Can Blockchain Boost Commodity Trading Market Performance?

David Drake  |


Blockchain has been hailed as the technology that could alter the way businesses run across the globe. Its potential has attracted developers across different sectors and encouraged development of solutions to problems such as portfolio optimization by LiveTradr, digital coupon marketplace for Qupon, security of social interactions on ONe Network and portfolio management for the emerging digital assets class on BlockVest.

Other blockchain backed solutions that are gaining traction include family smart contracts on URAllowance, peer to peer hedge fund trading on BQT, web mining optimization on Gath3r, and interactive marketing on Noiz Chain.

Even so, over the last two years the activities conducted on the blockchain appear to be voluminous, it is emerging that they are still insignificant compared to the full potential of blockchain usage. A report published by the Boston Consulting Group (BCG) a few weeks ago shows that application of blockchain technology in the commodity trading space is largely overhyped.

It demonstrates that blockchain is not the ultimate cure for all businesses despite the fact that companies have looked to this nascent technological application as a means of increasing transparency, boosting operations, and solving the fraud problem.

Slow to Integrate

Blockchain is unable to carry large volumes of transactions, which makes it less ideal for some companies. According to Varun Mayya of Avalon Labs, Blockchain can only be applied in very specific situations. However, the cryptocurrency community has been trying to create tokens for everything.

When companies utilize blockchain, they no longer have to produce compliance reports to authorities because everything can be tracked in real time and discrepancies are noted as they occur. This isn’t appealing to commodity traders who tend to manipulate the market for profits.

It is also illogical to use a digital system to manage a physical entity because tracking would become a real problem. Reconciling terminologies in the physical and virtual world of blockchain is another stumbling block for the new system.

Roman Miroshnichenko, co-founder and CEO of IOU says, "The financial viability of blockchain technology in commodity trading will certainly simplify the financial system, but a consensus on common terminology needs to be adopted based on the experience gained."

Integrating blockchain into companies is no simple thing. Oftentimes it requires a complete system overhaul, or retraining. This is not something companies may want to do especially when the foreseeable benefits are dim, at best. Having spent millions on IT systems, for some companies - over $100 million - it would devastate the coffers to have to spend even more on a new system that may not work as well as hoped.

Scalability and Viability

The BCG report indicates that commodity trading could benefit from blockchain use such that utilization of solutions that are backed by this technology in this industry would enhance transparency significantly. It is anticipated that the technology would also enhance liquidity and efficiency in this market.

However, this may be limited to the diamond mining business, crude oil, and power where the driving factor is not efficiency but certification of the source. In the case of arbitrage, the use of single ledger reduces the profit-earning capacity of traders due to price standardization. For traders who capitalize on market inefficiencies, blockchain ledgers are not ideal. But for blockchain to be useful, transparency through accurate recording of goods traded would be key.

The only way for commodity trading to effectively make use of this technology is for all players to come on board. Currently, not all companies want to invest in a system that not only takes away their competitive advantage, but remains untested and poses uncertainty.

James Lopez, CEO of HFC Coin says, “Many people view blockchain's financial viability through the lens of Bitcoin and its roller coaster price ride. To address blockchain technology financial viability, leaders of blockchain have to change the optics of blockchain by distancing itself from cryptocurrency and loudly celebrating the successful companies that use blockchain.”

In terms of use cases, Mayya notes that the most successful projects are those that apply blockchain on internal systems that are vulnerable to fraud. Such systems plus smart contracts tend to be the best blockchain use cases.

Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

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DISCLOSURE: Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.


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