The COP26 summit in Glasgow, UK in 2021 saw world leaders come together to forge an actionable roadmap for tackling climate change. This has led to a pledge from the European Union, under the EU Green Deal, to become the first climate-neutral region of the world by 2050.
Core to this pledge was the need to replace the historic ‘take-make-destroy’, linear consumption model with a circular economic model that focuses on sustainable product production, remanufacturing, reuse, and recycling.
Web3 technologies are providing a practical basis for this transition – many stakeholders are looking towards a blockchain circular economy as an answer.
What is the Circular Economy?
Sometimes described as part of the ‘Industrial Revolution 4.0’, the concept of a circular economy has three key principles:
- To eliminate unnecessary waste and pollution
- To ensure that products are circulated around the supply chain retaining maximum value
- To actively participate in the regeneration of natural resources and minimising extractive activities
Plenty of for-profit organisations have already taken action to increase their sustainability efforts, contributing towards a circular economy, altering their business practices and growing their ESG departments. However, it’s been noted that there’s a general lack of oversight and vague, hard-to-measure metrics that are prevalent within current ESG frameworks.
This has led to scepticism about the genuine intentions of these companies and allegations of ‘greenwashing’ – the intentional (and disingenuous) use of environmental and social activism as a marketing tool, even when the claims they make don’t hold true under scrutiny.
The breakthrough of blockchain technology offers a clear opportunity to support these businesses in achieving their sustainability goals and demonstrate that they’re reaching their targets genuinely.
Blockchain networks can run across thousands of computing nodes worldwide, updating all network participants with records of transactions in real-time, delivering unparalleled transparency and immutability as the data cannot be tampered with or altered once added to the chain (as it could in theory with a closed, centralised system).
The raw material and manufacturing data for products circling the supply chain need to be easily and readily accessible, especially to those parties involved in the recycling and remanufacturing process. With a blockchain-based system, this can be done at the point of manufacture and the product’s data can be easily accessed and verified by anyone within the network, including the end user, recycling organisation, or second-hand retailer.
To realise this level of data granularity and accessibility, there needs to be a standardised technology solution that can be deployed across the supply chain. A proposed technical solution to address this challenge is the digital product passport (DPP), a core element that would underpin a blockchain circular economy.
What is a Digital Product Passport?
Digital product passports are a mechanism for sharing product data throughout the product’s lifecycle. They can be updated in real-time so that each participant within the system has a 360-degree view of the manufacturing data and process, the journey the product has taken from manufacturer to end user, and all information regarding its sustainability.
In essence, the DPP for a product (or product set) creates a digital twin of the physical good, which can be updated with event data such as repairs, degradation and anything else that might be pertinent to the product’s lifecycle and potential remanufacture.
For organisations involved in the supply chain – for example, manufacturers of the products themselves, retailers that sell the products, or third-party recyclers – DPPs provide certainty around raw materials used in the manufacturing process and give them an immutable, traceable record of usage throughout the product’s lifecycle.
For end users or consumers, with the increasing concern around sustainability and the ‘green’ credentials of organisations, DPPs can give crucial insight when making purchase decisions and provide transparency when evaluating the seller organisation’s claims of sustainable manufacture.
DPPs enable environmentally conscious decision-making throughout the entire supply chain, augmenting waste management, and ensuring that maximum value can be retained throughout the process and beyond.
They provide traceability of each product’s environmental impact at a granular level, allowing organisations to point to tamper-proof records that align with their ESG goals, satisfying stringent regulatory requirements that will be imposed within a circular economic model.
The EU is looking to make DPPs mandatory across related industries by 2030 – to operate within the bloc’s supply chain, organisations must invest in a DPP programme for their business (with exceptions given to certain industries). This is the first full-scale regulatory initiative of its kind.
However, at the time of writing, the technical specifications that these DPPs need to follow have yet to be fully laid out. This powerful technology has the potential to be the backbone of a circular economy – especially when built using decentralised technologies such as the blockchain.
What are the technological options for digital product passport implementation?
The best technological option for implementing digital product passports at scale is up for debate. Most propose either using a decentralised network such as the blockchain, a centralised cloud network, or a hybrid solution incorporating elements of both.
There are a couple of key challenges to be solved that will determine which type of technology is used. Firstly, data such as raw material information, recycling data and records of repairs need to be accessible to network participants for the circular economy to function.
This presents a challenge regarding privileged access and privacy – many organisations may consider some or all of this information to be business-critical and it may dissuade them from fully integrating into the circular supply chain with DPPs.
Secondly, interoperability and legacy system integrations are a factor in the adoption of any digital product passport solution. For many organisations, the natural inclination might be towards a DPP solution utilising a centralised cloud network since that’s the prevalent Web2 infrastructure that exists within supply chains already.
Building a digital product passport solution solely via a centralised cloud network could mean a simpler integration process with existing ERP databases and legacy systems – centralised cloud infrastructure is a relatively mature technology category.
However, blockchain-powered decentralised networks offer several advantages over a traditional, centralised approach.
Benefits of Blockchain-based DPPs
Within blockchain networks, ‘blocks’ contain transaction data from across the network that are validated using a consensus mechanism (such as proof-of-stake).
Blockchain technology is underpinned and secured by advanced cryptography and hashing, with every block containing the hash of the previous block to create an irreversible ‘chain’. If there is an attempt to change or modify data, then the hash of the block (in which the data is contained) will change – meaning that it no longer matches the previous block in the chain and the network will immediately reject the changes.
Rather than having a centralised network prone to manipulation, transactions are verified democratically and are visible to network participants – no single bad actor can alter data for their own benefit without being detected, eliminating data tampering and removing the capacity for fraudulent activity.
Distributed networks also benefit from low chances of network failure, translating into high operational resilience for mission-critical systems. Centralised networks have a single point of failure – a main server that runs the system. If there’s an outage, all companies relying on that specific solution provider would be affected, causing a domino effect across the system which could cost huge sums of money.
Whereas blockchain networks rely on a global network of computing nodes. If one node goes down, the network continues to function. If DPPs were to be implemented on a mass scale, this level of resilience would be critical to ensure that the circular economy never fails.
When a DPP is created on the blockchain, that record can be added to it, but the data itself can’t be altered after the fact. This prevents organisations from retroactively erasing a record of repairs that might alter the perceived value of a product, for example.
Tamper-proof DPPs reduce supply chain fraud and enable better oversight of supplier production operations. For organisations that utilise third-party factories in the developing world, the DPP can record the information about employees on the production line.
This can help provide a record of fair labour practices and gives leverage to prevent malpractice such as using child labour.
Replacing Legacy Systems
For a truly global circular economy, DPPs would need to be created and updated constantly. At present, slow, cumbersome legacy systems are still in operation within the global supply chain. Oftentimes, these systems aren’t designed with interoperability in mind, leading to a fragmented web of different software programs across the supply chain. This has implications around data quality and security.
Data can easily be lost in transit or corrupted when being transferred between uncoordinated systems. Blockchains, on the other hand, offer all parties access to the same network no matter their geographic location and provide consistent data security.
Utilising a single decentralised network across the supply chain would remove the need to send the data across to different systems, reducing the capacity for data loss and giving a real-time, holistic view of the supply chain which would greatly improve overall operational efficiency.
For organisations worried about revealing all their data on the network, a permissioned blockchain solution could be used to ensure that only permissioned parties can view information relevant to them.
As blockchain technology continues to mature, interoperability challenges are diminished with the creation of intricate APIs, cross-chain protocols, integrations, and ultimately the phasing out of legacy databases.
Smart Contracts and Automation
The latest generation of blockchains utilises smart contracts – code sets that act as intermediaries within on-chain transactions, programmed to only execute when both sides’ contractual obligations are fulfilled.
Smart contracts can be built to be as simple or complex as is necessary and can allow for a large series of transactions to be actioned continuously, reducing the burden of human oversight and the potential for human error.
Automation of processes allows for disintermediation, minimising the number of inessential agents, reducing cost and labour, and encouraging efficiency.
Building a Blockchain Circular Economy
Blockchain technology has the potential to be the underlying technological infrastructure for a fully realised circular economy and supply chain – with a core focus on digital product passports to deliver the necessary data storage, transmission, and access.
As a product-level example, a batch of luxury watches may be manufactured. Each of these watches is given a digital twin stored on the blockchain as part of the digital product passport solution. The data within this record – including ownership credentials, manufacturing records and raw material information – is accessible at any time to the new owner via a QR code placed on the item.
An individual purchases one of these watches and continues to wear it for six months. At this point, a part of the watch mechanism breaks down. Not wanting to simply throw the watch away, the individual gets it repaired. This repair information is updated and stored via the existing DPP for the item.
In another six months, the individual decides to opt for a change of style and sells the luxury watch into the second-hand market via a used watch resale business.
A new buyer is looking to purchase the watch. Because of blockchain-enabled DPPs, the used watch business can offer not only the physical watch but also the entire lifecycle information of the item at the scan of a QR code, giving the new owner infallible proof of authenticity, material quality and ownership.
Let’s say, a couple of years down the line, the watch breaks irreparably, and it needs to be disposed of. The current owner takes it to a third-party recycling company. The blockchain-enabled DPP provides easy access to raw material information for the company to minimise wastage and maximise value retention during the recycling process.
The recycled materials can be fed back into the circular economy to potentially create a new product, reducing reliance on raw material extraction and closing the supply chain loop. This is just one simplified example of the blockchain circular economy at work.
There are already many recognised use cases for blockchain within the context of a circular economy, and as the underlying technology is still developing, there are likely to be several more that emerge in the coming years.
Raw Material Provenance
Being able to prove infallibly what raw materials were used in the manufacture of a product, the amounts used, and how those raw materials were sourced, is crucial information for enabling the circular economy.
Blockchain-enabled digital product passports provide a data repository for their associated products – the data is gathered and secured at the time of manufacture.
This allows companies to prove the origins and composition of their products for compliance purposes, and for environmentally conscious customers to scrutinise these details ensuring they’re fully informed about their purchase.
When the item is sold, the new owner would gain access to the DPP and therefore can ensure that they’re happy with the sustainability of the purchase from a raw materials standpoint.
Equally, if the product is to be recycled or ethically disposed of, the recycling company can check the product’s DPP to find out exact information on the composition of the product, and even instructions on how to break it down sustainably back into its raw materials components.
Data Privacy and Compliance
Data privacy concerns are often raised as a case against decentralised, open-source technologies such as the blockchain. For instance, an organisation wishing to prove to a regulator that they’re hitting their sustainability targets may not wish to divulge the data points to everyone on the network.
Developers in the Web3 space have worked to address such concerns, and innovative technologies such as zero-knowledge proofs have emerged. ZKPs use advanced cryptography and algorithms to generate a mathematically verifiable proof that the data being sent on the network is what the sender claims it to be, without revealing the information within the transaction.
In the case of a blockchain circular economy, this could be crucial to addressing participating companies’ data privacy concerns, creating a privileged data access structure without drastically restricting the flow of information.
For example, during an audit, an organisation can send the required environmental impact data to regulators via the blockchain shielded with a ZKP so that the regulator is the only one able to see the underlying transaction data, but network participants can still verify the validity of the transaction comfortably.
Even consumers could receive verifiable proof that the organisation’s sustainability claims are sound, without the organisation having to reveal any critical data.
Tokenisation of Environmental Assets
The ability to tokenise environmental assets via blockchain technology such as carbon output, water wastage and plastic production allows organisations to demonstrate that they are meeting their ESG targets.
Vague metrics are replaced with numerical units of value that can be tracked against clear, mathematical targets. These tokens can be created using a certain standard (e.g. ERC-20), enabling them to be bought, sold, and traded on cryptocurrency exchanges.
A key example is the voluntary carbon market (VCM) and the way that blockchain technology is transforming that industry. The VCM allows purchases of carbon offsets by individuals and businesses, allowing them to neutralise their carbon footprint using their financial resources.
However historically, the VCM has faced issues such as double counting of credits and difficulty in proving that the purchased carbon has actually been offset. With tokenised carbon offsets secured on the blockchain, each carbon credit purchase creates an immutable, unique record (eliminating double counting).
Offsetting data can be gathered from IoT-enabled carbon capture tools, and stored with the purchase record on the blockchain to provide proof that the carbon has been effectively removed from the atmosphere.
Rewarding Positive Activity
Another benefit of blockchain-based tokenisation of assets in the circular economy is that it makes it much easier to specifically reward and incentivise sustainable purchases. This doesn’t have to be limited to purchases either – additional tokens can be given out to incentivise recycling or selling used goods back into the circular economy.
It’s easy to keep track of all activity through the item’s DPP, as the data is instantly updated and stored on the blockchain. Smart contracts can automate the dissemination of reward tokens to each individual’s wallet for seamless service. Like existing loyalty schemes, customers could rack up points for sustainable activity in the form of ERC-20 tokens.
The key difference between the loyalty schemes that exist today is that rather than just being able to spend these points with the same retailer, ERC-20 tokens can be traded via decentralised exchanges, expanding their usefulness and value.
There’s rising pressure on businesses and consumers to curb their carbon footprints on a global scale and increasing concern around the ethical sourcing of materials.
Web3 technologies are helping to pave the way towards a circular economy, replacing the traditional extractive and linear supply chain – digital product passports are a key component of this transition. When built on blockchain technology, digital product passports create an immutable, secure record for each product containing data on its raw material components, manufacturing process, repairs and lifecycle information.
DPPs are stored on a distributed database, secured with advanced cryptography and a consensus mechanism making it impossible to retroactively alter or tamper with data for fraudulent purposes. All participants can check the validity of transactions on the network – for privacy-concerned businesses, any sensitive data can be concealed using zero-knowledge proofs.
Implementing a digital product passport solution gives companies the ability to prove to regulators beyond a doubt that their products comply with environmental legislation, allows remanufacturers and recyclers to access products’ component data to augment their operations, and provides consumers with the opportunity to scrutinise the sustainability claims of their chosen brands to make informed purchase decisions.
At Protokol, we are experts in Web3 and blockchain technology. Through our consulting and development services, we can help you build and deliver your Digital Product Passport solution to support your broader sustainability and circular strategy.
Take the first step today book a call with our experts to discuss your requirements and objectives. Or, still in research mode? For a deeper understanding of Digital Product Passports, read our eBook!