A wedding ring is the most prominent symbol for trust and love. Often there is a little diamond on top of the ring. Whereas a relationship is based on trust, purchasing a diamond ring is, too. Diamonds and Trust – but what has blockchain to do with it?
When you purchase diamonds, you want to make sure it is worth its price. You also want to make sure that you do not buy a conflict diamond or a blood diamond. What is that? That are diamonds which have been mined in war zones. This term hints at a problem inherent in diamond trade. Diamonds can be used by terrorists as a means of finance. For example, it can be a currency which is used when buying weapons. The trade with diamonds has a trust problem.
Main Problems In The Diamond Industry
In their scientific article “Blockchain Technology Impacting The Role Of Trust In Transactions: Reflections In The Case Of Trading Diamonds” the authors Claudia Loebbecke, Leon Lueneborg and Denis Niederle from the University of Cologne write: “The main problems in the diamond industry causing vulnerability are fraud and theft. Fraud relates to the quality of the diamond or to illegal mining. Theft concerns cases where stolen diamonds are traded without being able to trace back the origin of the diamond.”
Loebbecke, Lueneborg and Niederle state that conflict diamonds from war zones are used to finance wars. To prevent this from happening, there is the so called Kimberly Process Certification Scheme.
It takes several steps and processes until a diamond arrives a product in a jewelry store or as a retail product in an online shop. First, the pieces have to be literally dug out of the earth. Mined diamonds then are sorted, valued and traded as rough diamonds. Third, the diamonds are cut, polished and traded to diamond jewelry factories. During each of these phases of diamond production there is already possibility for fraud. Diamonds can get lost before they even get traded as rough diamonds or before they are sold to a trusted jewelry manufactory.
Everledger: The Blockchain Solution
To keep track of mined diamonds and prevent fraud in diamonds trading blockchain adds a solution to the trust problem. Loebbecke, Lueneborg and Niederle write in their article: “Blockchain enables transactions even when there is no direct trust relation between the parties. Further, it replaces a third party along a trading or value creation process, which used to have the power to enforce agreed terms. As all actions in the blockchain are visible on the ledger, the technology prevents players' hidden intentions and malicious actions. Finally, the consensus mechanism avoids recording fraudulent transactions in the ledger.”
How a blockchain solution to diamond trade work in the real word, you can see at the example of Everledger:
Sources:
1. Claudia Loebbecke, Leon Lueneborg and Denis Niederle (2018): Blockchain Technology Impacting The Role Of Trust In Transactions: Reflections In The Case Of Trading Diamonds
2. Financial Action Task Force (2013): FATF Report Money Laundering And Terrorist Finance Through Trade in Diamonds
