Blockchain Smart Contracts and Supply Chain Security

Miles Oliver

With the ignominious demise of FTX in recent months, cryptocurrency has been much in the news of late for all the wrong reasons. The reality, however, is that blockchain technologies, through which the various cryptocurrencies operate, offer significant promise in spurring efficiency and security across industries.

This is particularly true of the supply chain. In recent years, the global supply chain has been rocked by protracted disruptions that have contributed to rising prices, empty store shelves, and shuttered businesses. Blockchain technologies, and particularly the use of blockchain-enabled smart contracts, may well make these supply chain disruptions a thing of the past.

This article explores the use of blockchain smart contracts to enhance supply chain security. 

What Are Smart Contracts?

Smart contracts are automated contracts that are executed on blockchain. The terms of the contract are activated once certain conditions are met. As with any blockchain-based technology, smart contracts enable far greater efficiency, transparency, and predictability than traditional contracts.

For example, since smart contract processes are automated, no human intervention is required to execute the diverse phases of the contract. As soon as preliminary conditions are met, the next phase of the contract is automatically activated.

The Benefits of Smart Contracts on Blockchain

Not only does the automation of smart contracts through blockchain make business transactions more efficient, but it also makes them more predictable. Stakeholders know exactly what will happen, when, and under what conditions. This also reduces the risk of human error, as specific actions can only be taken when certain terms are met exactly as specified by the programmer.

Moreover, blockchain is designed for optimal transparency. All parties can trace the progression of the smart contract’s execution. When business transactions involve multiple parties who are geographically distributed across large areas, the ability for all stakeholders to receive real-time information on contract execution is critical.

No longer do interested parties have to wait on a status update by email, phone, or courier. The decentralization of blockchain means that data is available whenever and wherever it is needed or wanted.

Benefits for the Supply Chain

Smart contracts operating through blockchain are, perhaps not surprisingly, particularly beneficial for the supply chain. Supply chains, by definition, are not only highly segmented but also often widely geographically distributed.

This makes the coordination of the supply chain’s constituent elements both essential and formidably challenging. However, the decentralized nature of blockchain technologies, as has been shown, creates an optimal environment for coordination because operations are managed in the digital domain.

For example, even big ticket items, such as homes and automobiles, are being purchased with bitcoin and other cryptocurrencies. This enables the sales lifecycle, from product comparisons to sales contract execution to order fulfillment, to take place entirely online, making the process faster and more efficient.

For example, with a smart contract on blockchain requisitions for a company car can go into fulfillment immediately upon receipt of payment or the satisfying of other contract conditions. If the purchase is made using digital currency on blockchain, likewise, then you also avoid wait times associated with processing or, for international transactions, currency conversion.

Simply put, the transparency and the immediacy of blockchain-based smart contracts mean that all parties in the supply chain know what is or will be required and when. This prevents slowdowns due to human error, miscommunication, or delayed communications.

Because smart contracts are largely automated, the need for human intervention is significantly reduced, if not entirely eliminated. That’s critical when you’re dealing with a large and highly segmented supply chain that operates across many nations, languages, and time zones. In such cases, the less human engagement needed in each locale, the better.

However, that does not mean that the human is or should be entirely cut out of the supply chain. There are circumstances in which timely human intervention is critical. This, too, is an arena in which the immense promise of blockchain smart contracts shines through.

Smart contracts can be developed to ensure that relevant parties are immediately alerted when specific conditions, such as those signaling some potential emergency in the chain, are met. These alerts can enable humans to take prompt action to intervene and correct any issue with the supply chain before it can escalate into a full-blown crisis.

Smart contracts’ capacity to issue timely alerts in the event of a potential or existing problem in the supply chain should eliminate or significantly reduce the impact of future disruptions.

Vulnerabilities in Smart Contracts for the Supply Chain

As profound as the benefits of blockchain smart contracts are for the security — and reliability — of the supply chain, there are some important vulnerabilities. Indeed, one of the attributes of blockchain smart contracts that lends to their security also lends to their risk.

Specifically, blockchain technologies are designed to be immutable. Once the code is written, it will be executed exactly as is. No alterations are possible. On the one hand, this protects blockchain technologies, including smart contracts, from exploitation by bad actors seeking to alter or add to the code.

However, if nefarious agents discover a vulnerability in the code, there’s no opportunity to patch it. That means that the entire cyber supply chain can be attacked due to this one vulnerable area in the code. When that happens, the only option is to kill the code and institute new smart contracts for all areas affected by the blockchain vulnerability you’ve identified.

This can lead to massive financial and productivity losses, requiring you to redirect time, money, and resources to fixing the problem. The better option, though, is to prioritize cybersecurity in the initial phases of programming. You might include Artificial Intelligence (AI) and Machine Learning (ML) in your processes for developing blockchain smart contracts.

These can help you identify potential vulnerabilities to be addressed when writing the code. It’s also advisable to limit the scope of the contract, such as putting restrictions on the asset values each smart contract pertains to. This way, if a vulnerability is identified on the blockchain after the smart contract has gone live, your potential financial losses will be limited.

The Takeaway

Blockchain smart contracts may well be the answer to the devastating supply chain disruptions that have threatened businesses and emptied store shelves worldwide in recent years. Smart contracts support efficiency and productivity in the supply chain due to their automation, transparency, and immutability. However, to ensure the security of blockchain smart contracts, identifying and addressing vulnerabilities in the code before the smart contract goes live is essential.

Miles Oliver

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