Disruptive Technology: Hedging On The Blockchain
The oil and gas trading business significantly changed during the adoption of the internet, and it has the potential to change again in the next few years due to a new technology that is experiencing rapid adoption. Blockchain technology, sometimes referred to as a decentralized-ledger technology, is the backbone for cryptocurrencies such as Bitcoin, and it has the potential to significantly disrupt the oil and gas trading business. It holds the promise to eliminate the need for intermediaries. Eliminate both accidental and malicious discrepancies. Eliminate or significantly reduce fraud. Provide immediately audited settlement, and significantly reduce the complexity and costs of routine transactions. Agricultural and precious metal traders have already adopted new platforms. It’s only a matter of time before blockchain is widely adopted by oil and gas trading.
At a basic level, blockchain is a peer-to-peer network of computers called “nodes” that come together with cryptography to create a decentralized, distributed, digital transaction ledger. Through a series of steps, the transaction records on the nodes become blocks that are added to a chain. The chain has established protocols that cannot be circumvented or altered.
The transaction record includes sender and receiver pseudonyms, date and time, asset type and the quantity of the asset. This means that no one entity has control over the transactions of the chain catalogues.
Access is also widespread which means that coordination of a fraudulent alteration in the chain would be impossible to achieve without detection. The transparency between parties and immutability of records provide trust that would otherwise be required by intermediaries. Therefore, intermediaries such as banks and exchanges are no longer needed to transact.
It is also done with fewer human steps that slow the process, increase costs and increase the likelihood of clerical error. Some tasks that currently take days, weeks or months to complete can happen in minutes using blockchain.
The core of the technology is the trust it creates through a combination of the distributed, immutable ledger and cryptology. Transactions that have a low amount of trust are inefficient, take more time and generally require intermediaries. They are also more costly as there is a concern over performance.
When transactions are executed and settled on a distributed ledger, counterparties don’t need to have an established relationship to create trust. Each participant trusts the blockchain itself. They don’t need to directly trust each other, thus opening new avenues for transactions directly at the buyer-seller level.