Potential Blockchain Technology Benefits for Agriculture
The blockchain technology allows peer-to-peer transactions to take place transparently and without the need for an intermediary like a bank (such as for cryptocurrencies) or a middleman in the agriculture sector. By eliminating the need for a central authority, the technology changes the way that trust is granted – instead of trusting an authority, trust is placed in cryptography and peer-to-peer architecture. It thus helps restore the trust between producers and consumers, which can reduce the transaction costs in the agri-food market.
The blockchain technology offers a reliable approach of tracing transactions between anonymous participants. Fraud and malfunctions can thus be detected quickly. Moreover, problems can be reported in real-time by incorporating smart contracts. This helps address the challenge of tracking products in the wide-reaching supply chain due to the complexity of the agri-food system. The technology thus provides solutions to issues of food quality and safety, which are highly concerned by consumers, government, etc.
The blockchain technology provides transparency among all involved parties and facilitates the collection of reliable data. Blockchain can record every step in a product’s value chain, ranging a product’s creation to its death. The reliable data of the farming process are highly valuable for developing data-driven facilities and insurance solutions for making farming smarter and less vulnerable.
This article reviews applications of the blockchain technology in the agriculture and food sector.
In this section, we discuss four classes of applications in agricultural and food sectors: agricultural insurance, smart farming, food supply chain, and transactions of agricultural products.
Weather extremes threaten agricultural production, putting food security at risk. Both, crop and livestock production are affected, and climate change is expected to further exacerbate weather extremes in the future . Agricultural insurance schemes are traditionally a well-recognized tool to manage weather related risks. Here, farmers pay an insurance premium before the cropping cycle begins and receive an insurance payout whenever they experience a loss on their farm. Thus, the insurer bears all the insured risk and farmers are able to manage their financial exposure to weather extremes, i.e., financial losses caused by weather extremes. In addition, in case of weather threats that systemically affect all the insured farmers, the insurer can further hedge the systemic part of the risk with a reinsurance company.
Agricultural insurances differ with respect to how losses are assessed and consequently how payouts are triggered. Insurances that indemnify farmers based on a damage assessment that was made by an expert on the farm are denoted as indemnity-based insurances. Indemnity based insurances are able to precisely cover losses, however, they are prone to problems arising from asymmetric information problems . More specifically, information on the riskiness of the agricultural production and production practices is asymmetrically distributed between farmer and insurer. Farmers are expected to be better informed about both which incentivizes adverse selection and moral hazard. The adverse selection indicates that farmers with a higher ex ante risk exposure are more likely to purchase insurance compared to farmers with lower risk. Moral hazard indicates that farmers shift to more risky production practices when being insured. Both phenomena lead to market failure of the insurance scheme if the insurer has insufficient information on the two cases. Thus, indemnity-based insurances are prone to costly damage assessment and need to implement measures to avoid problems arising from asymmetric information, such as deductibles. Moreover, productions that cannot be measured, e.g., grazed meadows, cannot be insured although leading to financial damage.
Motivated by the drawbacks of indemnity-based insurances, the idea of index-based insurances was born either as an alternative or complement to the classical products . Here the payout is not triggered by the loss itself but by a measurable index, such as rainfall at a nearby weather station . If this weather station has sufficiently long historical weather records, both parties, the farmer and the insurer, have identical information about the insured value and moreover, farming practices have no impact on the insurance payout. Hence, adverse selection and moral hazard play no role and the technical procedure to trigger a payout became substantially simplified. Moreover, full insurance coverage without any deductibles is possible and payments can be made timely and automated just after an adverse weather event was measured. However, discrepancies between payout and on-farm loss can occur which is denoted as basis risk . Three sources of basis risk can occur. Spatial basis risk marks any differences between measured and on-farm weather, e.g., through spatial distance . Temporal basis risk indicates that an unprecise time window was chosen for index determination, e.g., whole year rainfall vs. growing season rainfall . Design basis risk summarizes all remaining sources, e.g., missing weather variables or biased technical implementation .
Underlying the agri-food systems is the essential data and information on the natural resources that support all forms of farming. As shown in Figure 1, data and information flow while products flow from inputs to output through various value-adding stages as well as financial flow from output to inputs. Different actors and stakeholders generate and manage data and information as per their needs and capacities. Smart agriculture is featured by the utilization of ICT, internet of things (IoT), and various modern data collection and analysis technologies including unmanned aerial vehicles (UAV), sensors and machine learning. A key issue of establishing smart agriculture is developing a comprehensive security system that facilitates the use and management of data. Traditional ways manage data in a centralized fashion and are prone to inaccurate data, data distortion and misuse as well as cyber-attack. For example, environmental monitoring data is generally managed by centralized government entities that have their own interest. They can manipulate the decision-making related to data.
Data and information flow along the food value chain
The blockchain technology serves to store data and information that various actors and stakeholders generate throughout the entire value-added process, from seed to sale, of producing an agricultural product. It ensures thatthe data and information are transparent to the involved actors and stakeholders and all recorded data are immutable. Figure 1 shows how what type of blockchain (permissioned or permissionless) used on what kind of platform (Ethereum or Hyperledger) along with which consensus mechanism [Proof of Work/Proof of Stake and (Practical) Byzantine Fault Tolerance] might be suitable to collecting data and information at different stages in crop agri-food systems. The blockchain technology generates security through decentralization rather “security of obscurity” that traditional technologies rely on . Distributing data to stakeholders’ computers all is less vulnerable to data loss and distortion than storing data in servers centrally managed by administrators. A blockchain is a database that contains timestamped batches of transactions and activities related to a product. Storing data in servers centrally managed by administrators are more vulnerable to loss and distortion than distributing them to servers on the Internet. The database is incredibly helpful for developing data-driven mobile applications that help optimize farming. Moreover, the blockchain addresses the challenge of creating a comprehensive secure infrastructure for IoT and integrating numerous technologies used in ICT e-agriculture.
Food Supply Chain
With increased globalization and intense competition in the market, food supply chains have become longer and more complex than ever before. There are some common problems in food supply chains such as food traceability, food safety and quality, food trust and supply chain inefficiency, which add additional risks on the entire society, economy and the health of human.
From the producers’ perspective, the use of blockchain technology helps establish a trust relationship with consumers and build up the reputation of their products, by transparently providing individual product information in the blockchain. Enterprises can better achieve the value of their products and thus increase their competitiveness. This would make it difficult for suppliers of fraud and low-quality products to stay in markets and force all suppliers to improve the quality of products in the whole agricultural and food sectors. From the consumers’ perspective, the blockchain makes true and reliable information about how food is produced and transacted available. It helps address consumers’ concern about the safety, quality and environmental friendliness of food . The use of blockchain provides the possibility for consumers to interact with producers because consumers can understand the food production process more conveniently and in more detail. It supports consumers by removing obstacles in the exchange of goods to tighten their relationship, and thus strengthen consumer trust and confidence in food safety. From the regulatory agencies’ perspective, blockchain makes reliable and accurate information available for them to carry out informed and efficient regulations .
Blockchain is capable of recording the information of a product from its provenance to the retail store. It provides a secure and immutable way of storing data collected at the start of the supply chain, e.g., DNA of livestock animals, pesticide residues of grain or vegetables. Such information can be checked and verified by any party involved in the supply chain of the product. Collecting such data for all products can be very costly, but it can be done on samples. The transparence of such information can help detect, e.g., the containment of undeclared meat also.
Many solutions facilitated by blockchain technology have been proposed to improve the traceability of agricultural products. Tian proposes an agricultural food supply chain traceability system using Radio Frequency Identification (RFID), a non-contact automatic identification communication technology. It can trace products with trusted information in the entire supply chain. The use of blockchain guarantees that the records of production, process, store and distribution in the system are reliable and genuine.