Counterfeiting: Why Blockchain Is A Solution For The Semiconductor Industry

By Adrien Sandrini, CEO at Precogs, originally published on EBN.

I remember my first year in the electronic industry. I had been recruited as the manufacturing and logistics director of the Sagemcom set-top-box division. At that time, back in 2008, our growth was steady and shortages were our daily bread. We were putting a lot of pressure on the semiconductor manufacturers to get the components on time. Maybe too much… because once, we received wrong components directly from one of the top semiconductor manufacturer: he had shipped components made by another manufacturer!

How is it possible? At that time, I was not aware how big of an issue this was. We just returned the components…

That was my first encounter with semiconductor counterfeiting. Now, I understand the issue better. According to the Semiconductor Industry Association, counterfeits cost U.S. semiconductor companies more than $7.5 billion annually in lost revenue. But, more importantly, counterfeit components pose major threats to the health, safety, and security of people worldwide.

Counterfeiting: nothing but a double spend issue

Three years later, I’ve decided to jump into the entrepreneurial world. As a startup co-founder, I try to stay aware, understand the latest technologies, and link those technologies to actual industry issues. Ever heard about Blockchain? This is the technology underpinning Bitcoin cryptocurrency. It has been specifically designed to answer the double spend issue. And, really, counterfeiting is nothing but a double spending issue :)

Let’s look at how Blockchain works, why — in my humble opinion — it is a 100% reliable, robust and almost free solution to address counterfeiting. Best, it could easily be applied to the electronic component industry.

Blockchain 101

If you know the basics of blockchain, you can just skip the next section. However, since it is not yet used much in our industry, you may be interested in hearing how elsewhere it works before we discuss how it can be applied to our industry.

Bitcoins are virtual coins kept in virtual wallets. Every transaction from one wallet to another is written in the Blockchain. Blockchain is the technology that allows each transaction to be public (although you don’t know the owner of a wallet) and 100% secured (in short, it’s encrypted and duplicated on so many computers that the IT power requested to hack it does not exist). Bitcoin (BTC) has a concrete value on the market. 1 BTC was 2,164.27 USD as of this writing. But you can make transactions as low as 0.00000001 BTC (around 0.00002 USD).

Blockchain applied to the electronic component industry

Let’s get back to our industry, and how the bitcoin blockchain can remove any counterfeiting risk. For each manufacturing part number, a manufacturer can create an “MPN wallet”. For each batch of production, the manufacturer will buy some bitcoin in the created MPN wallet. The amount is exactly the number of components multiplied by 0.00000001 BTC (lowest bitcoin transaction).

For example, for 2,000 components on tape and reel, the manufacturer has to buy 2,000 x 0.00000001 BTC = 0.00002 BTC (approximately $0.04). Those BTC are in the manufacturer’s MPN wallet. When the manufacturer sells the tape and reel to a distributor, he will also send the 0.00002 BTC from his MPN wallet to the distributor wallet. When the distributor resells a cut-tap of 55 components to an electronics manufacturing service (EMS) provider, he will also send 55 x 0.00000001 BTC of the bitcoins he’d received from the manufacturer’s MPN wallet. When the EMS resells 14 components because they finally are in excess, he will also sell 14 x 0.00000001 BTC. The new buyer just must automatically check in the Blockchain that the 14 x 0.00000001 BTC came from a transaction that went through the manufacturer MPN wallet on a date that is in line with the date code.

The protocol to automatically check if a transaction is safe is easy: each time you receive an advance shipping notice (with MPN, quantities, and date code), you automatically check that you have received in your wallet bitcoins for the same quantities that were in the manufacturer’s MPN wallet at the time of the date code. If the transaction is not safe, you get an alert even before receiving the components. It’s possible to develop an open source protocol that anyone can use to collect advance shipment notices, check the wallet, request the Blockchain, and send the alerts.

With this system, the only way to provide 100 counterfeit components is to own another 100 real components of the same manufacturing part number and the same date code. However, if you sell the 100 counterfeit components, you will no longer be able to prove that the real ones are real. That offers no compelling opportunity for counterfeiters. If all buyers request their transaction bitcoins then you won’t be able to sell the real ones. End of the demo. 100% viable and robust. Of course, you can still use the real ones for your own production but manufacturers are not counterfeiters.

About the cost

Now, let’s talk about the cost. Buying and selling bitcoins is simple. Any manufacturer or distributor can do that readily. When sending an advance shipping notice via EDI, the organization would also send the bitcoins. Any EMS or OEM can easily open a wallet and receive bitcoins in any amount. Even the smallest ones. If a customer knows that he will not have to resell some components (production is done for example), he can sell the BTC against USD, EUR, or any other real-world currency. The initial cost of the bitcoins goes back into the end customer’s pocket. Manufacturers can just add it to their sale price (remember it’s just $0.00002 per component). And if a buyer doesn’t need any traceability, he can just immediately sell the bitcoins.

There is a per transaction cost in the Blockchain. Today, that’s around $0.4 to $0.6 for each bitcoin transaction. The higher the fee you pay, the faster the transaction will be certified into the Blockchain (from a few minutes to hours or even days if you only pay $0.1). Fortunately, in our industry, it’s fine to wait a few hours before reselling components (because of transit times). The good news is that the fees are not dependent on the amount of bitcoins. That means a manufacturer will have to pay less than $0.4 fee for each batch number (almost free). A transaction of 1,000 T&R will also cost a fee of $0.4 (almost free). Of course, if you buy a 100 cut-tape of resistors through your favorite electronics distributor, then the fee is still $0.4.

These small fees are nothing compared to normal shipping and handling costs. In fact, it is comparable to the cost of the reading operation of any type of tags (RFID, DNA taggants, DARPA’s dielets). It’s much cheaper than the actual manufacturer Certificate of Compliance (COC) paperwork process, and with this new system, COC would be rendered unnecessary.

Cherry on top, we could choose another Blockchain less expensive like Ethereum. Actual transaction cost is below $0.2. We could even think of a private Blockchain between all manufacturers.

Let’s summarize it: 100% reliable, robust and almost free.

Any drawbacks?

Now, of course, with any system, drawbacks exist. Publicly traded manufacturers can not disclose each transaction for each MPN. Again, a solution exists in the Blockchain. It is so easy to create a virtual wallet that a manufacturer can create many wallets for the same MPN.

Buyers will be able to request a manufacturer API to check if a wallet belongs to the manufacturer or not. However, the manufacturer will not allow a single buyer to request too many of his wallet addresses, so that no one would be able to calculate the number of sold components (plus it’s difficult to calculate sales or margin given the number of sold components).

Again. 100% reliable, robust and almost free.

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Let me know your thoughts! We must act fast because the new protocol — blockchain, RFID, DNA plants, DARPA dielets or whatever — will take years to be fully implemented.

Disclosure: Precogs is not in the blockchain field or anti-counterfeiting business.