This is the second of a two-part series on Blockchain and the Water Industry. If you missed Part I, it can be found here.
Although blockchain technology has become synonymous with Bitcoin for many people, it has evolved far beyond that. It provides the technical infrastructure for the Bitcoin crypto-currency, but it also enables the use of smart contracts due to unsurpassed cybersecurity, the consensus mechanism, and the immutable distributed ledger.
What is a smart contract?
A smart contract is a digital protocol intended to facilitate, verify, and enforce the negotiation or performance of a contract. Smart contracts are those transactions that are executed automatically once all Peer-To-Peer nodes within the blockchain agree that contractual conditions have been met. They allow the performance of verified transactions without the intervention of third parties.
Smart contracts are self-executing, with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements exist across a distributed, decentralized blockchain network. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They render transactions traceable, transparent, and irreversible.
What are some water industry applications for blockchain and smart contracts?
Water utilities soon will be able to take advantage of blockchain and smart contracts in many business areas. Here are a few sample scenarios.
The water agency enters into an automatic refill agreement on an annual contract with a chemical supplier. The agency’s procurement system is triggered by a replenishment level flag and it automatically issues a P.O., which is electronically received by the chemical supplier’s order system. The smart contract algorithm validates that all purchase conditions have been met and the order is released and shipped to the water agency. The water agency receives the shipment and logs it into the procurement system. This triggers the smart contract algorithm to once again verify that the transaction is valid (e.g., the right chemical, quantity, and negotiated price), record the transaction, and electronically issue payment. Other than the shipping and receiving process, no human intervention is required.
Water rights/trading/resource management
Like automated procurement, water contracts can be executed automatically. On the water accounting side, agencies can keep this data on an immutable public ledger and, thus, decrease the need for manual recordkeeping and to facilitate auditing to determine authenticity and payments. In water utilities, immutable and secure blockchain systems can help overburdened agencies and save countless hours of manual work.
Asset lifecycle management
This is also like automated procurement, and includes parts, consumables, shared resources, and third-party services. All activities are triggered, automatically processed, performed, paid, and recorded based on pre-negotiated contractual terms.
Partnership initiatives that share resources
A regional group of water utilities share a work management system and have a common pool of maintenance technicians. A priority work order is issued by Agency A and they have no immediately available resources. Agency B of the pool has a crew available. The algorithm of the Pool’s smart contract recognizes that Agency B has an available crew and, per the parameters of the contract, dispatches Agency B’s crew to perform the priority work for Agency A. The work order is completed and an invoice is automatically created and charged to Agency A for payment to Agency B. The smart contract verifies that all parameters were met, authorizes the payment, and records the transaction on the common ledger.
Metering and billing
A water agency has implemented AMI (Advanced Metering Infrastructure) with its retail customers. The blockchain performs smart contract functions with respect to monthly water consumption determination and billing. The customer has autopay since their bank is part of the agency’s CIS/payment blockchain. Once all conditions are verified and validated, monthly bills and payments are transacted and recorded.
How will water utilities benefit from using blockchain for smart contracts?
The benefits of using smart contracts in a blockchain environment include:
Cutting costs and efficiently processing transactions
A major benefit of blockchains is that they secure records, eliminate back office functions, and reduce transaction friction (time and money) – providing better transparency. Blockchains can be paired with smart technology to enable coordinated recordkeeping that would otherwise be logistically difficult. Smart contracts and blockchain can help to create more efficiencies and cut fees by providing a system through which transactions are quickly settled at a low cost. Utilities that automate their processes through blockchain and remove the intermediaries that distribute payments and process transactions would benefit from improving speed and efficiency of payments for customers as well as reduce their own operating costs and risks of errors. By providing a secure, immutable system blockchain could help to streamline transactions for water utilities.
Knowing and servicing your customer
By implementing smart contracts to provide a common record of information relating to your customers, blockchain allows agencies to immediately access information and updates relating to client records including changes in address, payments, and water usage.
Further, water agencies could benefit from incorporating blockchain technology to ensure more transparency in their operations. Via a public ledger of information, agencies would be accountable to their customers by storing their expenditures, water quality data, and pricing in a publicly accessible blockchain system. If multiple rates and programs are offered, say by number of household members, customers could “digitally” select their desired program and have it automatically managed by the associated smart contract.
Smart contracts are not quite yet ready for prime time.
1. Due to the distributed nature of the code, they are very difficult to change. All changes must be implemented on all nodes simultaneously. Errors in code may not allow the smart contract to properly run or leave security holes that hackers can exploit. In time all of this is projected to be addressed, but not quite as of this writing.
2. Updates to smart contracts, if not properly coded or managed, may cause you to lose all of your smart contract bound information from the blockchain.
3. There are also significant legal issues that need to be resolved. US courts recognize a concept called the implied covenant of good faith and fair dealing, which is a presumption that contractual parties will deal with one another fairly and will not rob the other party of its rights to receive its anticipated contractual benefits. This is something that is implied in every contract despite not being expressly stated anywhere in its terms and implementation of this legal concept into code is paramount.
Utilities must continuously and successfully address challenges in:
· controlling rising costs through business process improvements and automation
· managing their aging infrastructure
· right-sizing and developing their workforce
As a key arrow in their quiver of solutions, agencies have been turning to digital water technologies. As a result, smart contracts is an important emerging technology to track. This is because of the benefits of secure blockchain systems that diminish risks of hacking, data destruction, and improve transparency. Further, smart contracts enable agencies to disintermediate third-parties that have long impacted the cost structure and resourcing of operations. The increasing use of IoT and big data usage by utilities require data reliability, accessibility, and analytics which can be more efficiently managed via blockchain systems.
Additionally, asset management can be made more reliable with this distributed ledger technology. Also, smart contracts help ensure customer engagement and satisfaction because transparency and cost-effectiveness are crucial to building strong relationships with customers. Finally, open data systems can bolster the perceived trustworthiness of utilities and blockchain can increase the speed at which information is available to stakeholders.
In conclusion, the most successful water utilities will be those where the underlying blockchain systems, like smart contracts, are transparent to users and integrated across multiple technologies. This will fundamentally alter the way utilities perform transactions and manage and operate access to water.