Use of Smart Contracts in the dexFreight’s FinTech-Enabled Logistics Market Network
How dexFreight reduces invoice processing and back-office cost as well as provide cheaper liquidity to logistics companies using smart contracts
By Rajat Rajbhandari, PhD (CIO and Co-founder), and Adrian Giannini (CTO and Co-founder)
Summary
In this blog post, we describe how dexFreight uses smart contracts to enforce terms of contracts between shippers/brokers and carriers with self-executable rate confirmation agreements. Smart contracts are an essential component of dexFreight’s FinTech-enabled logistics market network. Smart contracts enable automated and programmatic transfer of funds between parties involved in the shipment process based on milestones reached in the shipment lifecycle without waiting for invoice reconciliation, as well as the conversion of transactions into non-fungible tokens to source cheaper, faster and programmable liquidity from decentralized finance ecosystems.
Introduction
In simple terms, a smart contract is a piece of code that resides in blockchain. Because the code resides in blockchain, the terms of agreement encoded in the smart contract between the parties are immutable and self-executable. On top of that, the underlying blockchain ledger keeps track of changes in transaction variables while parties interact with each other. In dexFreight, smart contracts store contractual information between shippers/brokers/carriers, and trigger automated payments to carriers at the broker/shipper’s choosing, as well as create non-fungible tokens (NFTs) from freight invoices to be used as collateral to provide immediate liquidity to the carriers.
Typical contracting mechanism between logistics users
dexFreight’s users are carriers (trucking companies), shippers, and freight brokers. Their everyday operational objective is to “process” shipments faster. For brokers, that means onboarding more carriers and negotiating with them to move shipments. For shippers, pushing their products to their customers quickly; for carriers that means ensuring their trucks do not stay idle.
In a typical spot market (open market), brokers/shippers select carriers through active negotiation, onboard them using the required legal documents (legal authority, insurance, W9, etc.) past performance information, and eventually after executing a “carrier-broker” or “shipper-carrier” agreement, they sign a rate confirmation sheet for each shipment. These documents define the terms and conditions of the shipment. The terms also include origin, destination, equipment type, weight, time and date of pick and delivery, agreed rate, etc. At present, terms are mainly exchanged between parties via email or faxes and are difficult to enforce given that the average transaction is around $1200.
In dexFreight the previously mentioned process is streamlined, reducing the booking time for all parties while recording all terms and conditions in a smart contract. The smart contract resides in Rootstock, a side chain of the Bitcoin network that leverages it’s hashing to secure and anchor the transactions in the blockchain. Data from dexFreight’s mobile app and other sources including electronic logging devices and/or GPS in the trucks, telematics devices, Fleet management systems (FMS), etc., inform the smart contract of real-world events during the shipment lifecycle such as proof of pickup and delivery of shipments triggering the execution of agreed terms such as payment right after delivery.
Smart contract use cases
Invoice-less payments — Companies lose a substantial amount of money in reconciling invoices before issuing payments after a shipment has been delivered. According to American Quality and Productivity Center, the median cost of processing invoices is 0.08% of revenue and translates to $5.83 per invoice across multiple industries (1). Other sources have mentioned invoice processing costs as high as $40 (2). Once a shipment has been delivered by the carrier, it has to create an invoice and send it to either a broker or shipper, which then reconciles against the agreement they signed along with other fees accrued during the shipment. Since the smart contract holds the terms of the agreement and receives information about the shipment, the broker/shipper doesn’t need to wait for the invoice from the carrier and let the smart contract trigger a bank payment to the carrier. Although the dexFreight platform creates an electronic invoice of shipments for records, automated triggering of payments saves a significant amount of time and resources for both parties.
Proof of existence of contract components — Components of a typical broker/shipper — carrier transaction include bill of ladings and proof of deliveries. Using dexFreight’s mobile app, drivers collect that information, which is hashed and added to Tierion that uses Bitcoin infrastructure to anchor digital fingerprints of those documents. This provides users with a guarantee that the contract exists and that the documents haven’t been tampered with.
dexFI invoice financing —dexFreight offers a cheaper alternative to traditional freight invoice factoring, enabling carriers to convert their receivables to cash immediately instead of waiting for a payment from the broker/shipper. Basically, the carrier can request an advance against the invoice at a much lower fee. Factoring companies charge an average of 3% for 30-day invoice plus fees to the carrier for the advance. In dexFreight with a single click, invoices are converted into a non-fungible token. The NFT is a unique digital representation of that transaction including all of its details, this digital asset with a defined value amount is then used as collateral to source cheaper liquidity in the form of stable cryptocurrency from the decentralized finance ecosystem and is seamlessly converted to the carrier’s local currency to provide the requested amount. Because the shipment was processed within the dexFreight platform and the smart contract has captured cryptographic signatures of the parties transacting and all the milestones of the shipment lifecycle, the NFT is fully attested.
In conclusion
We are excited about using the power of smart contracts to solve some of the more prevalent problems of the logistics industry. However, as with any new technology there are challenges ahead. For example, addressing service exceptions in the form of physical and administrative disputes that arise while moving shipments. We will continue to push the limits of using smart contracts to solve the trust issue between the transacting parties, reduce the back-office costs for our users with workflow automation across multiple companies and to unlock innovative business models much needed in the supply chain.
References:
- “Accounts Payable and Expense Reimbursement Performance Assessment”, American Quality and Productivity Center, Accessed January 5 2019. https://www.apqc.org/benchmarking-portal/osb/accounts-payable-and-expense-reimbursement
- Palmer, M., “The True Cost of an Invoice to Small Business Owners”, Due Inc., September 7 2017, https://due.com/blog/the-true-cost-of-an-invoice-to-small-business-owners/
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