- Blockchain technology is an invaluable tool for identifying an item’s origin and tracing its path from its source to its final destination.
- The value of luxury items such as diamonds, works of art, fine wine, and more depends mainly on their history. Using blockchain to validate provenance can increase their value.
- Companies have built a blockchain to bring transparency to the diamond market. Data points of more than 1.6 million diamonds are stored on the blockchain today.
How confident are you that the diamond you are about to buy was actually mined diamond and not a lab-grown diamond? How can you make sure that the diamond is truly yours?
In practice, we must trust that the retailers we deal with are telling us the truth about what we buy, and they must trust their suppliers to do the same. Unfortunately, this trusted web is often flawed, subject to fraud, error, and mismanagement.
It doesn’t have to be that way. Bitcoin and other cryptocurrencies use blockchain technology to provide the trust necessary for parties who do not know each other to securely transact business, such as securely enabling the transfer of millions of dollars in a single transaction. Blockchains ensure that the trust you place in the origin of goods – where they come from – is well-founded.
What does blockchain have to do with your diamond ring? Before 2000, a diamond’s path from the mine to the retail trade was not closely followed. In 2000, the United Nations initiated the Kimberley Process “to ensure that diamond purchases did not fund violence by rebel movements and their allies seeking to undermine legitimate governments.”
Although 81 countries have joined the process, including all significant producing, exporting, and importing countries, it has not worked well. It is based on a system of participant certification and a paper transaction record. Corruption and smuggling are widespread, and it is rarely possible to trace a diamond’s provenance to its country of origin, let alone the mine from which it originated.
Blood diamonds remain a problem today. Document tampering, fraudulent claims, falsely identified synthetic stones, and double funding is challenging to detect. There is an urgent need for a single point of truth so that all parties in the supply chain, from manufacturers to cutters to bankers and insurers, have shared access to documents documenting the extraction, production, and sale of a diamond.
Rough to Cut Diamonds
Diamonds undergo a multi-stage transformation between the mine and the jewelry store.
- Mining: More than 69 million carats of rough diamonds were mined in 2016, mainly from mines in South African countries, Russia and Canada.
- Sorting and Pricing: Rough diamonds are sorted into more than 5,000 categories. Only about 20% of all rough diamonds are of gem quality, while 80% of the diamonds mined are sold for industrial purposes. Rough diamonds are priced and sold to manufacturers at one of the ten annual fairs called sights.
- Manufacture: Gemstone quality gemstones are purchased by cutting centers. There, the rough stones undergo a 3D scan to make a computer model. Experts examine each rough diamond for its size, shape, and the amount and position of its internal inclusions and imperfections and update the computer model. Then they decide how to cut the stone to generate the most significant value.
- Becoming a jewel: The stone is then marked and cleaved or swan with a diamond saw or laser. Different diamond cutters, each with their own specialty, help craft the gem. Polishing is also a multi-stage process, with various experts polishing the main facets of the gemstone and others polishing the final facets. The last step is quality control to verify the diamond’s characteristics and make sure it meets the manufacturer’s standards. It can also be a GIA laser engraved with an identification number (inscription).
- The Sale: The finished diamond will be sold to jewelry manufacturers and wholesalers. They, in turn, sell the jewel online to customers or to diamond traders and jewelry stores.
Diamonds on the blockchain
Some companies have been set up to bring transparency to the diamond market using the open-source Hyper ledger software in recent years. The company also created software to interact with the scanning, modeling, and cutting equipment used in gemstone production. These highly calibrated and accurate instruments can automatically generate and store data related to the production process directly on the blockchain.
About 1.6 million diamonds now stored on the blockchain are identified with 40 metadata points and a high-definition image of the diamond. At each stage of the manufacturing process, the company protocol allows users to enter data such as the time and date of the process and the craftsman’s name running it. Retailers can enter information about each piece of jewelry containing the diamond, such as store location and warranty details. Customers can view the entire origin by simply logging in with their credentials.
The value of luxury items, such as diamonds and artifacts, bottles or chests of fine wine, watches, and other jewelry, depends mainly on their history. The parties that have agreed to participate believe that creating such records increases the prices that they can count on the entire supply chain and retailing of diamonds that produce them and follow.
What is blockchain?
A blockchain is a distributed ledger, a list of simultaneously tracked and updated transactions on thousands of computers. Parties to a transaction use cryptographic techniques to digitally sign a transaction record, confirming their agreement. Other parties, called miners or validators, check and validate this record before adding it to a blockchain. Records on a blockchain are linked, making it impossible to change previous records without invalidating the entire chain.
Once created, a blockchain is not owned by anyone, making it an ideal platform for inter-company use, even among competitors. It continues to operate, following the rules and logic outlined in its creation. The transactions it contains cannot be changed, even by the company or person who initially created the blockchain. That is why it is such a valuable tool for identifying an item’s origin and tracing its path from its source to its final destination.
What if a certified organic apple grower sells a pesticide-treated apple to a distributor and correctly signs the transaction as coming from an organic farm? If anyone in the supply chain detects pesticide residues on the apple, transactions on the blockchain will trace it back to the grower no matter how many other companies have handled it in the meantime. The grower will almost certainly lose his certification. The ability to control blockchain transactions in such cases provides a strong deterrent to potential fraudsters.
The weak part of any technological control system is human interaction. In many cases, a blockchain overcomes this weakness by using digital signatures. For example, when a certified mine places a diamond on the blockchain, it signs the transaction with its private key. The signature can be verified by anyone using the mine’s public key. This means that the mining company cannot later deny that it was the source of the diamond. It also means that a rogue company cannot put a diamond on the blockchain and claims it will be the certified company because the rogue company’s signature will be immediately considered invalid.
Blockchain is an added value
The blockchain, combined with digital signatures and machine-to- blockchain software, provides a way to securely record the origin of diamonds and other goods. Users can easily view the movement of a product in the chain from the source to the present. This transparency adds value to the product at every point in the supply chain and at the consumer’s final purchase.
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