Transformation to a Circular Economy: By Applying Blockchain Technology

Each year, mobile phone brands hold launch events to unveil the latest version of their products and related features. These flashy events are designed to entice users into replacing their devices prematurely. Globally, on average, smartphone owners upgrade their devices within two years. Today, 69% of the world’s population uses smartphones and annual spending on new hardware exceeds US$370 billion.

We are increasingly being propelled into a digital world where new technologies are adopted almost as quickly as these hit the market. However, this situation accelerates the take-make-dispose cycle of the linear economy that has been dominant since the existence of the Industrial Age.

In the linear economy, raw materials are used to make products and discarded as waste after use, without much regard for Nature or the depleting supply of natural raw materials. For example, a company producing light bulbs takes raw materials such as glass or metal to manufacture its products. Light bulbs are sold to customers, who use it until these burn out. After that, the bulbs are disposed as waste.

In order to be profitable, such companies need to produce goods at the lowest cost possible or sell large quantities of the goods. The linear economy does not take into consideration the limited amount of resources available or the output of waste products through creation and use of the goods.

In contrast, the circular economy treats resources as if these are finite, and focuses on building sustainable economic health. The inherent restorative and regenerative design of the circular economy minimizes or even eliminates waste, shifting towards the cradle-to-cradle production cycles. This means that product lifetimes are extended by offering options for used items to be returned and component parts repurposed into new products.

Beyond addressing the negative impacts of the linear economic models, the circular economy represents a shift towards a sustainable, resilient business and economic landscape that benefits the environment and society in its entirety. In reference to light bulbs, Phillips now offers the opportunity for companies to lease, rather than acquire, light bulbs over a longer period of time. This creates an incentive for Phillips to produce energy efficient lights, while companies save money on fixed office lighting costs and maintenance.

Traditional companies are attempting to move towards the circular economy. H&M, one of the world’s largest clothing retailers, is working on a strategy to become 100% circular by collecting old clothing in stores for recycling. Since 2013, H&M reports to have gathered more than 55,000 tonnes of fabric.

Disruptive technologies also support the transition to a circular economy by radically increasing virtualization, de-materialization, transparency and feedback-driven intelligence. In addition, the shift to a circular economy requires innovative business models that either replace existing ones or seize new opportunities.

The increasing popularity of access-over-ownership business models has been accelerated by the capabilities offered by disruptive technologies. A new generation of consumers places less emphasis on owning and more on sharing, bartering and renting goods. This shift in consumer behaviour, coupled with the capabilities of emerging technologies, has propelled an entirely new range of businesses – from shared car rides offered by companies like BlaBlaCar, to sharing accommodation on holiday via the likes of Airbnb.

Advancements in 3D printing technology are similarly paving the way for innovative manufacturing and production approaches. This enables the circular economy by disrupting the existing materials value chain and increasing the efficiency of the production process.

With the gradual reduction in price and improvements in quality, 3D printers could become commonplace in each home, similar to other household electronics. The option to acquire designs online and print our own products, from clothing to electronic parts and even food, could become routine. This sort of on-demand, hyper-personalised production could mean significant reductions in waste and increased efficiencies.

Governments and regulators are actively trying to support the circular economy. The European Parliament recently backed several laws that support the shift in EU policy towards a circular economy. According to the laws, by 2025, at least 55% of municipal waste should be recycled and 65% of packaging material will have to be recycled. In addition, the European Parliament has overwhelmingly backed a wide-ranging ban on single-use plastics. The benefits of a circular economy to the environment, climate and human health are widely recognised and accepted.

However, a majority of the regulatory environment, as well as economic incentives, still favour linear business practices. The current inability of supply chain stakeholders to track the provenance of materials, components and products throughout the value chain prevents assertion of their circularity – from extraction or creation, all the way through the many life cycle stages. In this respect, application of blockchain technology will have a transformative impact and enable a circular economy.

Essentially a distributed digital ledger system, blockchain was originally developed to record transactions for bitcoin, a well-known digital currency. Although digital currencies face skepticism and volatility in the global market, the underlying blockchain technology has grown in terms of credibility as more potential applications are developed across various industries.

Uses of blockchain technology
Supply chain management has emerged as one of the major use cases for blockchain technology, offering an efficient and almost fully tamper-proof way of tracking the cradle-to-cradle life cycle of goods. The blockchain translates chain of custody across the value chain into a distributed, immutable, digital trail that asserts the circularity of products.

For example, Bext360 combines several disruptive technologies, such as the Internet of Things, blockchain and artificial intelligence (AI), to create a fair and transparent coffee supply chain:

• Harvested coffee beans are placed into a BextMachine, which analyses the beans and quality based on an AI system.
• This information is recorded instantly on the blockchain to track source farms and payments to specific farmers. The farmers receive payment digitally via a mobile app.
• The beans are then continuously tracked and traced across the entire value chain, from the farm to roasters to retailers and finally consumers.
• Each of these transactions is recorded in near real-time on the blockchain and made available to all parties, optimising efficiencies across the entire chain, increasing compensation to farmers, and enabling consumers to understand the origin of the products they use.

Since the Industrial Age, supply chains have followed a competitive business model that limits opportunities to create and leverage synergies. In addition, intermediaries continue to benefit from the lack of trust between supply chain stakeholders who are reluctant to share information and compete on costs.

In order to enable and engage in a circular economy, stakeholders need to be able to collect, process and share data within a trustworthy and secure environment. Blockchain technology, in combination with AI systems and the Internet of Things, could help establish a trust economy that lowers collusion between centralised parties, while also making them accountable.

Blockchain technology enables stakeholders to gather more knowledge on material cycles and processes throughout the value chain and to share data securely.

For instance, the startup Provenance intends to design a blockchain system that is able to track all used materials, including the dimensions of quality, quantity and ownership, over the whole supply chain in real-time. Basically, Provenance is trying to achieve a digital passport for any product, which enables consumers and producers to track the whole production process.

Foundation for success
Based on the current development trajectory of blockchain technology, it would be possible to establish a macro-economic incentive system that promotes transformation to a circular economy.

Within the linear economic system, raw materials are extracted from Nature, transformed into products and, finally, disposed back to Nature. Although the linear model could incorporate recycling, most of the components within this system have not been designed for reuse or regeneration, resulting in significant material degradation and accumulation of waste in the environment.

For example, the world today generates around 40 million tonnes of electronic waste each year. Even when recycled, a significant amount of electronic materials cannot be recovered. Conversely, the circular model aims to achieve a waste-free system – an economy which functions in loops and maintains the ecological value of materials over time.

With the application of blockchain technology, it will become possible to unambiguously identify a product’s inputs, including the quantity, quality and origin of materials. In addition, information regarding a product’s biological or technical components could be tracked on a blockchain. A blockchain-based system which is able to track product attributes would make it possible to adjust taxes according to the level of material degradation.

Ultimately, the application of blockchain technology could potentially enable transparency and traceability across end-to-end value chains, as well as crate a macro-economic incentive system that promotes the transformation to a circular economy.

This article was originally published in Global Oil & Fats Business Online, March, 2019 in Issue 1 - 2019, Techonology.