Smart Contracts: The Future of Supply Chain Management and Contractual Obligations

October 5, 2021

As blockchain technology and cryptocurrencies continue to rapidly develop and gain popularity, their potential uses and applications in the professional world have taken center-stage. More specifically, the appearance of smart contracts, computer programs that perform a task when triggered by the occurrence of a predetermined event, have become one of the most attractive uses of this new technology.  

These smart contracts are particularly useful in supply chains, as they are effective for sending payments, recording ledger entries, and flagging events that require human intervention. These use cases open up the possibility for more efficient and reliable supply chain management across the world. 

Smart contracts use “oracles” to receive information from the outside world and automatically trigger their programmed function. “Inbound oracles” provide data to a smart contract living on the blockchain and communicate to the contract that its conditions have been met. Then, an “outbound oracle” sends data to the outside world, triggering the contract’s predetermined action.  

There are three different types of oracles: software, hardware, and human. Software functions as an oracle by connecting smart contracts to online data sources. Hardware includes pieces of equipment, such as an RFID sensor, that communicate real-world information to the smart contract. Humans can act as oracles by manually providing information to a smart contract and are often used in situations that require subjectivity or when continuous monitoring is difficult. A combination of these oracle types can be used to strengthen the reliability of the oracle system. 

New technologies do not come without their drawbacks, however. Within smart contracts, there are three different types of vulnerabilities that can be caused by improper coding: prodigal contracts, greedy contracts, and suicidal contracts. Prodigal contracts occur when the parameters of the contract are incorrectly set in a way that leaks funds to random blockchain users. Greedy contracts occur when improper coding leads to funds being locked indefinitely. Finally, suicidal contracts occur when improperly coded parameters allow blockchain uses to destroy the contract altogether. Additionally, the use of a smart contract could prevent a non-coder from being able to check whether the smart contract actually does what he or she wants it to do. Even with a written agreement in place, a programmer could easily code the contract in a way that is not consistent with the terms of the written agreement.  

Despite their potential drawbacks, however, smart contracts represent the future of automated agreements. As companies across the world pour resources and development time into the use of this technology, its ceiling remains undefined and characterized by limitless possibility and impending innovation.