Blockchain-based trade infrastructure and the future of cities
The implication of a diversity of blockchain-based digital trade infrastructures is the emergence of a new type of city: an oracle city.
Today we are witnessing the build-out of a new digital trade infrastructure stack: blockchains as a trusted data layers, IoT tracking devices, machine learning optimisation, and new types of economic organisation coordinated through smart contracts. The common view is that this tech stack will make trade digital, cheap and fast. This vision and its implications for prosperity are reasonable and important, but uninteresting.
Historically, major trade technologies haven’t just lowered the cost of existing trade. Trade technologies have changed the patterns of global commerce. The standardised shipping container, for instance, required major infrastructural upgrades and led to trade being routed through different ports. Trading cities that provided administrative services and standards (e.g., product standards for industrialisation) became dominant, with products being routed through ports to touch that infrastructure.
What does the nascent digital trade tech stack mean for trading patterns? Blockchains are an infrastructural layer to coordinate trusted information to consumers (e.g. provenance data), producers (e.g. evidence of fraud, or support for trade finance) and governments (e.g. regulatory compliance). Elsewhere we have argued that blockchain-based supply chains will create new types of platform organisations (the v-form organisation), create more niche products with premium prices, and shift who captures value along a supply chain.
My argument here is a more macro one. The new digital trade tech stack, underpinned by distributed infrastructure, creates the opportunity for a new type of city: an oracle city. I’d like to make some claims about why these oracles cities might emerge and what they might look like.
An oracle city is a species of special jurisdiction and entrepot. Special jurisdictions (variously called special economic zones, free ports) compete on the basis of lighter business regulations, lower taxes, predictable institutions or exposure to domestic markets such as financing. They create an institutional niche to attract business.
The niche of an oracle city is secure digital and physical trade infrastructure that other parties observe as an oracle. Oracle cities verify physical products match their digital credentials, and bundle those credentials into standards. Goods will be routed through oracle cities, and consumers buying goods leverage the reputation of the oracle city as a brand that those products meet particular credentials (e.g. labor standards, sustainability metrics).
Why? Blockchains help to store and coordinate data between distributed parties in a tamper-resistant way. They might give us cheap and transparent access to a range of different supply chain data. At first glance it appears blockchains solve the problem I am pinpointing here, rather than creating it: can’t each party (e.g., a consumer, a government) directly observe and trust blockchain-based trade data?
The variety of different supply chain projects—and the diversity of ways that information is presented, coordinated and certified—generates an entrepreneurial opportunity for both verification and curation. On the one hand, there is the garbage-in-garbage-forever problem with blockchain supply chains, with questions around the veracity of information inputted. On the other hand, as more products are digitally represented with ever-more rich data identities attached to them, consumers and governments will seek proxies and simplification of that information. Many consumers might not care or understand that a product has been certified by a range of particular bodies in Victoria—some of which may be fraudulent—but do care that it meets a minimum sustainability metric.
Enter an oracle city. Oracle cities will be small, physical special jurisdictions. They will not be where products originate from, but a place that products route through. An oracle city has infrastructure that authenticates information about goods as they pass through, and curates sets of rules and standards that products must meet. They are the next Constantinople, Dubai or Singapore, but their specialisation is as an oracle to other jurisdictions of the vast amounts of digital information we now attach to products. Its role will be to provide a suite of infrastructures that will verify product credentials (relying on, for instance, a range of other blockchain-based supply chains) to their own entrepreneurially-discovered standards. This is a distinct but complementary service.
Oracle cities take on reputational risk to verify external claims using their digital infrastructure (e.g. using some combination of technologies to verify claims, such as scanning technology, or requiring information to be presented to them in certain ways) before exporting those goods. They provide centralized verification and curation for a world of decentralized digital infrastructure. That verification would be tied with clear public standards around what products the oracle city would allow to pass through it.
Today we rely on the production of products within a particular jurisdiction as an (imperfect) proxy of product characteristics (or alternatively on brands). Those proxies might be tied to, for example, the average conditions within that country (e.g. clean water) or the reasonable enforcement of strict production rules within that jurisdiction (e.g. labor standards). In a global economy of digital trade infrastructure we will rely on oracle cities as proxies for the quality of products. For instance, imagine an oracle city in the middle east focused on sustainability: they develop digital infrastructure and rules (with automatic enforcement) that products that pass through the city are carbon neutral. For a European country or consumer seeking carbon neutral products, the information that a good has passed through an oracle city may satisfy their information demands. Similarly, a country in Europe might also rely on the oracle information provided by the city to enforce their own customs rules.
An oracle city’s physical and digital infrastructure (ports, sensors, regulatory integration, automated compliance) could of course be built in each jurisdiction of a product’s journey. Every existing trading port could undergo the process of integrating digital infrastructure into their existing operations, and verifying products themselves. But not every city will be an oracle city. Verifying credentials at every touchpoint likely involves a costly rebuild of existing infrastructure, and it fails to recognize the potential economies of scale in both physical and in digital infrastructure and curation.
This raises many open questions about what oracle cities might look like (and a research program to design them).
What is the optimum number of oracle cities? Too few oracle cities has competition implications and are limited by the costs of physically moving goods through them. Too many oracle cities involves wasted duplicated infrastructure, diminishing the benefits of specialization and trade.
Why don’t existing trade hubs become oracle cities? It would seem obvious that existing trading hubs (e.g. Singapore) would develop this infrastructure. This is possible, but there are likely major costs of evolving the existing institutional systems, and there are constraints on the demands of the domestic population. The costs of integration and rebuild of existing infrastructure may be higher than a new purpose-built infrastructure in a frontier jurisdiction (e.g., a new special economic zone or charter city).
What is the information that an oracle city will verify? This is an entrepreneurial question. Some cities might focus on sustainability metrics, labor standards, or luxury products. Too broad of a focus and they lose their brand (c.f. a sustainability-focused oracle city), while too narrow a focus and they fail to defray their large infrastructure fixed costs.
Understanding the possible comparative advantages, dynamics, and implications of oracle cities on existing hubs and patterns will provide a valuable understanding of the way we can expect the patterns of global trade to shift in response to this new digital trade stack.
Thanks go to various RMIT Blockchain Innovation Hub colleagues for discussions on this topic including Jason Potts, Trent MacDonald and Vijay Mohan.