Blockchain Technologies in the Commodities Space

Determining the Suitability of Blockchain Tools for Your Business Needs

The advent of blockchain technologies has sparked immense interest across industries, with many exploring how this innovative approach to transaction processing can reshape their respective domains.

In this post, we’ll examine the commodities trading space with an eye to what benefits decentralized blockchain technologies might offer over more traditional centrally operated commodities transaction solutions:

Transparency and Verifiability

Blockchain, by its nature, is an immutable public ledger that can be viewed and independently verified by all market participants.  As a result, trust in the integrity of the data is an intrinsic feature of a blockchain ledger.

By contrast, traditional centrally managed transaction systems are only as transparent as they are designed to be, and trust in the integrity of the data is often a function of the integrity and reputation of the market operator.

These two approaches naturally come with tradeoffs; there are circumstances where full transparency may not be desirable. For example, the ability to view the transaction history and balance of individual accounts, even if anonymized, may still reveal too much, especially when there are few market participants. On the other hand, building trust in the reputation of a market operator can be a lengthy process that could be bypassed with the use of an intrinsically trusted public ledger.

Decentralization

Decentralization is the key feature of blockchain ledgers that have no real parallel in traditional transaction systems. The ability to remove the need for a central authority can be a powerful tool that democratizes access to a market, especially when there is a concern that a central authority may not provide market access to all participants equally.

Decentralization, however, requires a broad set of market participants willing to provide their computational resources to facilitate transaction processing, and may not be suitable for markets with smaller pools of participants, or where access to the necessary computing resources may be closely guarded by corporate IT policy and practice.

Blockchain’s successful adoption as the basis for alternative currencies such as Bitcoin is a direct testament to the concerns that many participants of those markets have with respect to the incumbent central authorities, however democratizing access to these markets has proven a double-edged sword as it provides the same anonymity and access to both good actors and bad.

For markets where central transaction controls are a requirement, even for reasons as benign as managing counterparty credit risk, decentralization may prove as much an impediment as a benefit, and while private blockchain ledgers exist with the ability for a central authority to enact such controls, these relegate the blockchain ledger to merely the mechanism by which a centrally controlled solution is managed.

Transaction processing

Due to the decentralized and cryptographic nature of transaction processing, processing blockchain transactions through to verification is a significantly slower process than can be done in a traditional centralized trading system. While this extra work contributes materially to the transparency and verifiability of the transactions once complete, in more liquid and faster moving markets it’s possible that the speed of processing blockchain transactions will not be sufficient to provide timely price signals. This tradeoff needs to be weighed carefully against the benefits for these markets, and for markets that have a prospect of maturing to this state.

Conclusion

In conclusion, while blockchain technology is still a relatively new and innovative approach to transaction processing that is intrinsically transparent, verifiable, and most notably decentralized, it is beginning to find inroads into industries where centralized transaction management has traditionally been the standard.

When it comes to wholesale commodities markets, especially those with relatively small numbers of participants, however, the problems that blockchain solves tend to either be problems that these markets do not have, or those which can still be easily overcome using traditional approaches.