EXPLORING THE ADVANTAGES OF BLOCKCHAIN TECHNOLOGY FOR SMALLHOLDER FARMINGInternational Fund for Agricultura l DevelopmentVia Paolo di Dono, 44 - 00142 Rome, ItalyTel: +39 06 54591 - Fax: +39 06 5043463Email: ifadifadifadf acebook/ifadinstagram/ifadnewslinkedin/company/ifadt witter/ifadyoutube/user/ifadTV© 2019 by the International Fund for Agricultural Development (IFAD)The opinions expressed in this publication are those of the authors and do not necessarily represent those of IFAD. The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of IFAD concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The designations “developed” and “developing” countries are intended for statistical convenience and do not necessarily express a judgement about the stage reached by a particular country or area in the development process. All rights reserved.ISBN 978-92-9072-950-1Printed October 2019Contacts:Michael Hamp (PhD)Lead Regional Technical SpecialistRural Finance, Markets and EnterprisesAsia and the Pacific RegionSustainable Production, Markets and Institutions Divisionm.hampifadMaria-Elena MangiaficoKnowledge Management SpecialistEnvironment, Climate, Gender and Social Inclusion DivisionStrategy and Knowledge Departmentm.mangiaficoifadEXPLORING THE ADVANTAGES OF BLOCKCHAIN TECHNOLOGY FOR SMALLHOLDER FARMINGAcknowledgments 4INTRODUCTION 5DISTRIBUTIVE LEDGER TECHNOLOGY/BLOCKCHAIN 7Evolution of blockchain 8HOW IT WORKS 9Public networks versus private networks 11HOW DLT/BLOCKCHAIN IS BEING USED 13Future development 14IFADS ROLE 15Remittances 16Land title registry 17Agricultural value chain 18CONCLUSIONS 19RECOMMENDATIONS 21APPENDIX 1 - GLOSSARY 23TABLE OF CONTENTS4EXPLORING THE ADVANTAGES OF BLOCKCHAIN TECHNOLOGY FOR SMALLHOLDER FARMINGTABLE OF CONTENTSAcknowledgmentsMany people have contributed directly and indirectly to the production of this Brief. The initiative was led by Michael Hamp, Lead Regional Technical Specialist, Rural Finance, Markets and Enterprises (Asia and the Pacific Region, New Delhi) in the Strategy and Knowledge Department, who guided, reviewed and coordinated its production. Acknowledgements are due to Henk van Cann and Hans Geldof of the Blockchain Workspace, Amsterdam, the Netherlands, who contributed to this note through the IFAD assignment on the Blockchain Awareness Study and Learning Event, December 2018 February 2019.Special thanks are due to Moses Abukari, Jonathan Agwe, Ainina Aidara, Ward Anseeuw, Conrad Atuhire, Florent Baarsch, Valentina Berardini, Willem Wefers Bettink, Thomas Bousios, Alessandra Casano, Paxina Chileshe, Pedro De Vasconcelos, Ricardo Del Castillo Becerra, Adriane Del Torto, Constanza Di Nucci, Rosanna Faillace, Edward Gallagher, Enrique Hennings, Davinia Hoggarth, David Hughes, Christa Ketting, Mylène Kherallah, Stefania Lenoci, Harold Liversage, Maria Elena Mangiafico, Mauro Martini, Dunia Mennella, Rikke Olivera, Eilish Oneill, Amedeo Paglione, Bettina Prato, Dyah Pritadrajati, Fidy Rajaonson, Antonio Rota, Laura Sollazzo, Thouraya Triki, Erik van Ingen, Maria Linda Vicente, Paul Winters, Fatima-Zohra Yaagoub, Kathy Zissimopoulos, and Chris Jarzombek, the editor.While this Brief was prepared for IFADs staff and partners, the views expressed are not necessarily those of IFAD.5Distributed ledger technology (DLT)/blockchain is an exciting new technology that may prove to be a radical innovation. Similar to the steam engine and the Internet, which triggered previous industrial revolutions, blockchain has the power to revolutionize existing economic and business models. It has the potential to deliver productivity gains to multiple industries, including the financial sector, energy markets, supply chains, intellectual property management, “virtual firms”, the public sector and beyond. Its ability to provide disintermediation, improve transparency and increase auditability can significantly reduce transaction costs, introduce efficiency into existing value chains, challenge revenue models and open new markets. In short, a blockchain is a database which is shared across a network of computers. One can add to it but not change previous data within it. The network runs constant checks to ensure the authenticity of the database. While the most noted use of blockchain is in the cryptocurrency bitcoin, its application is now used for many other collaborations. It is a foundational technology of a platform that allows designing a secure way to record transactions and circulate it among signatories, or any kind of target group with an Internet connection. At its core, it is an extremely democratic ledger that cannot be arbitrarily manipulated and easily shareable. For agriculture in poor countries, blockchain has the potential to improve financial management, provenance, traceability and transparency in food chains and to enable the creation of new markets and products.This briefing note is intended as a primer on blockchain and a spur to begin considering how best to capitalize on blockchain technology to achieve IFADs objectives. Several development agencies have already expressed their vision of blockchain and discussions continue among them on how best to tap into the opportunities of blockchain for agriculture.1This note also explores potential applications for blockchain in IFADs business. It offers a useful overview of potential directions for IFAD to consider as well as recommendations for initial steps the Fund can take.Blockchain applications are in the early stages of development. Not only is the technology itself new, but its prerequisites (smartphone usage, connectivity, education and the skills to manage cryptographic keys) are often lacking. As of today, hardly any real-world problem has been solved by blockchain, but we can say it solves the problem of “trust”. 1. Brussels Briefing n. 55 “Opportunities of blockchain for agriculture”. brusselsbriefings/2019/04/26/next-brussels-briefing-n-55-opportunities-of-blockchain-for-agriculture/ INTRODUCTION6EXPLORING THE ADVANTAGES OF BLOCKCHAIN TECHNOLOGY FOR SMALLHOLDER FARMINGAccording to reports in a 2017 issue of Harvard Business Review, “Bank of America, JPMorgan, the New York Stock Exchange, Fidelity Investments, and Standard Chartered are testing blockchain technology as a replacement for paper-based and manual transaction processing in such areas as trade finance, foreign exchange, cross-border settlement and securities settlement.” Through its mandate, IFAD must aim to ensure that rural people are able to benefit from the opportunities brought about by blockchain technology. In determining IFADs approach to blockchain, the most important criteria should be the technologys risks, competitiveness, longevity and fundraising capabilities, in addition to its coherence with IFADs objectives. Applying these criteria, the most promising application areas of blockchain technology in smallholder agriculture are remittances, land titles and supply chains. Ultimately, only active proofs of concept will reveal the potential of blockchain, but IFAD could also engage in related activities, such as building knowledge and competencies and by expressing a well-thought-out vision on realistic and fair blockchain applications.7A blockchain is a digital transaction ledger, maintained by a network of multiple computing machines that are not relying on a trusted third party. Individual transaction data files (blocks) are managed through specific software platforms that allow the data to be transmitted, processed, stored, and represented in human readable form. Every transaction is disseminated through the network of machines running the blockchain protocol and needs to be validated by all computer nodes. The key feature of a blockchain is its ability to keep a consistent view and agreement among the participants (i.e. consensus).2Blockchain may prove particularly valuable in emerging market economies, although serious challenges and risks (both technical and regulatory) will need to be addressed before it achieves widespread adoption. Questions remain about blockchains scalability, interoperability among different networks, security, transition costs, data privacy and governance. Business leaders and policymakers will need to think long and hard about when and under what conditions a blockchain initiative may be warranted.In traditional systems, a central authority (such as a reserve bank or land registrar) maintains and controls a ledger of information. For example, banks maintain a financial ledger of who holds money, and governments maintain a ledger for information such as identity and titles. These entities also act as the trusted agent in any exchange: banks handle financial transactions, and governments maintain titles.Distributed ledger technology (DLT) and blockchain enable transactions between members of complex networks without the need for central authorities or middlemen. Everyone maintains a copy of the shared ledger and independently confirms its validity through consensus. Everyone has access, but no one is in control. Only through consensus are new records and amendments allowed to the ledger, and no one can alter past entries. Eliminating centralized authority can increase speed, lower transaction costs and enhance security.2. Francesc Xavier Prenafeta Boldú, IRTA Institute of Agrifood Research and Technology. The Rise of the Blockchain Technology in Agriculture and Food Supply Chain. September 2018.DISTRIBUTIVE LEDGER TECHNOLOGY/BLOCKCHAIN8EXPLORING THE ADVANTAGES OF BLOCKCHAIN TECHNOLOGY FOR SMALLHOLDER FARMINGEvolution of blockchainBlockchains first got their start in the early 1990s, but they really took off with the introduction of bitcoin. Bitcoin is a peer-to-peer electronic cash system launched by Satoshi Nakamoto, a mysterious, pseudonymous person or cabal that laid out a white paper on how blockchain could be applied to bitcoin, in 2009. It is “based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without any need for a trusted third party” (Nakamoto).3Bitcoin was originally backed by techno-libertarians seeking to establish a currency outside of government control.Bitcoins commitment to the self-sovereignty of its users and pseudo-anonymity in transactions also opened the platform to illicit activities, which tarnished its reputation with governments and the public alike. Despite these problems, the development of bitcoin has continued. In January 2019, its market capitalization was approximately US$60 billion.4Today, bitcoin is used as payment by millions of people, including a growing remittances market. Ethereum, a blockchain-based start-up, was launched in 2014 as an open-source, public, blockchain-based distribution system for any kind of decentralized application. Because of these extended abilities, it is often called Blockchain 2.0. Ethereum introduced the possibility of smart contracts, or deterministic exchange mechanisms controlled by digital means that can carry out the direct transaction of value between untrusted agents. 3. Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. Retrieved from bitcoin/bitcoin.pdf 4. Bitcoin trading volume. data.bitcoinity