Automated Supply Chain Tracking Using Blockchain and Internet of Things (IoT)

In global trade, the supply chain is a complex series of activities for the exchange of goods between a Buyer and a Seller, which involves documentation, tracking, and reporting at every stage in the supply chain. When financing is involved, another intricate series of activities is added to the process.

The following explores how blockchain, combined with the IoT and trade finance, will play an important role in automating parts of the supply chain.

Letter of Credit (LC)

A letter of credit (LC) is a payment mechanism in international trade that carries a “conditional guarantee” of payment from the Buyer’s bank to the Seller. Such guarantee is conditional upon the Seller fully complying with the LC’s documentary requirements — detailing how the purchased goods will be documented during shipping and throughout the supply chain. The issue of strict compliance is applied during the process of checking documents in LC transactions and aims at protecting the Buyer, who has no opportunity to physically inspect the goods prior and during the loading, and benefits the Seller by providing fast payment. The bank is also protected against any legal consequence as far as the payment is made upon strict compliance of the Seller’s documents.

There may be several banks involved in the LC process, and each has a role in examining, verifying, and confirming documents that accompany the shipment of goods. There is a set time period to review and handoff documents throughout the shipping process. These documents must be read by a bank representative, and the process, in general, is cumbersome and inefficient. Yet, this process is critical to the integrity of the LC and the buyer/seller transaction — major and even minor discrepancies could render the transaction null and void.

Automation through Blockchain

The need for mutual trust drives the intricate LC process. Thanks to its high degree of transparency, blockchain is often described as “trustless,” and one of its core features is decentralization, meaning that neither a single person nor entity can control it. Instead, each node verifies the transaction via the blockchain’s consensus mechanism and adds the transaction to the block. Transactions are immutable (unchangeable), time-stamped and will reside on the blockchain forever.

More recently, blockchain is also being used to generate documents like bills of lading in LC transactions. Because international transactions involve many documents, with multiple potential phases of correspondence, this technology is an easy way to store, organize, and verify documents and can also be used in tandem with smart contracts to further automate international transactions.

RFID and the Internet of Things (IoT)

IoT is most commonly associated with consumer goods, yet businesses have also begun to take advantage of technologies like radio-frequency identification (RFID) and complementary technologies like sensors, actuators, and oracles. Businesses regularly apply IoT to logistics and supply chain to aid in shipping perishable goods or to detect equipment failure.

At its most basic level, RFID is a tagging system that provides the means to track “physical goods” and deliver the information to an electronic database through a wireless system that tracks the location of tagged objects via a GPS device. Each tag has a unique Electronic Product Code (EPC), similar to a bar code, though it is able to hold more information that can be rewritten and can function even when it is not easily visible. These small “powerhouses” can transmit valuable information for companies throughout the supply chain along with RFID tags which are commonly used in shipping containers as they allow companies to track the location and quantity of goods throughout the entire supply chain. This provides valuable information that would otherwise be unknown or undiscovered until the goods reach their final destination.

RFID and IoT capabilities are enhanced by sensors and actuators which collect information and data that can be accompanied by actuators capable of implementing decisions as they can react to things like weight, temperature or moisture. As a result, IOT can sense, process, and respond to data without the need for human intervention.

Before the Seller ships the goods under the sales contract to the Buyer, each item can be equipped with an active RFID tag, a sensor and a GPS device. Once the goods are loaded onto the container, a smart contract generates a bill of lading based on the data collected by the RFID for documents generated. The data is tamper-proof and ensures the information reflects reality, mitigating the risk of fraudulent documents.

The blockchain’s consensus mechanism allows it to first verify the information of the document with the terms of the Letter of Credit. Then, if no discrepancies are detected, it notes that it is compliant and a smart contract authorizes goods to go on to the following step in the transaction without any interruption or involvement by the Issuer. If there is a discrepancy that is not related to the material or physical conditions of the goods, the blockchain notifies the issuing bank, who has the final word on whether the documents are in compliance, based on standard banking practices.

Summary

Through the use of blockchain, smart contracts, and IoT, progress is being made to digitize and automate supply chains. Through its XDPoS consensus mechanism, the XDC Network is already a leading Layer 1 EVM-compatible blockchain that is capable of handling the large and complex transactions of a supply chain. As the first and, in most cases, the only blockchain invited to join the ITFA, DNI Initiative, and TFDi, the XDC Network is at the forefront of policy decisions which offers a unique value proposition to the global trade industry.