How blockchain will allow for fewer counterfeit goods and faster product recalls

De Beers is putting diamonds on the blockchain. Walmart is putting lettuce on the blockchain. Startups are putting skin care and liquor and fancy watches on the blockchain. By now, it may be safe to say that if someone, somewhere is selling something, someone else is thinking about how a distributed ledger with a buzzy name might help them do it better.

Comb through the hype and the headlines, though, and there are some promising use cases for how blockchain could help solve some of the problems plaguing retail, and even a few initiatives that are already well underway.

While widely known as the underlying technology for Bitcoin, blockchain may be best understood as a means of storing data. Generally speaking, a blockchain — and yes, there are many — is a sequence of records, shared among a network, that are both accessible and immutable, meaning no member can change or delete the data within them without invalidating the rest of the sequence. The exact definition is still a matter of debate among experts, but most agree that the aim, at least, is to produce a ledger that’s difficult to tamper with and easy to verify independently.

A retailer, for instance, might want to record its end-to-end supply chain data on a blockchain in order to track inventory or combat counterfeits (more on both of these ideas later). For this to work, each entity — from factory to distributor to shipper to warehouse to store — would need to participate so that there are no gaps in the data. Then every time a new transaction is logged (say, when a container is scanned at a port or an item is placed on a shelf), it could be validated and bundled with other transactions into a “block,” which would be linked to other blocks to form a blockchain. Copies of the data would be stored across multiple devices called “nodes,” creating a decentralized system that acts as a safeguard against hacking.

If this sounds complicated, it is — particularly when you’re dealing with a tangled web of suppliers spread out all over the world who might still be using paper spreadsheets or clunky software to manage shipments. But with billions of dollars at stake, it’s less a question of if the industry will figure it out than of how and when.

In the meantime, it’s worth familiarizing yourself with the areas of retail that could eventually be improved by blockchain. Here are six that technologists, investors, and analysts are excited about now.

”In retail, the two biggest issues from a data perspective are understanding and knowing where your inventory is — whether it’s in your supply chain or in the store or online — and then matching that with the right customer,” says Steve Sarracino, founder and partner at Activant Capital Group, a growth stage venture capital firm.

Even solving just the first part of that puzzle would be hugely lucrative to retailers and the logistics firms that service them, giving companies better control over their shipments, and ultimately over what goes on their shelves. For consumers, this could mean fewer frustrating trips to the store only to discover that an item is out of stock  — something retailers, too, want desperately to avoid.

According to a recent study by IHL Group, a research and advisory firm, stockouts (industry parlance for the aforementioned out-of-stock scenario) cost retailers nearly $1 trillion per year globally. With better inventory visibility and more transparency throughout the supply chain, suppliers and retailers could stay on the same page in terms of tracking the progress of shipments and knowing when products need to be replenished. Blockchain could help by increasing accountability and ensuring that the data all parties are receiving is accurate and up to date.

Of course, this requires everyone to get on board and put the infrastructure in place. “There’s no magical fairy dust blockchain platform,” says Sarracino. “It’s got to be some sort of web-based platform that you’re using already, and then you’re going to program blockchain behind it so that each piece of inventory has tracking. You have to interact with the physical world, so there has to be a way to do that: barcodes, RFID, visual scanning — there has to be some analog-to-digital [interaction].”

This is one of the major hurdles for any blockchain initiative designed to track physical goods: The system has to be uniform, effective, and itself resistant to counterfeiting (QR codes, for instance, are easily copied).

The potential methods also vary widely depending on what kind of item you’re trying to track: Verifying an individual cut of diamond presents different challenges than tracking a whole shipping container worth of produce. Plus, some of the more promising methods, such as RFID tags, can be costly, particularly when attached to individual products rather than whole pallets.

Hand in hand with knowing where your inventory is: knowing where it came from in case something goes wrong.

Walmart, as one of the most powerful retailers in the country, may be having the most success in this arena. The company can wield its influence and mandate that its suppliers get on the same platform, as it did last month when it launched its Food Traceability Initiative in partnership with IBM. When the program goes into effect in 2019, Walmart will be able to trace the origin of any leafy greens it carries back to their source in 2.2 seconds — a process that used to take six days, 18 hours, and 26 minutes, according to Jason Kelley, IBM’s general manager for blockchain services.

The retailer is starting with leafy greens because of the high-profile outbreaks and recalls that have occurred in recent years, including this spring’s deadly E. coli outbreak caused by contaminated romaine lettuce, but the initiative will likely expand to other categories if it proves to be a success. One could imagine that other retailers that have been hit by product safety issues in the past (say, Amazon with its exploding hoverboards) may want to consider a similar process to restore customer trust and avoid liability in the future.

Similar traceability efforts are also playing out in the worlds of luxury goods, apparel, cosmetics, fine art, and high-end spirits — anywhere, essentially, that knockoffs abound.

The cosmetics industry, for one, is plagued with problems of counterfeits and diverted products ending up on marketplaces like Amazon. While diversion isn’t technically illegal, unauthorized resellers can’t guarantee the chain of custody on their products, meaning customers may be getting fake or expired product (neither of which is good news for a cosmetics brand either).

“The systems that these companies have been using for problems like diversion are based on traditional cloud databases,” says Samantha Radocchia, co-founder and chief marketing officer of the supply chain startup Chronicled, “and because they don’t have the full supply chain or network onboarded, they don’t really have any way of determining the moment that something is diverted. They have to go around and inspect and scan product.”

”If you are tracking it on blockchain and integrating all of these systems so that once it leaves the packager and goes to the first distributor these events are recorded, you can determine at what point the chain was broken,” she says.

For something like a designer handbag, blockchain could help assure customers of its provenance — an ongoing challenge in the luxury resale market, which currently relies largely on the subjective expertise of authentication specialists.

But, cautions Andrew Frank, vice president and distinguished analyst at the research firm Gartner, “in order for it to really work for goods, there has to be end-to-end consistency to record each action in the blockchain, so there are no breaks in the chain where you can no longer be sure that the object you’re holding is the object is created in the factory.”

As consumers, we increasingly care (or like to say we care) about the provenance of what we buy. In response, many retailers have ramped up their transparency efforts (or at least how much they talk about transparency).

Blockchain, some experts argue, could back up brands’ claims about ethical supply chains and sustainability, offering a verified record of where a product came from and whose hands it passed through to get to the consumer.

While far from the only fashion-adjacent industry that could benefit from increased transparency, the diamond industry is investing heavily in blockchain technology to meet the demands of shoppers — particularly millennial shoppers — for greater assurance of the value, quality, and origin of their purchases. The latter, certainly, has been a matter of increasing importance since the phenomenon of conflict diamonds entered the public consciousness almost 20 years ago. Blood diamonds, as they’re often known, have been mined and sold to fund civil wars and human rights abuses, primarily in African countries like Sierra Leone, Liberia, and the Ivory Coast.

In 2003, the United Nations implemented the Kimberley Process, an international initiative to eradicate conflict diamonds by mandating more transparency around the mining and distribution of rough diamonds, though it has also been criticized in the years since for failing to address issues like worker exploitation, community displacement, and corruption.

Still, all of the blockchain initiatives entering the space promise to complement, rather than displace, the current certification programs, and firms that have already hopped aboard the train range from De Beers, the world’s largest diamond company, to Everledger, a technology startup focused on transparency and traceability. All promise to use blockchain to complement the industry’s existing certification efforts, including the Kimberley Process.

IBM announced its own diamond initiative, TrustChain, this spring, working with a consortium of gold and diamond companies from mine to retailer, along with a third-party testing laboratory, to “offer this chain of trust to consumers at that level,” says Kelley.

While before, each stage in the process had its own systems for tracking and verification, much of it was done on paper or through outdated software. With TrustChain, says Kelley, all of that information — the weight and characteristics of a diamond, where a piece of gold was refined, the SKU and price of a piece of jewelry, the retailer where it’s ultimately sold — is available on one platform online. “There’s also this added value that it brings the physical into the digital realm. You know, we may be accelerating down this path where that paper trail that everyone has been using over the years can disappear,” he says.

At least as important as mastering the supply chain side of the retail equation is understanding and knowing one’s customer — a challenge that most retailers currently fall far short of.

Part of the difficulty, of course, is privacy: Shoppers want to maintain control of their personal data, but they also want their shopping experiences to be tailored perfectly to them. They also definitely don’t want to be trailed around the web by creepy ads.

According to a 2017 Accenture global survey, 49 percent of US consumers said they had concerns about their data privacy when using services designed to anticipate their needs. Forty-four percent also said they felt frustrated by companies failing to provide relevant personalized experiences. (We’re a demanding bunch.)

As a decentralized system, blockchain could provide a means for retailers to use their customers’ data to tailor things like product recommendations while not actually storing the data on their servers — which has proven to be a liability for many retailers in the wake of widespread hacks.

Putting the power of consent back into consumers’ hands has also been an area of interest thanks to Europe’s GDPR, which went into effect in May and requires companies to give users a clear option to give or revoke access to their personal data. But while blockchain could be a powerful tool to help them do so, there is a pretty major caveat:

“The tricky part is that, of course, blockchain is not exactly aligned with the goals of the GDPR in that information on the blockchain can’t be erased,” says Sarracino. “The GDPR talks about the right to be forgotten, and that’s very difficult to do if your data is stored on a blockchain. So these companies are working on systems that could separate the consent data from the actual personal data that is being protected or being shared.”

The baseline lack of trust that’s driving us toward blockchain also makes working with consumer data treacherous ground if you’re not careful. L.L. Bean discovered as much after launching a test project that involved attaching sensors to coats and boots and sending the encrypted data about temperature and frequency of wear to the Ethereum blockchain platform. The story took on a life of its own in the media, with many news outlets calling the idea “creepy” and some erroneously reporting that the company planned to gather location data and continuously track customers after purchase. In fact, only a small group of product testers ever wore the items, but the project was ultimately scrapped.

While the lack of standardization in blockchain will pose a challenge, the technology presents an interesting option for companies that want to bypass credit cards in payment processing. Retailers tend to operate on very thin margins — groceries, for instance, run at an average margin of between 1 and 2 percent — so the increasingly high fees that credit card companies charge businesses can put a significant dent in profits. If you can charge the customer directly, says Sarracino, “you’re talking about being able to double the margin and/or decrease prices for the consumer. Long-term, that can be super powerful.”

So how soon could we see blockchain affecting what we buy or how we buy it? If you do your grocery shopping at Walmart or are in the market for a diamond ring, the answer is very soon, although you likely won’t see much of a difference in the store. The changes will likely occur behind the scenes and be more subtle than the blaring headlines might suggest.

Ultimately, though, the promise of blockchain — putting power in the hands of the many rather than the few and restoring some semblance of trust to a society increasingly devoid of it  — seems as good a goal as any for retail to pursue.