Solving supplier financing with Daml & enterprise blockchain
In this post, we will demonstrate how we can use blockchain to enhance trade finance through a comprehensive, multi-level supplier network for a smarter supply chain. We’ll use a combination of Daml smart contracts, enterprise blockchain, and traditional enterprise databases to bridge siloed systems. Such a lean supply chain network will address important challenges with supplier financing in the larger trade finance and supply chain technology domains.
The architectural approach outlined in this post accelerates innovation by eliminating the need to select an underlying ledger (blockchain or database) before validating the business case. This is made possible using Daml, which is portable across multiple blockchains and databases. Also, see this accompanying video if you would like to roll up your sleeves and get a supplier financing application deployed within just an hour.
We will demonstrate the smarter supply chain technology solution step by step, by detailing out the following key components and considering each entity as a digital twin of its real self, rather than rows in different siloed systems.
- An enterprise can create a tiered network of suppliers for their supply chain using smart contracts that persist on either contract ledgers or traditional databases.
- The network can be certified to facilitate trade finance using the parameters that are customized & relevant for an enterprise’s supply chain environment (e.g., labor practices, environment).
- Financial inclusion can be facilitated by allowing any supply chain network supplier to easily get financing through a combination of on-ledger, off-ledger, or ledger-to-ledger bank transactions.
- This network can be connected to emerging trade finance blockchain networks and other supply chain procurement solutions
- Full privacy and auditability of the supplier network and transactions can be maintained.
By using Daml, we retain the flexibility of choice in which blockchain to adopt for your enterprise’s supply chain technology. Daml allows your solution to run without any changes on multiple enterprise blockchains (Corda, Fabric, sawtooth, VMware, etc.). Daml also allows for interoperability. So, each organization in the trade finance blockchain network could use different blockchains and still be able to communicate reliably and maintain their confidentiality. Finally, Daml includes enterprise-grade databases in its list of contract ledgers, so you could deploy an entire network using traditional databases if the hosting enterprise were a trusted party (as is the case with most networks). That’s a big step forward towards being able to choose the technology stack that’s right for your enterprise, resulting in smarter and lean supply chain technology to support efficient trade finance.
Rapidly creating a tiered supplier network
The first step in our model is the ability to create a tiered supplier network. Enterprises must be able to onboard their primary suppliers, allow those primary suppliers to onboard companies who supply to them, and so on.
This is a simple two-step process that can be recursively followed by each party:
- Onboard supplier
- Onboarded supplier can onboard the next tier supplier
Note that the Daml smart contract model enables each entity to be its digital twin, versus just being rows of data to be reconciled across different siloed systems, which makes it also independent of the underlying blockchain. As a result, it is portable across blockchains and databases, so it can be deployed quickly to your platform of choice without any changes. This leads to a lean and smarter supply chain technology network, because the smart contracts bridge the different siloed systems while providing every party flexibility of choosing their own technology stack.
Here is an existing supplier inviting their sub-contractor:
And here is the invited supplier accepting their invitation:
In reality, there could be one or more steps before a supplier is onboarded. Each of these additional steps can also be modeled easily in Daml. For example, the OnboardingInvitation above may need to be first approved by the host enterprise. In addition, there could be different categories of suppliers classified by the kind of products or services they provide.
By executing the above model as needed, a multi-tier supplier network may be created. This has two, primary benefits:
- Enterprises and all participating suppliers can get full visibility into their supply chain, while each party (or digital twin) keeps their own information private. Enterprises do not need to wait for a global network or an external entity to enable this transparency for them.
- Such a network does not require an advanced level of technological maturity. It can be deployed using a combination of blockchains and databases. And smaller suppliers can be parties on the network without having to “host” a node.
In the next step, we will see how any supplier in this multi-tier trade finance blockchain network can be enabled for financial inclusion and overall process compliance as required, because the smart contracts layer bridges the various siloed (or independent) systems.
Certifying the tiered trade finance blockchain network
Often, an enterprise is at risk for non-compliance to guidelines such as sustainable practices, local labor laws, data security guidelines, and so on. Some of these can result in government fines, while others can become reputational risks.
Now that a multi-tier supplier network is available as digital twins, a variety of actions can be enabled on the resulting smarter supply chain. Here, we will show how an external party can certify any supplier in the chain.
Here’s the supplier requesting the certification:
And here is that external certifier providing their approval. Various steps in the workflow may be required, which have been omitted here for simplicity. For example, there may be various types of certifications, a payment may need to be made, and the certifier may need to also notify a government agency or trade organization.
The supplier can now use this certification to apply for loans.
Securing financing in a supply chain blockchain network
A common method of securing financing in a supply chain is against orders or receivables. Given the powerful model we are building that bridges system silos, a supplier can now also request funding against the credibility of their certifications (among other things), because the data across multiple systems no longer needs to be reconciled. This reduces latencies dramatically, and ensures a lean and efficient supply chain network.
It is ideal that the financing entity, such as a bank, be on the same blockchain network so we can enable ledger-to-ledger bank transactions. But this is not required, given the business change management complexity of bringing every party onboard. In addition, the financing can be channeled through the host organization or through an accredited supplier nearest in the tiering chain.
Daml and its interoperability protocol handles the underlying communication for trade finance between the ledgers and various parties on the supply chain network. This makes development and maintenance much simpler than having to include all of this in the application code.
Here’s the supplier requesting financing:
And here is the financing authority such as a bank processing the loan:
In the sample code above, the bank has been onboarded by the enterprise to be on the network. Any supplier in the list, once certified, can interact with the bank. This leads to a powerful financial inclusion story by transparently certifying operations and balancing risks. The workflow depicted here can easily be extended to address additional business rules.
Building up to a global network
So far we saw how simple it is to create a smart supply chain network using Daml. The models above can be deployed on any database or blockchain (e.g., the VMware blockchain platform), and the concept of digital twins makes this very powerful.
Now, let’s see how an enterprise with its own network of suppliers can be connected to a global trade network. This is possible through the Daml interoperability protocol. The protocol allows for Daml applications deployed on different networks to transact seamlessly with each other.
This means that enterprises and associations are free to choose the blockchain or database they prefer. For example, the Australia Securities Exchange (ASX) chose the VMware blockchain for their network, while the Hong Kong Stock Exchange (HKEX) chose Oracle. Such flexibility is possible only because the rights and obligations model in Daml is separate from the underlying persistence layer.
Maintaining privacy & confidentiality
In any practical network, privacy and confidentiality is of utmost importance. A couple of these scenarios come to mind:
- Buyers may not want other buyers to have visibility into their purchasing patterns — e.g., what material is being supplied by which suppliers and when.
- Suppliers, too, may want to disclose their contractual relationship only as needed.
Daml has a built-in privacy model that allows contract privacy to be default, rather than having to be bolted on top of the data. This implies that the data generated by the workflows written in Daml must be disclosed explicitly. Otherwise, the data is private to the parties who are on the contract.
As an example, in the LoanRequest contract above, you may have noticed the keyword signatory and the keyword controller. The request for a loan is visible only to the requester (supplier) who created the request (signatory), and the bank (controller), who is going to be taking the action of either approving or rejecting the loan. This contract is not visible to anyone else. You can also say that on a Daml ledger that supports the Daml privacy model fully (e.g., a blockchain that supports physical privacy), this contract will not even be present on the nodes of any other party.
The privacy afforded by Daml implies that even as suppliers and buyers are part of multiple interconnected networks, the confidentiality of data can be controlled in a granular fashion by Daml.
Solving supplier financing through composability
The lack of financial inclusion of SME suppliers leads to sustained, elevated risk in the supply chain networks in trade finance.
In this post, we demonstrated how we can address this problem using Daml and a combination of enterprise blockchain, public ledgers, and enterprise databases to create a lean and smarter supply chain. These initiatives can now be supported using a robust, supply chain technology platform with a proven privacy model. Adopting such smart platforms within an enterprise accelerates value creation and helps make the enterprise architecture more flexible. Daml allows portability across blockchains and databases, and can also interoperate with external global trade networks. Regulatory compliance is also systematically achieved.
We believe that no modern network should be created in a silo. Otherwise, we will end up creating the same fragmented platforms of yesterday, even after using the powerful digital, smart-contract, and blockchain technologies available to us. Daml is a great way to enable a connected and smarter supply chain ecosystem.
- Get started with Daml quickly by deploying the models in this sample trade finance blockchain repository on Daml Hub, which avoids the overhead of maintaining any infrastructure at all. See this accompanying video for reference.
- See this blog by our CTO Shaul Kfir comparing and contrasting Ethreum & Daml.
- Learn more about Daml here.
If you want to master Daml smart contracts, you should also read:
- Interoperability between different markets and how Daml fits,
- Programming Smart contracts - A look into Daml, Kotlin & Java
- How easy it is to learn Daml,
- Some of the reasons why Daml and not Java or Solidity,
- Daml brings a paradigm shift as a programming language,
- How privacy in Daml differs from the rest and why it’s better.