The blockchain is the future. We have been hearing this for almost a year. Companies in every industry are developing proofs of concept for how blockchain could potentially be used to make systems and processes safer and more efficient and effective. Besides cryptocurrencies, one of the more common connections that get tied to blockchain is smart contracts and procurement. But what will this really look like in the future? What is the true potential of integrating smart contracts, procurement, and blockchain?
It all started with the blockchain’s use in cryptocurrency. This technology opened the world’s eyes the possibility of having a decentralised method for sharing information. It offered security without a middleman who had to provide the function for information sharing. Forward thinkers quickly realised that this technology could be used for more than just Bitcoin. So now we have smart contracts based on the blockchain.
Currently, the basis of all of these contracts is that coding was added to the blockchain. At its core, the coding is meant to offer the logic that, “if X happens, then do Y.” For example, in the investment world, a smart contract in blockchain could stipulate that if the price of a commodity reaches a certain low, then the commodity should be sold. Each step in the blockchain would be coded to provide various actions, including when to buy, sell, invoice, and receive the commodity. The revolutionary aspect of this is the fact that no lawyer is involved in it and no contract has to be drafted. This means that these contracts happen in real-time, which is unheard of when it comes to legal documents. Additionally, there is little room for human error.
This is not the full potential of the blockchain and smart contracts, though. These boundaries can be pushed. The transactions can be deeper than just logic-based.
1. Sophisticated smart contracting
Smart contracts can be smarter. The code has the potential to offer more. The basic logic that it offers now could be slowly transformed into something much more complex. It could be used in negotiations to reduce time-spend. The contract could stipulate that if a vendor offers a product at a specific price, then another price could be offered based on that vendor price. This could be extended to many more factors than price, including indemnity, fallback clauses, and other various redlines and markups. In short, the blockchain is programmable and rules can be built into it that execute under data-based conditions. This removes the need for advisors, consultants, and lawyers and enables companies to hastily make their way through negotiations in a much more pain-free way.
2. The creation of digital trust in procurement
The central issue that blockchain addresses is trust. It creates it without the need for an intermediary. Due to the inherent lack of trust in business transactions, when a house is being sold or bought, proof needs to be provided that the buyer and seller are who they say they are, the house is what it has been represented as, the seller owns the house, and the buyer has the means to purchase the house. These processes that are traditionally very lengthy, can be sped up with the blockchain and remove the necessity for a trusted intermediary. And this concept can be extended far beyond real estate, reaching into supply and value chains.
3. The ability to build on top of data
Historically, databases have logged transactions. And they have been good at it. They are even better at it than the first generation of blockchain—it was slow, did not have effective query support, and had a low throughput, among other issues. Once blockchain was advanced, it could keep up with databases. This, combined with the fact that it has an immutable audit trail and can not be altered by a single individual, makes it more trustworthy than traditional databases can be. Because of the confidence that businesses and individuals can have the data in the blockchain, it can be built on to help optimise business systems and processes.
For example, many paper-based business processes could be streamlined. Instead of paying with checks, B2B businesses could implement blockchain options. Another example directly in the supply chain is harnessing the technology to allow members of a supply chain to easily and safely exchange documents, track shipments, and oversee import and export paperwork.
4. Strengthening the platform economy
The platform economy is growing. Apps like southeast Asia’s Grab are putting more power and freedom into the hands of consumers. Blockchain could add to this platform economy. It could be integrated into these applications in order to help identify openings and surpluses in order to match consumers to these offerings.
5. The enhancement of regulation
Currently, much of the discussion around blockchain is that governments are trying to find effective ways to regulate the processes that it accomplishes. In the near future, however, this conversation will change into how the government will harness blockchain to regulate. Smart contracts will be the instrument that governments around the world use to implement everything from laws and regulations to directives and treaties. In the end, this will lower the cost of compliance for individuals and businesses, as well as making it much more effortless. It will also lower the cost and burden of oversight.
6. A cleaner supply chain
Supply chains have a tendency to get messy. It can be nearly impossible for retailers to know exactly how their product was sourced. They can not guarantee that slave labour was not used. They cannot be sure that detriment to the environment did not occur. They can not make a promise that the raw materials in the product were conflict free. Blockchain has the potential to change this. Every transaction and exchange within the supply change could be stored and recorded. This type of traceability empowers businesses to be more responsible, as well as making it easier to be ethical. This type of real-time traceability is especially lucrative for industries that have strict regulations, such as the pharmaceutical and food and beverage sectors. Additionally, counterfeit products would become obsolete under a blockchain-enhanced supply chain.
7. Better machine-to-machine cooperation in procurement
Because the data in blockchain can be fully trusted, offers additional data collection opportunities, and allows smart contracts to execute programs, this creates a distributed system where machines can fully trust each other. This means that more and more automation can happen with less and less risk, whether that be corrupted data, latency due to intermediaries, or poor execution.
In the future, IoT will be utilising this benefit, especially in the supply chain. For example, IoT could track product movements in real-time. If something goes wrong or is not on time, an immediate investigation can be launched. During the whole process, though, smart contracts that are powered by blockchain can use automation to execute various actions and all supply chain activity can be permanently and immutably recorded. This could be extended to everything from product requisitioning and ordering to inventory tracking and management. It can all be automated and operate consistently.
8. Better human-to-human cooperation in procurement
Human-to-human cooperation is no different to machine-to-machine cooperation in that it needs trust. This can become a problem in supply chains. Not all of the partners know each others’ identity or reputation. Blockchain fixes this. It guarantees that users are who they say they are. In the future, this will likely look like a digital resume on the blockchain. It will allow business partners to fully trust each others’ credentials.
To dive more deeply into reputation, though, blockchain will offer immutable reputations. They will be based on an individual’s or business’ history of transactions. As the blockchain expands, this reputation will become more and more reliable. In the end, this can significantly lower the risk of working with new partners. Instead of spending more money to work with a select few suppliers that a business trusts, they can start extending their reach and working with new partners that offer lower prices.
9. Audits will happen
In the past, bugs and glitches came part and parcel with software. With blockchain, this can not happen. Smart contracts represent capital. If there is a bug or problem with the system, this could lead to businesses losing large sums of money. Therefore, many organizations, in order to fully trust blockchain and smart contracts, will require security audits.
10. Predictions in supply
One of the issues that supply chains face on a continuous basis is all of the unknowns that can happen. There can be a shortage of materials. There can be drops in demand. Blockchain could be used to predict these events. These decentralised predictions would be objective and based on past events. When this happens, release dates could be more precisely estimated, hedging could be more accurate, and automation of payments could be tied to the probability of an event occurring.
The future of blockchain is becoming more and more clear. And it is promising. To find out more about digital transformation in your organisation, download our eBook!