Practical Applications of Blockchain: (I) ‘Smart Contracts’ Within eCommerce Logistics
The blockchain is basically a piece of software code that allows for information to be stored in a distributed ledger. There is no central ledger; there is no central body that’s the Chief regulator or Chief store of this ledger. It’s distributed throughout the entire fabric of the network. In logistics, the most obvious use case for blockchain is really around smart contracts. Which is the idea that computer code attached to a blockchain transaction can be automatically executed (i.e., contingent enforcement of contracts).
Smart contracts are computer code, attached to a blockchain transaction, which is executed under predetermined conditions.
A smart contract is intended to facilitate, verify and enforce the negotiation and performance of a contract. What that means is if the outcome (if all of the things that were expected) in the contract are triggered, the contract itself will execute on its own. If the contract tied into some type of monetary value, then you will be paid without having to go file a claim (or be paid without having to depend on a central, intermediary)— there is no cutter house.
For e-commerce shippers (and others along the logistics chain) a major value is around the idea of freeing up capital. What you have with smart contracts is the fact that money can be moved electronically (i.e., you don’t have to go collect the money). There is no collection process.
This could eliminate disputes. As a trucking company, for example, today your shipper may decide not to pay you a transportation bill. You have to follow up with it many times and submit (and resubmit) paperwork. It’s a very taxing process. But with blockchain (with smart contracts), you could set it up where it auto-executes. So, as soon as that load’s delivered, the money is settled out.
A smart contract also minimizes many transaction costs. For example, you don’t need (arguably) a traditional Freight Factoring company to pay to expedite your cash conversion cycle. You can have it done through the contract itself, and because it is precise, it can speed up the processes to get paid, and it would eliminate potential disputes.
Opportunity for Smaller Carrier(s). Today large carriers can bill and collect detention much more efficiently than the smaller carriers can. But it’s really up to the shipper (or the broker) to decide whether or not the small carrier gets paid Detention. The large carriers certainly have the resources to collect, and they have the leverage to collect, but most of smaller carriers do not.
Even those collection processes, they’re certainly not precise, and there’s a lot of money that’s written off that’s never collected that’s billed because there’s a lot of disputes that take place. And so, the idea of a smart contract, you can have it that once the ELD (Electronic Logging Devices) device recognizes that the truck has arrived. That record is precise and exact, and when that truck departs. And so, you can log that information in and that driver can be paid.
Consider another scenario when a broker tenders a load to a carrier and then subsequently cancel that load. Well, as an owner-operator, you have very little recourse to go collect the money, So, how do you enforce that? You probably don’t. You just walk away from your $250 trucker not used.
But in a smart contract, the transaction itself can be binding. You can say that if you tender the load, “I get paid a cancellation fee for the canceling. So, that can be written in it.” A counter-example would be a shipper or the broker enforcing the carrier to show up. If the carrier decides not to show up, they can be penalized. All that can be written into the smart contract.
Of course, there are hurdles for blockchain. It consumes a lot of energy, and the process is relatively slow. Just to compare, the best case scenario is that you can do about 3–20 transactions per second. Compare that to Visa’s global processing network at 56 thousand transactions per second. That said, processing speeds will speed up over time, and it will get expediency faster.