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.
Part of the b_Verify Project
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.
