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Understand blockchain before signing up

Contributed by Todd J. Janzen Published on 20 December 2018

This year “blockchain” moved from a little-known buzzword to a commonly used phrase in agriculture. If you missed it, blockchain is a distributed ledger accounting tool that promises better record keeping and reduced transaction costs.

Imagine being able to scan the bar code on a steak in your grocery store with your smartphone and learn where that steak was grown, how it was treated, where it was butchered and how many days it has been on the shelf. Likewise, a feedlot owner could track a load of soybean pellets backwards from the delivery truck, feedmill, farmer’s grain bin, all the way to the farmer’s field. This could be extremely valuable for the feedlot owner to determine the quality of feed, or to pinpoint where contamination originated if there is a problem with the feed.

For agriculture in general, blockchain means easier traceability of products from the farm to the dinner plate. Hopefully, this means more money in the farmer’s pocket due to fewer middlemen.

Before you sign up to participate on a blockchain, however, there are some things you should know.

First, all the laws of contract still apply

Blockchain advocates will tell you their blockchain uses “smart contracts” to replace the normal contract documents parties sign. These smart contracts are computer coded versions of traditional contracts, but simpler. Blockchainers will tell you they reduce risks because they have less uncertainty than normal contracts. But cut through the hype and remember that a contract is a contract. All legally binding agreements require the same basic elements: offer, acceptance, consideration and performance. A blockchain “smart” contract must still evidence these elements in order to be enforceable.

Second, know your blockchain intermediary

Blockchain promises to reduce transaction costs by removing the middleman. In theory, this means money can flow directly from the retailer to the farmer at the time of sale to the customer, cutting out all the transaction costs in between. But this oversimplification ignores one important fact: Many blockchains are built by third parties who serve as the intermediary to coordinate all parties on the chain. There is a transaction cost for this service, unless the intermediary is providing services for free. And there is risk, too, if the intermediary makes a coding mistake. Does the intermediary accept liability for mistakes in code?

Third, blockchain does not eliminate fraud

Blockchain can reduce fraud by requiring verification at certain contract points, but the risk for fraud remains. For example, blockchain may trace avocados back to their source on a farm in California, where the food’s journey began. But if avocados arrived at that California farm after being shipped in from Mexico, then falsely entered into the blockchain as “originating in California,” the grocery store consumer would never know. In fact, the blockchain traceability would do the opposite of its intent, instilling a sense of trust in the consumer about the food’s incorrect origin.

We are going to see many examples of blockchain technology in agriculture in the next few years. Farmers, shippers, processors and retailers should take the time to understand the contract issues related to this new technology.  end mark

Todd J. Janzen is with Janzen Agricultural Law LLC. Email Todd J. Janzen.

This originally appeared on Janzen Agricultural Law blog.

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