HERC Protocol Tokens measure, verify and track physical raw materials in a supply
chain (Value Chain) and assist with planning production and the design of physical goods.

World trade and production are increasingly structured around Global Value Chains (GVCs). [See Gereffi and Fernandez-Stark (2011) for an overview of global value chain analysis.] A value chain can be simply defined as the “full range of activities that firms and workers do to bring a product from its conception to its end use and beyond” (Gereffi and Fernandez-Stark, 2011). The HERC Protocol Tokens are designed to provide utility in verification and tracking of raw materials in value chains.  These activities can be performed within the same firm or divided among different firms. The fact that they are increasingly spread over several countries explains why the value chain is regarded as “global”, and why only an immutable and decentralized ledger of the underlying raw goods of a GVC is appropriate for future growth of GVC’s.

The concept of GVC can be traced back to the end of the 1970s with some work having been performed on the “commodity chain” (Bair, 2005). The basic idea was to trace all the sets of inputs and transformations that lead to an “ultimate consumable”, and to describe a linked set of processes that culminated in this item (Hopkins and Wallerstein, 1977). The concept of “global commodity chain” was later introduced in the work of Gary Gereffi (1994) describing, for example, the apparel commodity chain, from the raw materials (such as cotton, wool or synthetic fibers) to the final products (garments).

In the 2000s, there was a shift in terminology from the “global commodity chain” to the “global value chain”, the latter coming from the analysis of trade and industrial organization as a value-added chain in the international business literature (Porter, 1985). The concept of a value chain is not really different from the commodity chain, but it is more ambitious in the sense that it tries to capture the determinants of the organization of global industries (Bair, 2005). Gereffi et al. (2005) provides a theoretical framework for the value chain analysis and describes different types of global value chain governance.  The HERC Protocols concentrate on GVC self-governance via globally decentralized and distributed self-governance of the supply chain by industry participants.  It also utilizes the “Liquid Democracy” aspects of Blockchain technology.

An important difference is emphasized in the literature between “producer-driven” and “buyer-driven” chains. Producer-driven GVCs are found in high-tech sectors such as the semi-conductor and the pharmaceutical industries. Because these industries rely on technology and R&D, lead firms are placed upstream and they control the design of products as well as most of the assembly, which is fragmented in different countries. In buyer-driven chains, retailers and branded marketers control the production, which can be totally outsourced, with the focus being on marketing and sales. GVCs with lower needs for capital and relying on fewer skilled workers are generally organized this way, as illustrated by the apparel commodity chain (Gereffi, 1994).  The HERC Protocols are adapted from the needs arising out of the precious metals industry.  Therefore, the Protocols themselves, and the liquid democracy they employ, lend themselves most readily to the use of “producer driven” supply chains.  The HERC Protocol Library is perfectly situated for use in high-tech, military industrial complex, pharma, agri-food, etc.

The outsourcing of activities and the fragmentation of production are not new. The trade economist Bertil Ohlin  noted in 1933; “As a matter of fact, production is in many cases divided not into two stages –raw materials and finished goods- but into many”. There are examples of Global Value Chains before the 1980s, but what is undoubtedly new is the scale of the phenomenon and how technological change has allowed, in the last two decades, a fragmentation of production that was not possible before.  As we look to the future, only a globally distributed and decentralized immutable ledger of a GVC will allow for efficient friction-free integration of prediction engines and automated autonomous self-executing GVC management as AI becomes increasingly useful in increasing global economic output.

The main reason why firms can fragment their production is because trade costs have significantly decreased with technological advancement. Trade costs include the whole range of costs that companies face between the factory or office where the good or service is produced, and the final consumer. In the case of goods, trade costs include land transport (logistics), port costs, freight and insurance costs, tariffs and duties, and costs associated with non-tariff measures.  Costs can also be extended to include markups from importers, wholesalers and retailers.   The HERC Protocols are specific to weights, measures, proof of possession, and storage of the raw materials used within each GVC.

Transport and communication costs have first and foremost decreased due to technological advances, such as the shipping container and the Internet. Progress has been made all along the logistics chain, ensuring the smooth flow of goods in a coordinated and inexpensive way.   However,lower trade costs are not limited to technological change. An important driver is also trade and investment liberalization, as well as regulatory reforms in key transport and infrastructure sectors.  Policies have played an important role in improving efficiency and they are equally responsible for the fragmentation of production, as are advances in transport and communication technologies.  The HERC Protocol system builds upon the advances in GVC management.  It provides an emphasis on deregulation and a move toward decentralization.  It also offers greater economic productivity by allowing each GVC to essentially self-manage and execute according to their individual industry specific needs.

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