blockchain commodity trading
December 19, 2019 EnHelix Articles and Blogs

Commodity Trading Blockchain

The initial purpose of the Blockchain technology – first mentioned in Satoshi Nakamoto’s ground-breaking paper ‘Bitcoin: A Peer-To-Peer Electronic Cash System’ – was to enable the peer-to-peer exchange of digital money by means of clever computer code, thereby ruling out the need for trusted third parties (i.e., financial institutions). Therefore, the most obvious implementations of the Blockchain technology – which are based on its fundamental working principles – are focused on facilitating peer-to-peer financial transactions without the need of intermediary financial institutions. However, recent developments in the Commodity Blockchain Trading industry have enabled the storage of alternative data, including so-called ‘smart contracts’ to to used in ETRM. In what follows, three use-cases will be provided regarding the implementation of the Blockchain Technology within the commodities and logistics industry.

blockchain commodity trading
blockchain commodity trading

Due to geological characteristics, it is estimate that around 82% of the world’s oil reserve is located in only a small selection of 14 countries, commonly referred to as OPEC (the Organization of Petroleum Exporting Countries). However, oil and gas are valuable resources which serve as an input to production processes all over the world, irrevocable resulting in worldwide trade and international financial transactions. Usually, such transactions may take between one to four business days, with incurred fees – due to currency exchange rates and transactions costs – reaching up to 2%

Reducing Transactional costs

However, due to its technological properties and the absence of a third-party facilitator, the Blockchain technology allows the execution of international financial transactions within one day, with total transactions costs being relatively low in comparison to classical over-seas payment methods. By implementing Commodity Trading Blockchain solutions for facilitating international financial transactions, the supply chain industry – which is characterized by large amounts of international trade – can cut costs on incurred fees and transactional costs, thereby drastically benefiting a company’s bottom line.

Automating Buyer-Seller Relations

In addition to recording purely financial transactions, the Blockchain technology also facilitates the storage of digital contracts, commonly referred to as ‘smart contracts’. Such digital contracts – which are recorded and permanently stored on the Blockchain – can be programmed in such a way that specific actions are executed when certain, pre-defined conditions are met. In this way, smart contracts – in combination with digital payments – pose huge possibilities for the automation of buyer-seller relations within the supply chain industry.

One of the opportunities is the automation of payment-upon-delivery processes by linking smart contracts – stored on the Blockchain – to both temporary escrow payment accounts and livestream geolocation data.

At the point of initiation, all relevant trading parties initiate a smart contract which registers both the price rate (price per volume/mass commodity), the amount (volume/mass of commodity), and the delivery time and location. This information – captured in the smart contract – is stored on the Blockchain, and the required funds are transferred to an escrow account which is directly linked to the smart contract. Upon delivery, – which is verified by geolocation transmitter that is also linked to the smart contract – the contract is enforced, and the locked funds are transferred from the temporary escrow account to all relevant trading parties.

This Commodity Trading Blockchain implementations enables a smooth relationship between both the commodity provider and the buyer and provides a certain level of assurance and security in an industry which is known for instability and geopolitical interference.

Promote Traceability

In addition to the use-case discussed in section 2, geolocation transmitters can be used to carefully track and trace the transport routes that were taken during the delivery of the commodity. Due to the inherent characteristics of the Blockchain technology – being Distributed, Transparent, and Immutable –, the geolocation data stored on the Blockchain provides the purchaser with an unaltered and righteous source of information regarding the origin of the commodity.

Within the current society – which is characterized the increase attention toward the environment, child labor, and modern slavery –,  supply chain traceability is bound to become increasingly more important when partaking in international trade.