Originally written and published on June 22, 2020.

This post is a reflection on the body of knowledge from the From Linear To Circular Economy webinar series plus my expertise in Ethereum blockchain solutions and platform-based businesses.

The circular economy is a socioeconomic system based on nature: everything has a fit and purpose. 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 entropy makes its way through the structure that holds a product together. As a product decomposes with time its elements should serve the needs of downstream ecosystem participants — while rewarding the previous owner(s). Each reuse cycle is described elegantly in the “butterfly” diagram.

The circular economy concept is gaining traction. There are successful case studies and a number of business that are built with the circular economy as the core of the business model. In many cases, economic conditions for circularity are right when the element (product, materials, components, etc.) and energy sourcing is cheaper than virgin materials or linear sourcing options. My superficial assessment of the case studies suggests that most companies control most aspects of the circularity in their business. But this may be challenging to scale. And scale we must.

In my view, the circular economy is about open networks. It’s about the frictionless collaborative exchange between unrelated business entities and customers. It’s about seamless, private, yet trackable, transfer of ownership of elements that compose a product. It’s about receiving economic and intangible benefits from circular economy participation without the burden of tracking one’s share.

A circular economy succeeds when there is the useful movement of otherwise idle elements. All current software track and trace solutions are complex enough when a single entity manages everything. But how do you coordinate when unrelated participants come and go from the circularity? This requires heavy collaboration and current business models and technology solutions and infrastructure is not fit to serve this need. Who will maintain the always-on infrastructure that nobody owns, but everyone trusts? How do you instill trust between the participants without managing each participant?

Why blockchain?

As I progressed through the webinar series I kept noting signals where blockchain technology may serve as a solution to some of the circular economy scalability challenges. It’s not a silver bullet, but there is a clear signal.

A reputable general-purpose blockchain network, such as Ethereum, enables coordination and transfer of value in a trusted way. The design properties of the network (open source software, independent operators, immutable record keeping incentivized for honesty, cryptography) enable the assignment of value and ownership transfer of every element composing a product. All of this can be done without having a single controlling entity.

Four out of six business models associated with the circular economy (resource recovery, product life extension, sharing economy, and even product as a service) require mass stakeholder coordination and participation. This is because these business models require network effects and some aspects of game theory to be effective.

Successful large-scale circular economy businesses will not be built in a command and control way. These will be open network businesses that function like platforms where participants create value for each other. The relationships and responsibilities between entities will be encoded in self-enforcing contracts and recorded permanently on a blockchain (such as Ethereum). One example of such an enabler is guaranteed payments to the value chain contributors. The payments will be made after the actual product has left the physical possession, but without using a third party or another central authority to manage the release of funds. Blockchain technology will be the enabling factor because it provides a single always-on trusted record of element ownership, element value, and availability.