily on verifiable and transferable records of property, liens, and financial securities. Equivocation involving such records has been central to multi-billion-dollar commodities frauds and systemic collapses in asset-backed securities markets. In this work we present b_verify, a new protocol for scalable and efficient non-equivocation using Bitcoin. b_verify provides the abstraction of multiple independent logs of statements in which each log is controlled by a cryptographic keypair and makes equivocating about the log as hard as double spending Bitcoin. Clients in b_verify can add a statement to multiple logs atomically, even if clients do not trust each other. This abstraction can be used to build applications without requiring a central trusted party. b_verify can implement a publicly verifiable registry and, under the assumption that no participant can double spend Bitcoin, guarantees the security of the registry. Unlike prior work, b_verify can scale to one million application logs and commit 1,112 new log statements per second. b_verify accomplishes this by using an untrusted server to commit one hundred thousand new log statements with a single Bitcoin transaction which dramatically reduces the cost per statement. Users in b_verify maintain proofs of non-equivocation which are comparable in size to a Bitcoin SPV proof and require them to download only kilobytes of data per day. We implemented a prototype of b_verify in Java to demonstrate its ability to scale. We then built a registry application proof-of-concept for tradeable commodity receipts on top of our prototype. The client application runs on a mobile phone and can scale to one million users and ten million receipts.
On the Financing Benefits of Supply Chain Transparency and Blockchain Adoption
The original report “Inter-American Development Bank (IADB/IDB) with b_verify on Warehouse Receipts” was the result of a working group collaboration, in the Blockchain Labs course (2018) by Mark Weber (Graduate Researcher, MIT DCI) and Mykola Yerin (Fellow, MIT Sloan). After the course, additional research led to the publication of “On the Financing Benefits of Supply Chain Transparency and Blockchain Adoption“ authored by Jiri Chod (Boston College); Nikolaos Trichakis (MIT); Gerry Tsoukalas (University of Pennsylvania - The Wharton School); Henry Aspegren (MIT-DCI); and Mark Weber (MIT-IBM Watson AI Lab), and published in the Journal of Management Science in 2020
Abstract:
We develop a theory that shows signaling a firm’s fundamental quality (e.g., its operational capabilities) to lenders through inventory transactions to be more efficient—it leads to less costly operational distortions—than signaling through loan requests, and we characterize how the efficiency gains depend on firm operational characteristics, such as operating costs, market size, and inventory salvage value. Signaling through inventory being only tenable when inventory transactions are verifiable at low enough cost, we then turn our attention to how this verifiability can be achieved in practice and argue that blockchain technology could enable it more efficiently than traditional monitoring mechanisms. To demonstrate, we develop b_verify, an open-source blockchain protocol that leverages Bitcoin to provide supply chain transparency at scale and in a cost-effective way. The paper identifies an important benefit of blockchain adoption—by opening a window of transparency into a firm’s supply chain, blockchain technology furnishes the ability to secure favorable financing terms at lower signaling costs. Furthermore, the analysis of the preferred signaling mode sheds light on what types of firms or supply chains would stand to benefit the most from this use of blockchain technology.
Making the case for financial inclusion: a b_verify based solution to promote agriculture credit in peru
This report was the result of a working group collaboration, in the Blockchain Labs course (2019) with Inter-American Development Bank (IADB/IDB) and authored by by Eric Peña (MIT Sloan)
Research goal:
One of the more promising use cases of blockchain technology involves the development of secure digital registries for property title and smart contracts. This will continue the development of b_verify, an open-source protocol developed by the MIT Media Lab. Together with IDB experts, the working group will focus on identifying potential applications for b_verify.
Excerpt from Executive Summary:
“This report aims to document the process of use case assessment, business case development and pilot planning of a blockchain-based protocol application for a public sector organization. More specifically, the team focused on building a pilot of the b_verify protocol for a financial inclusion solution on the agricultural credit sector in Peru … The opportunity to use a blockchain based solution in the context of Agrobanco’s situation is clear, however, developing the underlying software infrastructure also involves a non-trivial investment of resources. B_verify provides an opportunity to tackle the challenge of providing Agrobanco with a blockchain based solution without the need to jumpstart a whole network. The effort necessary to create the product is closer to a regular centralized implementation than developing an independent blockchain solution.”