How does Blockchain technology apply to Diamond?

The technology most likely to change the next decade of business is not the social web, big data, the cloud, robotics, or even artificial intelligence. It’s the Blockchain, the technology behind digital currencies like Bitcoin. How could this technology be applied in protecting your diamond?

About Blockchain

“The technology most likely to change the next decade of business is not the social web, big data, the cloud, robotics, or even artificial intelligence. It’s the Blockchain, the technology behind digital currencies like Bitcoin.” – Harvard Business Review1

Blockchain is a distributed database that maintains a continuously-growing list of records called blocks secured from tampering and revision.2

It is a globally distributed ledger that can be run on millions of devices and open to anyone, and it can be used to securely moved and stored anything of value, including money, intellectual property, and even votes. On Blockchain, the trust is established through mass collaboration and clever code. It can remove the middleman and ensure trust between strangers, as it is difficult to cheat.

Many companies are betting big on this next game-changing technology, and financial institutions are of course at the forefront of this new game, as the new technology can help reduce transaction costs and complexity of financial transactions, and improve transparency and regulation. But it can also extend well beyond financial services. Here I would like to share an interesting example of how Blockchain can be used to potentially transform the diamond industry.

Everledger and Diamond

Trust and ethics is a problem in the diamond industry. The diamond industry has long faced problems with reporting the origin of a diamond and authenticating its ID and grading. Traditionally documented on paper, but sometimes it’s still difficult to trace the diamond’s true origins and providence. People may ask Where did the diamond come from? Was it blood diamond? Who owns it? Who bought it? Where is it now?

Everledger, a startup founded on Apr 2015 and based in London, is leveraging the blockchain technology to establish a global platform that is secure enough to enable people to access all the related information and address the trust and ethics problems. Everledger is using IBM’s infrastructure – LinuxOne to build a digital global ledger that tracks and protects items of value. They use cryptography to keep secure and accurate records of each transaction occurs during a diamond’s lifespan, and once a transaction occurs, it will be added to the history and cannot be removed or edited without multiple checks. Therefore, this platform can enable trust, transparency, and security of diamond business.

Everledger is building up relationships with major certificate houses around the world, where they grade and certify each of the diamonds. Everledger creates a digital DNA for each diamond and writes all of the information into blockchain. The blockchain platform records the chronology of a diamond’s ownership and is customized to incorporate the relevant integrity markers, which are calculated from 40 data points related to each diamond alongside the four-Cs (which stand for Cut, Color, Clarity, and Carat-weight). Once such information has been uploaded into the blockchain, the record is tamper-free, it’s immutable and can therefore be trusted.

diamond-40-data-points

The blockchain is immutable, fast and scalable, and it brings trust and transparency to diamond trading. In the future, people can know the diamonds origins, every owner of a diamond in the history, its 4Cs and 40 metadata points. This can not only benefit customers, online retailers, and vintage diamond market, but also Everledger can work with insurance companies when diamonds are reported stolen, and with Interpol and Europol when diamonds are crossing borders and entering black markets.

Insurance fraud is a global problem, it costs insurance companies 45 Billion a year and 65% of them claim go undetected 3. A large portion of this amount comes from the diamond industry. By creating transparency in the industry through easy access to all doc umentation, secure history of transactions, real-time updating, fraud can eventually be eliminated.

Additionally, this platform can put a stop on concerns over blood diamonds. Blood diamond is diamond mined in a war zone and sold to finance an insurgency or terrorism. By tracing the origin of a diamond with blockchain, we can judge whether a diamond is blood diamond or not.

Moving forward

Everledger is now still in its experimental stage, and their CEO mentioned that they will add two additional assets into its ledger: fine art and luxury goods.

The process is not easy, which requires making all the players through the value chain, from manufacturers, traders, and retailers to insurers, to buy in the concept and practice of blockchain. Moving forward, I think Everledger should speed up its relationship establishment with the major players in Diamond’s value chain, as well as insurance companies and even government to roll out its practice on diamond. In the long term, Everledger can consider how to build up the standards (which are more complicated) to track and offer fraud prevention for fine arts and luxury goods.

Word Count: 786

Reference:

  1. The Impact of the Blockchain Goes Beyond Financial Services, https://hbr.org/2016/05/the-impact-of-the-blockchain-goes-beyond-financial-services
  2. Wikipedia, https://en.wikipedia.org/wiki/Blockchain_(database)
  3. Everledger company data, http://www.everledger.io/
  4. Everledger Is Using Blockchain To Combat Fraud, Starting With Diamonds, https://techcrunch.com/2015/06/29/everledger/

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Student comments on How does Blockchain technology apply to Diamond?

  1. Very interesting article! I was not aware of this blockchain technology being used in business till very recently when I came across it in an article related to trade finance (link below). Diamond industry has an even more compelling case for using this technology given the traceability of diamond is so important and the fraud prevalent in the industry. Theoretically the concept is really good, however, I must admit that I don’t really understand how the physical good is actually verified with the data trail available virtually with the blockchain technology. Also, what is your opinion on ability of preventing fraud if the companies in the business have significant vertical integration present? Thanks!
    http://www.afr.com/technology/cba-blockchain-deal-creates-the-future-of-trade-finance-20161021-gs7w98

  2. Thanks Ting. I have a similar question to Akanksha’s. It makes sense to me how all the data gets recorded in the blockchain tech, but when I’m physically looking at a piece of diamond, how do I link that to its virtual ID? I assume a certificate separate from the physical iteam would be just as liable to fraud as it was in the pre Blockchain world.

  3. Thanks, Ting! This is really cool, and I had no idea people were trying to use blockchain for this kind of application. I guess my questions are similar to those of Akanksha and Haibo. The diamond industry is already super consolidated, and yet it’s still really easy for conflict diamonds (or at least those from unscrupulous/sanctioned sources, like those in Zimbabwe) to make it into the market. How would this technology overcome the underlying human problem that diamond companies face? Companies have already agreed not to buy conflict diamonds, and yet they do, knowingly or unknowingly, at a point relatively close to the original source. I think in order for this to work, the diamond would have to receive some sort of inscription (if that’s possible) at the mine, and be logged into the blockchain at that point; there would need to also be some sort of verification process for location.

  4. Ting, thanks for the post and great idea to include the video!

    Blockchain technology is clearly transforming businesses. The most common example that comes to mind is bitcoin and financial services, so it was interesting to learn from how Everledger is applying the same technology in the context of diamonds. As you mentioned, as Everledger continues to grow it makes total sense to expand into fine arts and other luxury goods.

    In line with the other comments above, I am also struggling to understand how the actual physical diamond is uniquely associated with its electronic ID and how would that be different from the methodology currently in place.

    Finally, speaking of blockchain more broadly, would be interesting to see how much progress the technology is making in other applications such as intellectual property and votes.

  5. Very interesting, Ting!

    Now that you have shown us this new application, I’m thinking about other possible ways to use this technology. Andres mentioned a couple already, and I wonder if it could be used to trace the origins of food (is this grain genetically modified? was this cow grass fed? etc).

    Also, as for people’s questions, I think the “signature” of the diamond are its physical characteristics, as he mentions: “In the future, people can know the diamonds origins, every owner of a diamond in the history, its 4Cs and 40 metadata points.”

    Thanks, Ting!

  6. What an interesting application of blockchain technology! Thanks for writing about this Ting.

    To respond to Haibo, apparently there is a physical serial number etched into a diamond if it’s graded by a reputable agency such as the Gemological Institute of America (GIA) – http://guide.diamondpriceguru.com/diamond-and-ring-basics/certified-diamonds/gia-ags-egl-and-other-diamond-grading-certificates/

    However, I’m not sure what measures there are to ensure the information about origin and other attributes about a particular diamond prior to this identification isn’t fraudulent. So I also agree that issue that Akanksha brought up is very troubling. If the diamond supply chain is vertically integrated, what’s to stop them from inserting bad data to begin with if it benefits them?

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