Why did blockchain startup 300Cubits' TEU Tokens fail? Image Credit: 300 Cubits

Why did blockchain startup 300Cubits’ TEU Tokens fail?

Last week, blockchain startup 300Cubits announced they are shelving their container booking module, the TEU Token. Aimed at solving the problem of container no-shows and rolled cargo, the blockchain token has been scrapped due to a lack of interest from industry. The TEU token was designed to solve a problem said to cost the industry $23billion, so why did it fail?

To understand what went wrong, we first must look at the problem TEU Tokens set out to solve. Currently, in the vast majority of cases, when a container is booked to travel on a ship, no deposit is paid. If the container doesn’t turn up at the port on time, there is no contractual mechanism that allows the carrier to recover some or all of the cost of the booking. Consequently, carriers often overbook a ship. They sell more space on board the ship than they actually have, and assume that a small percentage of the cargo won’t turn up.

If too much cargo turns up, some of it will be bumped, or rolled, onto the next ship. To combat the issue of rolled cargo, shippers often buy more capacity than they need to increase their chances of getting all of their cargo on the ship. The overbuying and overselling of capacity on container ships is an ongoing spiral. More container no-shows mean more oversold capacity, more oversold capacity means more rolled cargo, which means more capacity buying, finally leading to more container no-shows. If you’re interested in the economics of overbooking, check out this video.

TEU Tokens were designed to act as a blockchain-based deposit to safeguard a container booking. The tokens, based on the Ethereum blockchain, were used as a security deposit between a shipper and a carrier when a booking was made. Once the box was loaded onto the vessel, the TEU tokens would be released back to both parties. If the container failed to turn up, the token would be retained by the carrier as compensation, and vice versa if the cargo was rolled.

Despite a high profile launch in 2018, only a few hundred container bookings were actually transacted through the platform before it was shelved last week.

So what went wrong? TEU Tokens had no intrinsic value, were operating in a regulatory grey area, and were the wrong solution for the problem.

Lack of value

One of TEU Tokens’ issues was its lack of intrinsic value. The launch strategy for the tokens, according to Johnson Leung, founder and CEO of 300Cubits was to “give it to the liner and to the customer to use as a deposit” for free and for the value in the coin to come from the creation of a “secondary market” when the coin is sold on an open exchange through an ICO.

For any currency to function, it needs to be a good store of value and an effective medium of exchange. In days gone by, commodities like gold were used as currency as they are a good store of value in their own right. Most modern currencies are not pinned to gold or any other commodity, their value is derived from what people are willing to pay for them. The same is true for cryptocurrencies like Bitcoin and Etherium. Changing perceptions of what a currency is worth is what causes price volatility, and the ongoing debate around the validity of cryptocurrencies is one of the key reasons for their continued volatility.

While TEU tokens were a great medium of exchange, their lack of perceived value meant that they could not function effectively as a deposit. For a booking deposit to work, there needs to be some kind of cost to backing out of the contract. Carriers and shippers who received free tokens had no incentive to use them as a bond because there was no guarantee it would translate to any kind of financial protection for the end-user. In a statement announcing the suspension of operations the 300 Cubits team cited “the lack of liquidity for the TEU tokens and the volatility of all
cryptocurrencies” as a source of “constant doubt among the users on whether the value of the tokens could be realized”.

Regulatory ambiguity

Cryptocurrencies are a great example of how new technology can catch regulators off guard. Very few nation-states have created evolved regulations regarding the use of cryptocurrencies. The only major economies to take a hostile approach are China and India who have banned the use of cryptocurrencies by financial institutions. For most of the rest of the world, the use of cryptocurrencies is neither illegal nor explicitly supported by the legal system.

This uncertainty in the law created huge problems for 300Cubits. Many “potential users simply shied away from trying” citing the lack of clarity in an area of the law where clarity is important. If a dispute cannot be escalated to a court or there is a chance that a regulator may outlaw the use of a contractual mechanism that a user’s supply chain depends on, it could create a host of new problems that otherwise wouldn’t exist.

A solution looking for a problem

The problem of no shows and rolled cargo is still a problem for the industry, and unfortunately, a cryptocurrency is never going to solve it in isolation.

One of the most important potential applications of cryptocurrencies, and blockchain in general, is the automatic execution of “smart” contracts. For example, insurance policies can be executed entirely on the blockchain, with claims paid out automatically if certain conditions are met (eg. a temperature sensor detecting cargo is too warm). This dramatically improves the current process of claims handling and is a drastically more efficient way to execute a contract, making it a great use of blockchain. The key difference between the insurance example and TEU Tokens, is that in insurance all of the parties want to enter into the contract in the first place.

The problem of overbookings and cargo rolling could simply be solved by an edited freight contract, signed using pen and paper and executed by lawyers and the courts. The simple truth is that there is not enough demand in the market for a contractual change to the current booking process, and blockchain can’t help there. There is a misconception that every problem in the world can be solved by technology; it’s not true. Technology, and particularly blockchain, is fantastic at improving contractual processes that already exist. It is not good at driving behavioural change where the contractual economics simply don’t support the use. If you can’t convince people to sign a contract on paper, blockchain won’t help.

The good news is that 300Cubits is not shutting down, the team will continue to work on building solutions that solve pain points for the industry. All failure is painful but it is also how we learn. The team released a detailed statement on their decision to shelve TEU Tokens, their openness is laudable as it gives us all a chance to learn. You can read it here.