Smart contracts in the trade sector will need to rely on IoT sensors to live up to their full potential new research suggests.
Smart contracts have limited efficiency in certain industries if not implemented in conjunction with IoT sensors according to experts in blockchain and business from NYU.
Stern School of Business Associate Professors Hanna Halaburda and Yannis Bakos presented their research at the Unitize conference July 10 on the interaction between smart contracts and Internet of Things (IoT) sensors in improving business efficiencies.
Smart contracts make business more democratic
The study looked at how “smart contracts will make the business landscape more democratic” — that is, beneficial for all parties involved — however it found shortcomings in the current implementation of the technology when used alone.
Halaburda explained that IoT is critical for maximising the benefits of smart contracts within the trade sector:
“It turns out they solve a problem, but only partially,” she said, “but what doesn’t happen, if we just add smart contracts, is the higher quality of delivery [of goods].”
Citing a contract between a fruit shipping company and the retailer, she explained that the smart contract solves the problem of automated execution, but does not incentivize the shipping company to ensure the quality of the fruit.
However, when adding IoT sensors into the process, a smart contract can have increased detail or adjusted payments based on the quality of the fruit delivered, such as the temperature of storage. As a result, neither party needs to trust the other to complete their portion of the agreement.
It comes down to legal costs
The decision about whether to implement smart or tradition contracts comes down to the legal costs when disputing them, Halaburda explained:
“If the legal costs are very low, then it never makes sense to implement smart contracts when the smart contracts are costly to implement. […] For a region when it makes sense to implement the [IoT] sensors, then adding smart contracts is not adding any more value.”
When legal costs for traditional contract disputes would normally be high, the implementation of IoT sensors and smart contracts have maximum value, she concluded.
Saving $300 billion annually
A recent report by Cointelegraph Consulting and VeChain also addresses the benefits of combining blockchain technology with IoT, suggesting it can save the food industry $300 billion annually within seven years. IBM has already implemented FoodTrust which caters for Walmart, Carrefour, and California Giant Berry Farms.