Freeing Hamstrung Commodities Traders with Blockchain
The trading paradigms that dominate today’s investing landscape have undoubtedly served some of us well. For those who play by the rules, buying options or futures contracts is no strenuous exercise, and there is a huge market open at all hours of the day to serve willing participants. However, no matter how streamlined these practices are, or how fast online platforms become, the commodities trade will remain fragmented from bottom to top unless something changes.
In fact, the rules and major players within this modern industry are themselves keeping free market principles from proliferating. Bureaucratic protocols that purportedly keep us safe still do so, but oftentimes at the expense of transparency and accessibility. The regulations that keep commodities markets behind the walls of large, centralized exchanges and brokers, not to mention within enforceable geographic borders, have admittedly helped with data security and verification standards. However, they’ve also created an opaque, closed ecosystem where it’s difficult to identify stakeholders, their motives, and their level of control.
Whether barrels of oil or bushels of wheat, it should not be hard to discern which traders (or institutions) are behind the price speculation and manipulations in the futures market for commodities. Individual traders who rely on these commodities markets to hedge their investments or improve their businesses lose in the long run when this status quo exists unchecked. Many people hope that the situation will change for the better soon thanks to the proliferation of blockchain and the emergence of companies employing it to improve the entire value chain for all stakeholders. Nevertheless, the powerful technology will need to demolish multiple obstacles in the road before making a qualifiable difference.
There’s No Such Thing as Equal Footing
Even before coping with the unfortunate, unpredictable nature of the modern commodities market, traders must first pass muster with the enormous entities that control the industry. A Belgian farmer who wants to defray risk in his home market must connect his bank account with a Belgian broker, who allows him to hedge the value of his crop with domestic futures and options contracts. However, once this farmer finds customers in the United States, he will also encounter a massive struggle to register with foreign financial entities, become verified, establish new accounts, and then pay hefty fees for the privilege of allocating his own capital.
Besides dealing with physical and digital borders, traders often find themselves without any choice in who they deal with. Giant exchanges like the Chicago Mercantile Exchange and Euronext control commodities and force potential traders to utilize them as a conduit to access the world’s financialized resource markets. Such centralization creates the high-fee structures that we must struggle with, making smaller trades less affordable and edging out many willing market participants. Apart from creating a barrier that enables the biggest institutional players to maintain their iron grip thanks to scale that reduces their overall costs, this two-tiered playing field hurts other value chain stakeholders that are not financial institutions.
Bring On Blockchain
Trade finance is an especially important aspect of the global commodities market, but oftentimes, small and medium-sized firms are underrepresented due to high financing costs and expansive reporting requirements. One of the reasons these entities are pushed aside is that institutional participants typically like to focus on big deals which are more lucrative in a market that generates relatively high fees thanks to a high degree of opacity.
However, efforts like those undertaken by Singapore to establish itself as a fintech hub for global commodities trading is rapidly changing the stakes for the smaller players. Singapore has invested heavily in attracting companies dealing with investments and trading to create a better model to help its citizens trade commodities without the massive hurdles that currently exist.
Blockchain is already showing curious financial market participants a glimpse of what the future might look like without these realities. Platforms like ChainTrade, one of the first companies to take on the entrenched interests in the modern commodities market, exhibit extraordinary functionality. By hosting a platform for commodities options and futures on a completely decentralized network, the costs of maintaining a complicated centralized system, namely security and data reporting, are decimated. The virtual elimination of fees that could once be pinned on these costs is the least of such a system’s benefits.
More impressive is the opportunity to deploy smart contracts in conjunction with the blockchain ledger. Although commodities exchanges are designed for contract standardization, this level of consistency ignores a huge wellspring of opportunity to fold in other commoditized goods and services. While most of the disruptive fintech models are focused on taking share away from centralized exchanges, ChainTrade has effectively built an architecture that could expand trading beyond the traditional mining and farming emphasis. Soon, traders will be able to easily create custom contracts with their preferred expiry dates, margins, prices and other factors, and find willing parties to sit on the other side of the table.
An Improved Form of Guarantees
One of the best aspects of these new models is how they handle counterparty risk. Concepts like building risk-reduction features directly into smart contracts, requiring “Insurers” to back up both sides of the contract in case of default further contribute to the intelligence of this system. Smart contracts use the blockchain’s ledger to determine when these custom conditions have been fulfilled, and then autonomously distribute the correct funds to each recipient. In this case, funds take the form of cryptocurrency to help streamline the process associated with the smart contract ecosystem.
While smart contract functionality also reduces overhead and fees for participants, it has the secondary bonus of eliminating borders for the market. Cryptocurrencies are now very universal, and can be purchased with any currency and traded no matter where the trader or their funds originate. Alongside an irrefutable record of trading activity, blockchain solutions like these eliminate fraud, improve transparency, increase accessibility and expand assurances for participants.
Safety In Decentralization
With trading environments built on blockchain that are both open and freely accessible, yet simultaneously protective of individuals, smaller traders and hedgers typically overlooked by the existing paradigm have something to look forward to. The lucrative stranglehold that institutions keep on the commodities market serve the interests of the few, and not the many, but blockchain is the people’s new champion.
Blockchain gets its power from a combination of limitless accessibility alongside the consensus of those who choose to participate. Traders are now opting for blockchain-based solutions, and it is becoming increasingly clear that markets will be forced to address this choice in some way.