Is Blockchain the End of the Road for Commodity Brokers?
Over the years, commodity brokers have played a predominant role in commodity trading. However, recent trends highlight the growing importance of the blockchain technology and question commodity brokers’ place in the market. By drawing a comparison between the two, I will showcase their individual benefits for commodity trading.
But first, it is necessary to know what it means to be a commodity broker. This individual or firm performs the order of buying or selling commodity contracts and a variety of energy products on behalf of a company, as well as arranges trading contracts between the buyers and the sellers. For the following reasons, energy companies and utilities may use commodity brokers:
Sometimes, companies do not want other people to know who is in the market for a certain product; this can be to ensure there is no favoritism and their positions on topics are not revealed to the public.
Most existing trading boards require the sizing of deals to be in round multiples. For odd sizing, of which does not fit the existing increments of standard markets, the client would then have to get these deals from the secondary market. The brokers can facilitate finding a counterparty on the secondary market.
Often, intermediaries are required to build trust between two counterparties who have not done business together before.
Despite these multiple reasons for companies to use commodity brokers, leveraging blockchain — a distributed database made up of a series of blocks that contain validated transactions — is significantly impacting commodity trading.
Shared Ledger Between Participants
Blockchain records and verifies transactions across multiple participants. This significantly reduces the costs, time, and risks associated with private information.
Transparency and Trust
Blockchain ensures that transactions in the ledger are shared among the nodes. This allows the system to be transparent and creates trust between participants.
Blockchain can be either public or private, with cryptographically secured records that cannot be deleted or changed.
A blockchain requires fewer intermediaries due to a distributed ledger, which reduces delays and the cost of transactions.
High Availability and Speed
With multiple nodes on a peer-to-peer network, data is replicated across many nodes, so, even if some nodes are unavailable, the network remains available. Blockchain can also allow companies to increase transaction execution speed by utilizing machine-to-machine communication.
Without third party clearing houses, a blockchain can drastically reduce costs and simplify checking-out since all parties have the same ledger.
What does the Future Hold for Commodity Brokers?
As we look at what a blockchain can accomplish, it is easy to see where there is a distinct overlap. Trading already occurs on electronic platforms, such as the Intercontinental Exchange (ICE) and Chicago Mercantile Exchange (CME), ultimately diminishing the need for brokers.
In my research, I found a company that has already begun to offer its services in the European market. The hurdle for these new entries is not the technology, but the ability to get customers. Only when a trading and exchange platform is widely accepted — at least in their niche — it can become successful. A company needs the market to believe that they are a must-have in their shop, otherwise there is no liquidity in the markets and the need for brokers shall continue.
As we have seen with other disruptive technologies, the need to adapt will be the key for the future of the broker, such as being more of an advisor and providing independent market advice. This may not be the traditional use of a broker, but changes are bound to happen.
An example of a company that has the technology to adapt to the market changes is OATI. Blockchain-as-a-Service (BaaS) by OATI provides an easier and scalable way for customers to leverage Blockchain technology to develop distributed applications for the energy sector. BaaS uses OATI’s secure Blockchain infrastructure and allows organizations to build blockchain networks to drive more secure and efficient transactions. Utilizing our extensive expertise in delivering solutions to customers, OATI BaaS is tailored to meet energy sector-specific needs.
Know more about the key features and infrastructure of OATI BaaS by requesting more information from Sales@oati.net.
About the Author
Mr. Alan Mize, OATI Account Executive, has been in the energy industry for over 16 years, with almost 5 years of Account Management experience and over 7 years of implementation experience of vendor Energy Management Systems (EMS) and building in-house EMS. He has managed projects of varying sizes and served in several management positions.