Blockchain as a mechanism to program incentives for Circular Economy products

Originally published on Oct 30, 2020. Humans are selfish, but will gladly perform useful activities with the right incentives. Circular economy products must be instrumented to incentivize the right next circular step.

This post is about an approach to enable the right next circular step. It is based on the presentation to GreenHome NYC Forum on October 21, 2020. The video is here.

Circular economy is about movement and frictionless reuse

The core design principle for a circular economy is the reuse of elements and energy (human and physical) that go into making and using a product or its parts. The circular design calls for multiple reuse cycles of elements and energy, in whole or in part. As a product decomposes with time (or is disassembled) its elements should serve the needs of downstream ecosystem participants - while rewarding the previous owner(s). More on the concept here.

Circular economy at scale requires massive coordination

Complexity grows exponentially as the lifespan of a product or its parts extends. To make this work a collaborative exchange is needed between unrelated business entities and customers. This is of course possible to implement now, but the coordination overhead is too great to achieve this efficiently.

Seamless, private, yet trackable, information about the product and transfer of ownership becomes a requirement for frictionless operation. When faced with a choice to make a decision people and businesses will take the step that provides them the most economic value. Therefore incentives at an item level are needed to make circularity work.

A trusted incentive mechanism is needed to encourage circularity

Humans are selfish, but will gladly perform useful activities with the right incentives. Circular economy products must be instrumented to incentivize the right next circular step. The return of a product, its ingredients, or its parts needs to be designed and directionally programmed right into the product. It will be difficult, expensive, and sometimes impossible to know exactly how your product may come back. With the right incentives the ecosystem participants can be encouraged to take the right next circular step; or even compete with each other to do it. Markets already decide the flow of goods and raw materials across the globe. But what if you were able to dynamically set and re-set the incentives on a specific product - down to a specific item level - based on market conditions or other business needs?

But central coordination is limiting and there is a problem of trust

A circular economy succeeds when there is the useful movement of otherwise idle elements. We are seeing progress in circular economy adoption among conglomerates such as Ikea, Nestle, Walmart, and others that manage and direct their supply chain participants. Track and trace solutions are very complex when a single entity manages everything. At scale, it is not practical to use a centralized system to orchestrate coordination.

Ethereum blockchain enables programmability of incentives into a product

Circular economy products need to anchor on tamper-proof public utility IT infrastructure. The monetary incentives for taking a right circular step are programmed into the product itself through a unique digital twin token representing a physical product. This is one of the key benefits of blockchain technology innovation: you can program the flow of money from one person to another without going through a third party to manage the funds. The circularity flow and the reward structure is programmed into a token tied to a physical product and its visible & verifiable by everyone. The current owner of the item is rewarded when the right next circular steps is taken. The actions are verified and the payments are released incrementally. Programmability enables shared rewards from the economic value generated by an item for the people who support continuous movement.

Watch the video here to see to diagram come to life with on-screen layers and explanatory narrative.