BLOCKHAIN powers up thanks to Smart Contracts and IoT

January 22, 2018

 

When we are talked about Blockchain and the advantages that it can bring to the business, such as the improvement of traceability, the exchange of data between different parties, the automation of processes or the control of intellectual property, among others, our reaction can be : "Oh! we already have it " or "Yes, we already do this ".

Maybe this is the case. However, it is most likely not so, for many reasons.

 

Not so, because the Blockchain is a recent technology. It is the backing technology of virtual currencies such as "Bitcoin", but it is in the initial phase for its application in industrial or business areas. The most advanced developments are found in the banking and insurance sectors. In the other areas, the applications are at the pilot level or close to "roll out", with reduced perimeter.

Not so, because the Blockchain carries some totally new features, such as allowing the transfer of value (from part to part) without intermediaries, with total security, or the possibility of implementing the so-called Smarts contracts.

Not so, because it is now possible to combine the bases of the Blockchain with the Smart Contract and the Internet of Objects (IoT). This combination has recently opened many opportunities for innovation that, nowadays, are being defined and tested.

 

The Blockchain itself is a time-stamped, secured and shared ledger of transactions. In the beginning it allowed transferring money from person to person without going through the intermediary of banks. The first blockchain is the now well-known "Bitcoin" but its potential use, as such, in the industrial field, is limited.

However, since its creation in 2008, important technological developments have already taken place, which propose new and important opportunities for innovation, which I will explain below.

 

In 2015, Vitalik Buterin created a new Blockchain protocol known as "Ethereum", which allows the development of Smart contracts.

A Smart contract automates certain actions when an expected event occurs between one or more parties. It is a program installed in Blockchain, algorithm type: if event A happens, action B is performed.

For example: when the merchandise is received, it is paid; when there are more than X non-compliant parts, the supplier's note goes down to a certain level.

 

The implementation of "Smart Contract" is almost evident in areas of digital nature, since the verification of the execution of the event (or the action) is carried out automatically. As, for example, the payment of a dividend for the sale of a share.

It can be more complicated when it comes to physical objects, since they have to access the digital world. That is done thanks to the IoT.

 

[MTT1]  As we know, the IoT technology has grown enormously in recent years. The IoT is based on the digitization of assets. It is done thanks to sensors with such different shapes today that there is almost no limit. Sensors can digitize a machine or a vehicle, but also a freshly caught tuna. The most known "sensors" are RFID. However, there are other methods that can be used when RFID is not suitable: for example the "patch" made of gel or other solutions in development such as "Smart-dust".

 

The IoT by itself allows an asset (digitized) to send information / signals through the network to "its" base entity (the owner of the asset itself, a service company that needs to intervene, etc.). The receiving entity uses the information for its own activity: launch a maintenance service, schedule a replacement of products, change the temperature of a container, change the path of a vehicle, etc.

 

However, the information initially issued usually belongs to a single entity, which takes advantage of the information and does not share it (although this may be interesting for the others parts involved). Data being the oil of the 21st century, it is a pity. In addition, it results in a loss of control and sometimes, even, of value.

 

So yes there are machines that send information, yes a truck can already be located at any time, yes there is a certain level of traceability in the supply chain, etc., but the key step forward is the combination of technologies, as we will see.

 

Using the IoT within the scope of Blockchain allows the collected data not to be owned, nor available for only one part, but for all authorized actors. We must remember that the Blockchain is a decentralized system, whose information is available to all authorized persons. It can be "everyone" in the case of public Blockchain, or a limited group of people, in the case of semi-private or private Blockchain. Therefore, there is no "centralizing" part that can enjoy the information without other interested parties having access. In addition, the Blockchain is a registration system with a high level of security, so that all parties can trust that the information available is completely reliable and without falsification.

 

We have just seen the advantage of combining Blockchain and IoT. Now we will see what can be achieved if a Smart Contract is added. By completing this combination, the connected asset will inform the Blockchain when an agreed event occurs and, consequently, the Smart Contract will apply the agreed routine / rule. This happens without the intervention of intermediaries, with total transparency, since the information is distributed in the Blockchain immediately (the IoT does not delay the notification) and with total security (transactions are verified before entering a block).

All this opens a new field of work that could not even be imagined only 18 months ago.

 

Some examples of these combinations are:

- release a container from a customs area once the administrative formalities are validated in the Blockchain;

- buy a certain material when its price reaches a certain index;

- pay for advertising viewed by certified profiles (not "bots");

- activate insurance in case of failure of a machine or a service;

- give autonomy to connected objects (the car that decides, and pays, for its battery recharge when necessary);

- make more flexible the use of loyalty points between different loyalty programs;

among other examples and, very important, all this always with the registered information, in a safe and accessible way for all involved actors.

 

In all these examples, what is at stake is transferring value in a totally secure environment, with fewer or no intermediaries: an unprecedented innovation.

 

The Blockchain provides new tools to improve processes, to design new services, to improve communication between parties that do not have enough trust in a natural way. Our role in Procurement is to take this technology into account because it can very effectively support the improvement of our own processes: we must not turn our eyes away.

In addition, it also offers new opportunities (unknown only two years ago) to bring more innovation to the business. Isn’t it one of the strategic tasks of procurement ?

The technology is still new, and will undoubtedly improve quickly to offer even more features and opportunities. However, it is important to begin to understand it and to define the first fields of experimentation. Let us be motors to transmit the advantages of the Blockchain and to support our business partners to identify and implement the best use cases. Let's be part of the innovation already underway.

 

 

Published in the AERCE magazine (Asociación Española de Profesionales de Compras, Contratación y Aprovisionamientos), January 2018

 

 

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