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How Will Smart Contracts Change the Logistics Industry?

by Paul King

What is a Smart Contract?

We are all familiar with how a regular contract works. The last time you bought a new phone, you likely signed a contract to agree the sale with the seller.

A smart contract is essentially the same concept, where one party agrees to sell a product or a service and the other agrees to buy it. However with a smart contract, the code and agreements are stored in a decentralised and immutable blockchain network.

On 30th May 2019 (today at the time of writing) - one of the most promising smartcontract companies called Chainlink celebrated their mainnet launch - effectively meaning they have transitioned from theory to reality.

The “Internet of Things”

A smartcontract on its own isn’t particularly useful. In order for it to have practical, real-world applications, it must be able to detect physical events, such as goods reaching a location. This physical event could trigger a payment to the supplier by way of the smartcontract.

The ability for physical things to interact with the internet has been around for a while, and is often called the “Internet of Things”. For example, a sensor may be attached to a shipping container which transmits its physical location.

The Advantages of Smart Contracts over Regular Contracts

Smart contracts offer several advantages over paper-based contracts, but perhaps the main one is that they cannot be changed or reversed. They offer the ultimate audit trail for any financial or legal transaction.

  • They are self-executing - a physical event could trigger a smart contract
  • There is no need for the transaction to be verified by a third party
  • They are irreversible
  • They are transparent
  • They are immutable (cannot be changed)

Charles Holmes, Managing Director of Newcastle based company, North East said:

Smart contracts are the most reliable form of digital agreement as they offer guaranteed outcomes. Companies pushing the burgeoning Fourth Industrial Revolution will proffer highly reliable, tamper proof, and deterministic smart contracts as the building blocks for future development, and business to business interoperability.

A Real-World Example for the Logistics Industry

Imagine the following scenario:

You run a global logistics company delivering refrigerated goods. These goods are shipped between countries with multiple handlers along the way. The goods must be kept cool along each leg of the journey, so they reach the destination in good condition. If you sold ice, you wouldn’t want it to be water by the time it reached the customer!

The old way of working

At various stages of the journey, a third party would manually verify that the goods were the correct temperature, and that the delivery arrived. Of course, it’s in their interest to say so, as it could be a costly mistake for their company otherwise.

The new way of working

At various stages of the journey, a sensor automatically verifies that the goods are the correct temperature and records this information to a smart contract. Sensors also record arrival at each leg of the journey, and this information is once again enshrined into the smart contract.

Benefits of the smart contract approach

In the example above, there is no longer a need to rely on third parties for manual verification. If one of the handlers failed to keep goods at the correct temperature, this information will be transparent for all to see. There is no way for handlers to change results, pass the buck to the next handlers, or to defraud the system.

Since delivery confirmation is saved to the smart contract, this also reduces delays due to paperwork or miscommunication

What does this mean for the Logistics Industry?

The advantages of the smart contract approach are:

  • Less supply chain delays
  • Overall reduction in fraud
  • Transparency of supply chain events

In global supply chain operations, this could represent many millions of pounds worth of savings and better customer service levels. Many large companies will already be curious about implementing this technology and it will naturally filter down to smaller companies over time.

The adoption of blockchain technology by industry and logistics companies is inevitable. Sure, individual crypto-currencies such as Bitcoin have had a turbulent ride, but the advantages blockchain technology outweigh the risks. I believe that mainstream adoption of these technologies will happen over the next 10 years or so.

Global logistics company, DHL wrote an excellent report on the impact of blockchain technology within the logistics industry which I recommend checking out if you want to learn more about this technology

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