Identity in a Circular Future — Part 1/2

In our series about The Economic Value of Decentralized Identity on the future of IT, we addressed how open identity standards will change the ground-rules and framing concepts of the IT business, moving from vendor lock-ins and closed platforms to interoperability and meta-platforms. Now, we turn to a related but very different shift in conceptual frameworks: the transition towards a circular economy. Decentralized identity, we believe, will be a driver of this transition, which will in turn accelerate and sustain further decentralization of IT, as well as the economy itself, allowing for more agile processes and thus more economic resilience, in circular as well as linear terms. In the first part of our Identity in a Circular Future series, we will break down the massive, civilizational shift entailed by a turn to circular economics in terms of radically new premises and prerequisites. Then, we will situate IT and open data governance in this new set of requirements and goals, before turning specifically to what role open data and decentralized identity could play in the landscape of circular accounting and global transparency necessary for an enforceable program to circularize the world economy. In the next installment, we’ll look at what this shift could mean for cloud computing, for a decentralized data commons, and for the business models of the future.

Circular economics as holistic accounting

Until a decade or two ago, the phrase “circular economy” would have struck most economists as an oxymoron, because traditional, linear economics is an intellectual tradition founded on certain basic assumptions about the relationship of the human and non-human world. Foremost among these assumptions is the concept of “growth”, i.e., the endless annexation of natural resources as inputs for the value economy to grow its total size, has been taken as a paradigmatic goal almost universally. When the inputs to this growth become painfully finite and delicate natural habitats, this once axiomatic good turns problematic.

Another problem is globalization, which expands faster than economic theory can keep up. The scale and scope of microeconomics have traditionally been the purview of one enterprise, while those of macroeconomics have been one state or jurisdiction; markets, particularly highly globalized ones, remain difficult to study given how fragmented and unreliable global data and metrics are. Meanwhile, the human economy’s outputs on the non-human world have been almost completely ignored as “externalities,” which is a fancy word for “out of scope,” in the sense of unmeasured and understudied. Increasingly, the economic “externality” of environmental impacts.

This one-way relationship between human and non-human life is not just an asymmetry of power, but more importantly for our purposes here, it is an asymmetry of scope: maximal consumption of finite nature is a given, while measurable impacts on nature (such as pollution or habitat loss) are seen as beyond the scope of economics unless it has an economic impact on other economic actors. The first step towards circular economics is expanding the scope of economics to other forms of value, such that natural extraction is not an “input” and pollution is not a value, but a conversion of natural value into human value that can only be measured holistically (or in business terms, “end-to-end”). Total and multidimensional value (including biodiversity and sustainability of natural systems) is the “big picture” of this global measurement schema that does not relegate other, necessary forms of life to the status of “externality.”

This schema requires new metrics and new concepts, something like the “double-entry accounting” achieved by distributed ledgers. In short, we need to stop calling extractive human activities “value creation” and reconceive them as transformations or conversions, robbing Peter to pay Paul on the finite ledger of earth’s resources.

This broader accounting, which would bring much of nature into the scope of economics, is not just a political and philosophical paradigm shift; it is also an engineering problem and a scientific project comparable to space travel or the massive expansion of renewable energy capacity. This reconception of the boundaries of economics entails also pushes the boundaries of humanity’s collective responsibility: insofar as this responsibility (or, to put it bluntly, liability) is not distributed evenly, it is a fundamentally economic problem.

Bringing non-human metrics of value (like biomass, carbon, weather regularity, etc) into the scope of economics is only one form circular economics takes. It also brings waste and disposal back into the accounting of the actual costs of modern life, particularly of manufactured goods. Just as carbon taxes are a way of taxing pollution at the point of consumption, many governments are moving towards taxes that connect disposal to manufacturing, particularly of cars, steel machinery, and other artifacts that are very costly to recycle and very damaging to the natural environment if not properly recycled.

Across both energy and manufacturing, a thorough accounting of lifetime impacts (in many cases reducible to a single variable, like lifetime carbon) is starting to look inevitable if we want to make entire economies circular in a way that is fair, thorough, and non arbitrary. Indeed, I’ve been publishing on this topic for years. This is the kind of engineering problem that fires the imagination of the technologist, and indeed it was first lead me to decentralized identity and data flows when researching the energy industry’s fundamental accounting challenges.

But holistic accounting is much more than a technical breakthrough; this accounting enables accountability, which is a precondition of sustainable governance, on any macroeconomic or the microeconomic level. Spherity’s role is to build technological infrastructure making end-to-end tracking along multiple axes (like energy and manufacturing transformations) thorough, auditable, and resistant to most kinds of frauds. These systems provide scaffolding and structure for data governance, but large companies need to reconfigure their supply chains along related lines, which requires more portable and harmonized data across all silos. To make this happen sooner rather than “eventually,” governments alsoneed to incentivize them to do so, while funding other technology startups that provide other necessary pieces of the circular puzzle. Cooperation from all sides is needed to effect such a global change.

The new kinds of data required for circularization

This circular refactoring of the global economy requires global cooperation but it would be unrealistic (and far too slow) to wait for pressure and funding to come from the top down; instead, more local preparations and infrastructural primitives have to be implemented locally and nationally first. Some would say that national economies are increasingly irrelevant after decades of aggressive globalization of supply chains, so attempting to shift to a circular economy on a national scale would be anachronistic and unpopular. This would be equating the national with the centralized and top-down, however, and relies on a caricatured view of government as hamstrung oligopolies. Instead, the most realistic strategy is to further distill and refine the scientific consensus around goals already set by the international community of specialists, while implementing timelines and incentives negotiated between authorities, communities, and economies in each nation according to its own power structures.

To use a more circular metaphor, the global circular economy needs to be seeded at the enterprise and regional scales, coordinating and gathering momentum and speed on the basis of the results achieved by these “early adopters”. Indeed, this is already happening, particularly as certain regions and smaller nations drive renewable energy to production to prove its premises at scale, and worldwide experiments are launched by global brands in specific manufacturing sectors like fashion retail and automobiles drive end-to-end tracing initiatives. Just as protocols are decomposable and recomposable into bigger and smaller protocols, so too are economies made up of economies — think of each supply chain or global brand as an economy unto itself, and each of these becomes more significant as a “production trial” for circular economics.

At any scale, each circular economy is an economic system predicated on eliminating waste and the maximally continuous use of existing resources. Circular systems get good marks against the new, “holistic” accounting outlined above, but they must also be sustainable by old-fashioned criteria of unidimensional profit unless they receive external support, which can rarely be counted on long-term. For this reason, most small-scale trials in circular economics are in sectors where circular models can be proven to be more efficient than linear ones with a little short-term investment in process changes.

Most of these accomplish such quick efficiency by innovating on processes of recycling, reuse, remanufacturing, and refurbishment to migrate from a system rich in externalities to a closed system, minimizing the use of resource inputs and the output of waste. This regenerative approach is in contrast to the traditional linear economy, which has a ‘take, make, dispose’ model of production. As extraction and disposal costs both climb, we will need more verbs than just “make,” “buy” and “sell”.

This requires four different paradigms shifts, each of which will amplify and multiply one another. One or two of them would make a merely incremental improvement in things, but the synergy of the four could really bring about an epochal shift in both thought and practice. All of them require an ubiquitous identity meta-platform, and yet, all of them would support and sustain such a meta-platform in a kind of feedback loop, even in the absence of the other three.

1.) Circular manufacturing refers to an approach where recyclability, repair, and minimization of resource consumption are incentivized to get as close as possible to zero need for further resource abstraction. From a materials point of view, this is already possible in most fields, although not incentivized in such a way as to be economically feasible.

Properly recycling, repurposing, and disposing of manufactured things is just as much an information problem and a tracking problem as a problem of finding new materials or methods. Figuring out what materials were used to manufacture a given piece of post-consumer waste or post-industrial machinery, and how its usage might have altered that composition, is a massive forensic undertaking. Today, sleuthing after this information can easily consume more resources than would be recovered by its optimal end of life (i.e., the best case scenario for recycling it). Unless, that is, the waste or machinery in question were digitally trackable through their whole life-cycle. One requirement of circularization is making this lifetime tracking capability the norm for all manufactured things.

2.) Global shifts in policy and regulation will probably be needed to incentivize circularity in general and this kind of tracking in particular. National or regional economies that want to move towards circularlity simply need to incentivize adequate materials tracking and supply-chain tracking to be able to favor the observance of whatever standards they want to impose, be it manufacturing free of child labor or slavery, circular-friendly materials usage, end-to-end materials tracking, minimization of pesticides or antibiotics, etc. Increasingly, these kinds of requirements are already being imposed on entire industries, whose global brands need to be able to prove they’ve done due diligence on their upstream suppliers to ensure end-to-end compliance with these requirements.

This shift is already well underway on the level of commodity categories and manufacturing categories, but a concomitant incentivization of adequate trackability and global accounting practices needs to be imposed in parallel to make such schemata enforceable. To be effective, these accounting systems have to be fraudproof and tamper-proof. One way technology can help “keep clean books” is to design fraudproofing, checks and balances, and many kinds of reporting into new systems of accounting based on contextual privacy and auditable data.

The solution to such problems, as a recent OECD report argued, is coordinated systemic change in both data models and business models. Auditability and reporting are key goals of this shift towards end-to-end visibility. End-to-end auditability and systemic regulation go hand in hand, so pioneering and iterating the former will accelerate the evolution not just of reusable toolkits but also of the latter. Another key factor in this symbiotic evolution is the refinement of trust frameworks between regulators and auditable enterprises, the conduit for this feedback loop.

3.) Radical transparency in supply chains is both a requirement and an outcome of the two above-mentioned processes. After decades of globalization, supply chains for major international brands tend to be mammoth, splintered, and massively opaque as a function of professional confidentiality between competing and independent (sub)contractors. Industries with very high safety and regulatory requirements have been the first to be held to high standards of data governance, end-to-end tracking, and upstream transparency.

Our work on systems for Third Party Risk Management and resale tracking for pharmaceuticals make abundantly clear that this is possible, even if other industries have not yet been incentivized to implement such solutions at global scale.

Just as circular economics is already both feasible and profitable in certain manufacturing sectors, so too is radical transparency and next-generation data already feasible and profitable in these highly-regulated sectors with advanced trust frameworks. In such cases, these systems could already be deployed to prevent counterfeit, less sustainable, or contraband oil or minerals into the closed system of a given country, using all the same methods that keep out counterfeit, badly manufactured, or contraband medicines. An incentivizing nudge from government, or a pro-active enterprise, might be all it takes to start replicating this approach to data in other key sectors, such as critical infrastructure supply chains.

4.) Redistribution of power between brands, logistics providers, consumers, and regulators will occur more and more as the above-listed shifts take place in the decades to come. When, as we have described previously, it becomes possible for consumers to interact and communicate directly with brands rather than through networks of retail and wholesale, this will change the culture of retail immensely.

Another form this disintermediation takes is the decentralized publication and maintenance of records containing each global enterprise’s contact information, their local representation in different jurisdictions, and the responsible parties to which they’ve contracted any particular function or duty. These records are commonly known as “enterprise master data” (since all global enterprise are really vast networks of contractors and suppliers), and they are fundamental to the operations of any global enterprise or network. This radical transparency in how legal persons relate to one another will have massive consequences for supply chains and industries, and we are already working on initial steps towards it today in a few forward-looking enterprises, which are already trialing such transparency systems today. What would it look like for a more public, auditable, self-verifying system of paperwork to register the accountability anchor points for supply-chain-wide enforcement of environmental or labor policies? We’ll return to some circularity-specific subtleties of this topic in part 2 of this article.

Decentralized data infrastructure as first step

As humanity begins to transition to a more circular economy, identity for manufactured things along their entire life-cycle and among all potential actors involved comes to be of utmost importance. As alternatives to a circular economy grow more scarce, unreliable, and progressively more expensive, circularity will rapidly pivot from abstract virtue to concrete value, and the circular economy’s data needs will similarly accrue urgency. In our next article in the series, we will focus on these.