Blockchains for Efficient Commodity Management

Blockchain is a digital ledger where transactions made in bitcoin, another cryptocurrency, or any other digital contract are recorded chronologically and publicly. It provides facility similar to other publically shared documents (Google Docs for example), enabling participants to view, and authorized participants to change, the contents while maintaining the latest version of the document. This ensures that everyone has the same, most current version of information at all times. Participants can create rules for the ledger, enforcing contracts and transactions based on predefined conditions all parties agree to upfront.

Blockchains – the next big thing

In an essay published in November, IBM chairman and CEO Ginni Rometty said, "Today, blockchain — the technology behind the digital currency bitcoin — might seem like a trinket for computer geeks. But once widely adopted, it will transform the world.” She is not alone in her assessment. In the last nine months of 2016, $1.4 billion was invested globally in blockchain startups as technologists explored how to capitalize on the technology.

Blockchain technology significantly increases efficiency. Blockchains can automate transactions and enforce contracts without oversight. Updates to the blockchain are logged and immediately visible to all participants, ensuring that no one is surprised. No party can change the rules in the middle of a transaction, because the blockchain is transparent to everyone at all times – everyone knows if someone attempts to alter the blockchain. This automatic compliance saves time and money on each transaction, and reduces fraud, disputes, and litigation.

What does this mean for commodities?

Blockchain technology has the potential to transform commodities value chains, providing seamless, automated tracking, planning, and execution of commodity trades regardless of how many different participants are in the chain. IBM’s latest estimate on the potential savings from applying blockchain technology to global supply chains is over $100 billion annually, and a substantial portion of it deals with commodity movements.

Blockchains provide complete data transparency. Commodity market participants can register the transfer of goods on the ledger, identifying the parties involved, price, date, location, quality, current state of the product, and any other information that would be relevant to managing the value chain. This information is visible to every participant in the chain at all times – every change, disruption, delay, and movement is completely transparent to everyone.

A blockchain can significantly improve efficiency and decrease costs in the value chain.

For example:

• Blockchains enable smart tendering. Pallets equipped with RFID tags can publish their need to move from point A to point B on a blockchain ledger. Carriers use blockchain mining applications to place bids to win the job. The blockchain will award the job to the bidder that best fits their requirements and the transaction is recorded on it. The shipment will be tracked on the blockchain as it moves through the supply chain. With blockchains, all of these steps can be done automatically, cutting out cumbersome negotiations and inter-party information exchanges and improving efficiency.
• Blockchains reduce transportation costs of waterborne transportation. The oil value chain can span hundreds of stages and dozens of geographic locations. Oil shipments are tracked manually using bills of lading – a pen and paper system developed over 500 years ago. When the cargo is shipped from buyer to trader to seller, the ship captain has to stamp the bill of lading to acknowledge receipt of the cargo. This paper document then goes to customs, surveyors, and other agents and officials to review. A blockchain can create one ledger, enabling the buyer, shipper, and seller to track the product at all times without the time consuming, manual process of reviewing paper bills of lading. All information about the shipment is available to every participant, so there are no inconsistencies or confusion – saving both time and money.
• Blockchain technology enables agriculture market participants to track a product through its entire lifecycle. RFID tags, IoT sensors, and barcodes are already widely used across agricultural supply chains. Blockchain technology can take the agricultural supply chain to a whole new level, tracking products through every step of the value chain – from farm to fork – and sharing that data with every participant. Manufacturers purchasing agricultural products have visibility into their supply crops long before they are harvested and shipped, receiving the same information that farmers provide to the blockchain. They are prepared for disruptions and supply complications long before their products are shipped, because the information is updated in the blockchain by the logistics providers. These well-informed purchasers can take steps to work around these issues long before issues become problems, improving efficiency and profits.

Blockchain technology provides commodity market participants with unprecedented visibility into commodity transactions – eliminating conflict, confusion, and manipulation of data while significantly decreasing costs and improving efficiency.