The diamond industry today faces numerous challenges related to diamond sourcing and quality. Lab-grown diamonds are infiltrating the natural diamond market, both illegally and legally. Because of this, both consumers and suppliers are increasingly wary of claims of authenticity. Compounding the problem, consumers are increasingly aware of and sensitive to social issues affecting supply chains of everything they purchase. Diamonds are no exception. The image of diamond jewelry has been tarnished by awareness of “conflict diamonds”, diamonds from regions of strife such as Sierra Leone and Congo that come with negative social externalities. This changing consumer preference has led to industry decline for nearly a decade
Certifying the authenticity and origin of each diamond is a big challenge. The supply chain is several layers deep, with diamonds changing hands and crossing borders several times before reaching the end user. In 2017, wholesalers and distributors bought over $5.7 billion worth of rough diamonds from De Beers. Next, the diamonds are sold to various polishing and cutting companies, smaller retailers, and to big retailers. With the diamonds changing hands several times from mining, sorting, distributing, cutting, polishing, manufacturing, and finally to retail stores, end-customers do not confidently know where diamonds originally come from. Even when diamond jewelry changes hands, often in the process it is easy for a diamond to be replaced with a lab-grown or lower quality diamond. Our solution is to utilize blockchain to track these diamonds and with the use of smart contracts to make diamonds traceable.
By allowing each step in the diamond supply chain to verify and track their product in an immutable ledger, we can add significant barriers to fraudulent diamond sources. At each point that a diamond changes hands would involve an entry into the blockchain, creating a record of which diamonds each entity was responsible for. This entry would include the id of the source, the recipient, and id of the diamond being sold. Each diamond could be given a unique id number by laser engraving. These engraved ids are already in place in many certified diamonds, but finding out what the origin of the diamond is based on this inscription is a not an easy matter. By logging each step of the supply chain in a trustworthy, public ledger, an individual considering a diamond purchase can easily verify that the diamond is represented throughout each step of the supply chain.
Commercial Value and Promise
Our next step in testing this idea out would be to consult with industry experts about its economic promise, build out the blockchain system, and begin building buy-in with consumers to incentivize producers and retailers to join our system. Once we have interested parties in at least one place in the entire supply chain, we would want to create our first entries, from mine to ring. Ideally this test would come with as much buzz and publicity as we can generate to get more consumers interested, giving incentive to suppliers to join, getting our flywheel moving.
For the system infrastructure, we would need to incentivize someone to run the mining computers to generate the nonces. This could be done by charging a small fee for each transaction on the chain, much like is expected to happen once final bitcoin has been mined.
For our initial discovery phase, we have conducted interviews with several experts in the diamond industry to verify our idea and proposed plan. This has led to some good feedback and it seems like it is a possible solution.:
Aman Parikh, owner of diamond wholesale business: “Definitely some scope to use this technology. The Kimberly Process modeled by the UN has tried to execute this to prevent nations with blood diamonds from selling their products. This could be more efficient to implement once the diamonds have been cut and polished as creating an ID on a diamond which is larger when extracted from the mine, will be harder”. Further, insight from Aman, led us to understand that currently on purchasing diamonds from a wholesaler, companies do not know how many times the diamond exchanges hands or is sold in between. This process would also have the potential to eliminate some middlemen from the process which would help the end customer.
Name Withheld, First year student at Booth who recently purchased diamond ring for his to be fiancé – “Sounds interesting, I would have an easier time purchasing a diamond and not paying an unnecessary premium at a Tiffany’s. I struggled with making a decision about my diamond purchase because I wasn’t sure that the jewelry store on Wabash was giving me a legitimate diamond.”
As for the technology’s promise for tracking a commodity product throughout the supply chain, we can look to a proof of concept from another industry: Tuna. This industry is using blockchain to help reduce the amount of illegal fishing in a similar way to our own proposal. This lends credence to the idea that we can use blockchain to reduce another negative externality of an industry.