Module 1: Why Blockchain?

1.1 Module 1

1.2 Introduction
This course has been developed jointly by the International Trade Center (ITC) and
the World Trade Organisation (WTO)

1.3 Objectives

The overall objective of this module is to determine if blockchain technologies have

potential value to you, to your business and to facilitate international trade.
In this module, you will learn:

a)Why it is worth learning about blockchain;

b)The main features of blockchain technology; and
c)How blockchain can add value for businesses and enable the participation of micro,
small and medium-sized enterprises (MSMEs) in international trade.

Transcription
Welcome to Module One, “Why Blockchain?”
As our world is continuously changing, technological innovations affect the way we
live and do business.
Likewise, the global economy’s history is intimately linked to technological progress.
Among emerging digital technologies, the possible benefits of blockchain are
multifaceted.
For international trade, blockchain could significantly reduce costs for businesses,
improve customs operations and boost inclusion.
In particular, the technology may open up new opportunities for small enterprises
and producers from developing countries to participate in global markets.
To introduce blockchain, this module answers high-level questions about the
technology.
Let’s get started!

1.4 Chapter 1

1.5 Answer the question

Feedback
This statement is false!
Blockchain’s first implementation was to enable Bitcoin, but they are two different
things.
Bitcoin is a cryptocurrency, yet the term is often used to refer to both the
cryptocurrency and its underlying technology: blockchain. This has led many people
to confuse blockchain technology with Bitcoin itself.

1.6 Answer the question

Feedback
This statement is true!
The potential uses for blockchain technology go far beyond Bitcoin and
cryptocurrency.
Despite media headlines and mentions of blockchain, the technology remains difficult
for many to understand.
1.7 Blockchain's benefits 1/2

Blockchain is much more than cryptocurrency

The initial implementation of blockchain to enable Bitcoin has led many to associate
the technology with cryptocurrency.
• As opposed to traditional, fiat currency issued and managed by a central bank,
cryptocurrency (or crypto) is a digital currency secured by cryptography, the
protection of information and communications through codes.
• The most well-known cryptocurrency is Bitcoin.
• However, the potential uses for blockchain technology go far beyond the world of
cryptocurrency.
• This course will primarily focus on blockchain use cases, or how technology can be
used to accomplish a goal other than cryptocurrency.

Blockchain is a tamper-proof, decentralized and distributed digital record of

transactions
A blockchain is a decentralized database of records that are secured together into
“blocks” across all computers/devices on a shared (distributed) network.
• Blockchain technology is, as The Economist calls it, a “trust machine” and can
create immediate across-the-board transparency.
• Transactions added to a blockchain cannot be tampered with easily.
• Blockchains are said to be highly resilient to cyberattacks compared to traditional
databases.
Blockchain allows for digitalization: data-driven process improvements that support
new and existing business models.

Blockchain may add value in a variety of industries and sectors, including trade
Made possible by blockchain, new business models have emerged that short circuit
traditional intermediaries (e.g. banks) in many industries and sectors.
• Blockchain technology can be deployed with customized features tailored to
specific needs and business requirements.
• Open source software offers the possibility for developers to build industry specific
blockchain platforms and solutions.
Blockchain development services have grown in recent years, offering a wide array of
options, including totally customized systems.
Many projects have emerged for trade, including for trade finance,
transportation/logistics and customs.

1.8 Blockchain's benefits 2/2

Blockchain can enhance supply chains

Blockchain can be used as a tool to:
• Promote supply chain transparency and traceability;
• Help fight counterfeiting; and
• Build consumer trust.
Numerous start-ups and well-established companies are developing blockchain
solutions to:
• Track the origin of products;
• Prove authenticity/quality (e.g. food safety); and
• Assert ethical claims and fair trade practices.
• For example: food companies are turning to blockchain to enhance supply chain
transparency, track tainted products and help restore trust in food quality.

Blockchain could foster a new generation of services

Blockchain is entering the services world.
• Services sectors are key contributors to economic activity, accounting for more than
60% of global employment.
• A number of use cases are in development that leverage blockchain technology to
provide better, quicker and cheaper services on a national and international basis.
Blockchain technology could become the future “infrastructure” of the services
industry and be to the services sector what robots have been to manufacturing.

Blockchain could strengthen intellectual property rights

For some products (e.g. music recordings, films, books and computer software), the
majority of their value is in the amount of innovation, ideas and knowledge involved in
their creation.
• Protecting intellectual property (IP) has become a key preoccupation of businesses,
creators and innovators.
• Blockchain could impact both the governance of IP rights and the IP industry itself.
A rapidly growing number of companies are looking at how blockchain technology
can improve the administration and enforcement of IP rights across multiple
countries.

1.9 Answer the question 1/3

Feedback
This statement is false!
Blockchain could benefit a variety of existing industries and sectors as well as allow
for the emergence of entirely new business models.
1.10 Answer the question 2/3

Feedback
The correct answer is “all of the above” - blockchain can be used to enhance supply
chains in several ways.
1.11 Answer the question 3/3

Feedback
Blockchain could impact both the governance of IP rights and the IP industry itself.

1.12 Chapter 2
1.13 What makes blockchain so great?

Many people are discussing blockchain, but what is it that makes the technology
worth talking about?
For one, blockchain has the potential to alter the way we transact and how business
is done.
Further, unlike traditional databases, administered by a central entity, blockchains
rely on a peer-to-peer network that no single party can control.
Peer-to-peer is a model in which two or more entities share resources directly,
without intermediaries, and distribute tasks through a decentralized network, rather
than a centralized server or network.
1.14 Blockchain basics 1/2

Blockchain is not one technology… it relies on different approaches and

technologies.
• However, the term can refer to the technology or to a specific blockchain platform
or application.

In contrast to a centralized client-server model, a blockchain network is a peer-to-

peer (P2P) distributed database (or ledger of transactions).
Source: Ganne, 2018 -
[Link]

A blockchain reflects a continuously growing list of electronic records grouped into

“blocks” of data that are “chained” to each other through cryptography.
• When a new block is added, it is connected or chained to the previous block,
making it difficult to change past information and easy to track transactions.
• Each peer (computer or device) on the network retains a complete record,
representing the entire blockchain.
• Records, such as transaction data, submitted to a blockchain can only be added
and previous data cannot be removed or modified.

Blockchains’ main functions

• Blockchains have three primary functions:
• Storing information;
• Tracking the exchange of value; and
• Automating processes.
• Blockchains are particularly useful in contexts that involve multiple actors and/or
 where ensuring trust is important (e.g. cross-border transactions).
• Technical aspects are introduced in greater depth in Module 2: “What is
Blockchain?”

What is a ledger?
• Blockchain is only one type of distributed ledger technology (DLT), but what is a
ledger?
• Traditionally kept by an accountant to track debits (withdrawals) and credits
(deposits), a ledger is a book or centralized database of records.
• Ledgers are used by banks to maintain a record of balances and by business to
keep track of transactions.
• They are centrally managed and not transparent to everyone. If the ledger is lost,
stolen or damaged, this could be problematic for maintaining the information.
• Similar to accountants using ledgers, a distributed ledger can maintain the balances
and the transfer of value between accounts.

1.15 Blockchain basics 2/2

What is cryptography?
• From the Greek words for “hidden/secret” and “writing”, cryptography is the
process of communicating securely in an insecure environment.
• Through the use of codes (or cyphers) and keys (to “decipher” codes),
cryptographic techniques ensure that only those for whom information is
intended can read or process it.
• These approaches have become critical to modern information and
communications technology (ICT).
• Blockchain authentication of transactions is achieved through cryptographic
means.
• Participants with no particular trust in each other can collaborate without relying on
a trusted third party.

KEY FEATURES OF BLOCKCHAIN TECHNOLOGY

Blockchain provides a “new model of trust” - a third party between two parties to a
transaction is replaced by cryptographic evidence, provided and validated by peers
on a network. The technology is:
Moving away from dependence on single points of failure that exist in a centralized
model blockchain allows for:

Distributed: Information added to the blockchain is distributed to all peers in the

network. Each peer keeps a complete copy of the records.
Decentralized: No one entity is solely responsible for the state of the ledger (or
making changes). A predetermined set of rules dictates how new information is
added to a blockchain.
Transparent: A blockchain ensures immediate, across-the-board transparency.
Depending on the type of blockchain, records may be viewable by anyone at any
time.
Security: Blockchains are highly resistant to attacks compared to traditional
databases.
Immutability: The assembly of technologies ensures records cannot be changed
(immutability). Once information is added to the blockchain, it is nearly impossible to
modify. A blockchain’s immutability makes it possible to create a single source of
truth between multiple parties.
Traceability: Blockchains make it easy to track attempted changes. This is particularly
important in a world where physical goods may need to be tracked or digital objects
can be copied, modified and shared at virtually no cost.
Automation: A feature of some blockchain platforms, smart contracts (computer
programmes that self-execute when certain conditions are met), can be used to
automate processes and reduce costs.
1.16 How can blockchain reduce costs?

Different types of costs can be affected by the use of blockchain technology.

Verification costs - the ability to verify the attributes of a transaction cheaply.

• The transparent and immutable nature of the technology, combined with the
possibility to automate processes using smart contracts, can reduce verification
costs to virtually nothing.
• Information added to the blockchain can be:
• Automatically screened on the basis of conditions defined in a smart contract;
• Easily tracked and audited; and
• Immutability facilitates the verification of individuals’ identity and of companies’
financial records.

Networking costs - the ability to establish and operate a marketplace without the
need for a traditional intermediary.
The business model consists of leveraging opportunities opened by blockchain to cut
out traditional intermediaries to lower costs.
The impact of blockchain on networking costs is best evidenced by the emergence of
P2P marketplaces.

Coordination costs - the ability to coordinate and interact with other actors at a low
cost.
• Blockchain breaks the silo mentality (reluctance to share information) between
multiple actors and enables multiple entities to coordinate actions in real time in a
transparent and highly secure manner, thereby enhancing efficiency.
• These costs are particularly important in the case of international trade.
1.17 Origins of blockchain technology

Blockchain’s underlying technologies have been in existence for at least 40 years.

2008-13: The blockchain revolution

• Blockchain was conceptualized by an as yet unidentified individual (or group) under
the alias Satoshi Nakamoto in the 2008 white paper, “Bitcoin: A Peer-to-Peer
Electronic Cash System”.
• The ancestors of Bitcoin were developed by members of the cypherpunks, activists
advocating for the widespread use of technologies as a route to social and political
change.
• In the wake of the global financial crisis, and as an alternative to centralized
financial transactions, cypherpunks used P2P systems and cryptography to process
secure transactions without a Big Brother element (i.e. the banking system).
• Blockchain was originally implemented in 2009 as a core component of Bitcoin.
• In the years that followed, the history of blockchain remained almost synonymous
with the history of Bitcoin. This may be one of the reasons it took so long for people
to realize that blockchain can be used in areas other than cryptocurrency.

2013 to present: Blockchain 2.0

• In 2013, a 19-year old Vitalik Buterin, published a white paper that laid out a
blockchain system that could also facilitate the development of “decentralized
applications”.
• This led to the release of the Ethereum platform, sometimes referred to as
Blockchain 2.0, in late 2015.
• Ethereum’s leap forward in the “version history” of blockchain was the concept of
decentralized smart contracts that run exactly as programmed without fraud, third
party interferences or delay.
• Automating transactions in this way constituted a “revolution within the revolution”.
• Blockchain technology started to make a name for itself beyond the financial
technology (fintech) industry.
• Since then, an array of technologies have been developed and consortia have
formed to develop blockchain-enabled solutions.
• In late 2015, the Linux Foundation launched Hyperledger: a multi-project open
source collaboration that focuses on cross-industry use cases (e.g. digital
identity and supply chain).
• For more information on the early history and features of blockchain technology,
see Harvard Business Review: A Brief History of Blockchain.

1.18 Blockchain - common misconceptions

There are several different ways that blockchain has been portrayed inaccurately.
For example, blockchain, in general, has come under unwarranted criticism due to
the use of cryptocurrency for funding illicit activities. However, the economic impact
and inclusion that could result far outweigh the misuse of the technology.
Also, the excessive computing power and energy consumption required by some
types of blockchains has been associated with the technology as a whole.
In fact, whether for energy routing by utility companies or server use by large
enterprises, distributed technologies like blockchain can now enable companies to
share digital infrastructure with less concern for security while optimizing energy use
(in comparison with multiple, separate networks).

The value of blockchain for business

• Due to its features, blockchain technology may be important for anyone as a user or
in support of new and existing business models.
• In the short term, the impact for business is likely to be internal: blockchain’s
characteristics and the possibility to automate transactions with smart contracts
make it an attractive tool for companies to cut costs and streamline processes.
 • McKinsey & Company estimates that blockchain’s strategic short-term value is
mainly in reducing costs before creating transformative business models.
• Based on 90+ use cases, McKinsey & Company found that approximately 70%
of the value at stake in the short term is in cost reduction.
For more information, see McKinsey & Company, “Blockchain beyond the hype: What
is the strategic business value?”

The future of blockchain

• Although blockchain is touted as transformative, its efficacy as a solution is only as
good as its phase of development and deployment.
• Fintech start-ups and IT companies of all sizes are exploring the technology.
• Billions of dollars in funding are being poured into blockchain companies, and
blockchain-related patents are on the rise.
• Venture capital funding for blockchain start-ups has been growing steadily.
• Blockchain technology could be considered in phase one, or “irrational
exuberance” of its growth cycle, with greater use and investment expected before
large-scale, global, value-added for business.

1.19 Answer the question

Feedback
All of the above are key features of blockchain technology.
1.20 Answer the question

Feedback
The correct answer is immutability! Once information is added to the blockchain, it is
shared with the whole network, and is nearly impossible to modify.
1.21 Answer the question

Feedback
The correct answer is Phase 3! There is still some time before blockchain can deliver
global, large-scale value added for business.

1.22 Chapter 3
1.23 What makes blockchain so great?

A WTO study found that trade costs can amount to a 134% tariff on a product in high-
income countries and a 219% tariff in developing countries.
Lowering trade costs could lead to greater participation by small businesses,
especially those located in developing countries.
Reflecting on its features and possible value for business, could blockchain
significantly transform international trade?

1.24 Can blockchain revolutionize international trade?

The glossary of the WTO publication “Can Blockchain revolutionize international

trade?” may be useful to have at hand when following this course.

The problem: goods trade remains paper-based

• From trade finance to customs clearance, transportation and logistics, trade in
goods involves multiple actors and remains paper-intensive.
For example: a shipment of roses from Kenya to Rotterdam can generate a pile of
paper 25 cm high, and the cost of handling it can be higher than the cost of moving
the containers!

A solution: blockchain and paperless trade

• Blockchain technology’s features make it an interesting tool to move toward
paperless trade (the exchange of data and documents in electronic form) and
improve processes.
• Blockchain is seen as a way to digitalize and automate trade finance processes.
• Transportation and logistics players are leveraging the technology to develop
platforms to connect all actors along a supply chain, including banks and
customs authorities.
• Blockchain could help administer customs procedures and national “single
windows” (a single point of entry through which trade stakeholders can submit
documentation and other information to complete customs procedures in a
more efficient, transparent and secure manner) and improve the accuracy of
trade data.
• Specific use cases are discussed in Module 3: “How Can Blockchain be Used in
International Trade?”

How can blockchain affect trade in services?

• Trade in services has become the most dynamic segment of world trade, growing
quicker than trade in goods.
• The services industry has been affected by the rise of new technologies, especially
the internet. New business models have emerged and companies are rethinking the
way they do business.
• An increasing number of both established companies and start-ups provide and are
developing blockchain-enabled services.
• Services of interest for international trade include cross-border payments, insurance
services and retail distribution.
• For example, the automation of processes in the maritime insurance sector could
help reduce administrative procedures and costs, handle claims and administer
multinational contracts.
1.25 Blockchain’s short-term impact on trade

• As with its value for business in general, blockchain’s short-term impact on

international trade will most likely be felt in cost reductions.
• Use of blockchain technology for trade-related processes could generate
considerable savings, with benefits split among government agencies involved (as
less time and fewer resources would be required to administer requests) and
traders (who would gain time and save money as a result).
• Blockchain technology has the potential to significantly reduce verification and
networking costs as well as trade costs related to processing, coordination,
transportation/logistics, financial intermediation and exchange rates.
• Significant savings can be expected in the shipping industry, a sector that
transports approximately 90% of goods traded internationally.
• Cost reduction estimates in the financial sector and the shipping industry are 15%-
30% of total costs.
• IBM has calculated that moving a container of avocados from Mombasa to
Rotterdam costs approximately $2,000, of which $300 is associated with paperwork.
Digitalization of the process could save up to 15% of the cost of international
maritime transport.
• According to the World Economic Forum, the removal of barriers due to blockchain
could result in more than $1 trillion of new trade in the next decade.

Factors that explain MSMEs’ limited participation in trade

Micro, small and medium-sized enterprises (MSMEs) are key economic actors.
• They account for more than 90% of companies worldwide and for two-thirds of total
employment in developing and developed countries alike.
• MSMEs’ participation in international trade is low, with exports accounting for 7.6%
of manufacturing sales in developing countries, compared to 14.1% for large
manufacturing enterprises.
• The numbers are slightly higher in developed countries, with MSMEs accounting for
34% of exports on average.

Various factors to explain MSMEs’ limited participation in world trade:

• High tariffs;
• Multiple non-tariff measures;
• Lack of transparency and cumbersome customs procedures;
• Difficulties in accessing trade-related information;
• Difficult access to distribution networks, and a lack of skills and technology; and
• Logistics and infrastructure costs, and insufficient access to trade finance.

These difficulties are common to all MSMEs, from both developed and developing
countries, but tend to impact small firms and small producers from developing
countries particularly heavily.

Blockchain technology can help to address many challenges and may be a powerful
tool in facilitating MSMEs’ participation in international trade.

1.26 Blockchain for trade - An opportunity for msmes?

Blockchain and opportunities for MSMEs in trade

• Blockchain has the potential to empower individuals and companies around the
globe to make transactions more efficiently, economically and quickly.
• Blockchain could not only make it easier for MSMEs to interact with customs
authorities, but also with consumers and businesses along the supply chain.
• Importantly, it can help MSMEs build a credit history and facilitate their access
 to trade finance.
• Blockchain can also contribute to the implementation of the WTO Trade Facilitation
Agreement and make trade and international market access easier for MSMEs.
• The International Chamber of Commerce (ICC) estimates that the trade
facilitation agreement (TFA) could increase MSME exports by up to 80% in some
developing economies.

Reducing costs for small business

• MSMEs face proportionally higher fixed costs than bigger companies do,
particularly those in developing countries. By reducing costs, blockchain can
enable MSMEs to grow their exports.
• Lower barriers to entry also make it easier for small businesses in developing
countries to participate in international trade.
• Blockchain is seen as an opportunity to promote financial inclusion in countries with
large unbanked populations.
• MSMEs could be one the greatest beneficiaries of blockchain.

Including small producers in developing countries in trade

• Blockchain may help small producers in developing countries to prove the quality of
their products and to negotiate fair prices.
• Small farmers often lack power and information for negotiating with middlemen,
traders and companies on price and other conditions.
• Blockchain can support improved access to trusted information and allow small
producers to defend their traditional knowledge and IP rights.
• Blockchain technology could be a powerful force for small producer inclusion in
trade, provided there is technical knowledge required to participate in the
technology, or the resources to use a service provider, and that they have adequate
internet access.
1.27 Blockchain - Limitations and appropriate use

Blockchain: not a solution for everything

• While blockchain technology opens interesting opportunities to enhance the
efficiency of a number of processes and cut costs, it is not a “cure all”.
• Companies and institutions must ensure that blockchain technology is suited to
their needs and those of users.
• A blockchain-enabled solution requires careful consideration and coordination.
• The opportunities and limitations of blockchain in comparison to alternative
technologies need to be analysed.
• The technology still faces numerous challenges to widespread adoption, discussed
further in Module 4: “Implementing Blockchain for Trade”.
• For more information, see ’Harvard Business Review, “What Blockchain Cant Do”.

When is blockchain an appropriate solution?

• Blockchains are particularly useful in contexts that involve multiple actors and/or
where ensuring trust is important (e.g. cross-border transactions).
• Numerous “decision-tree models” have been published on the web to enable
businesses and institutions to make an informed decision on whether or not
blockchain is an appropriate solution for their needs.
• Module 4: “Implementing Blockchain for Trade” presents two decision-making tools
to help decide if and when to implement blockchain technology.
1.28 Answer the question

This is true.
This statement is true. As with business in general, the estimated short-term impact of
blockchain technology on trade will be to reduce costs.

1.29 Answer the question

Feedback
All of these answers are correct. Blockchain technology’s “trust mechanism” could
help level the power imbalance for small producers in different ways (many of which
have yet to be developed).
1.30 Blockchain’s short-term impact on trade

Developed as the technology underpinning Bitcoin, use of blockchain soon spread

beyond the world of cryptocurrencies.
Blockchain use cases could touch all sectors of the economy, including trade.
The nature of blockchain has sparked the interest of the private sector and
government authorities alike.
The technology is expected to benefit MSMEs and small producers in developed and
developing countries and help them better participate in international trade.
1.32 Download

1.33 End