Smart Contract on the Blockchain - Efficiency and Automation in Metals Trading
In our blog post from July 6th, “Blockchain in Metals Trading – Metalshub is getting ready”, we introduced Blockchain technology and outlined how it could fundamentally change metals trading.
The Blockchain feature this post focuses on is the smart contract.
A smart contract is a protocol build on top of a Blockchain which allows for self-executing and self-enforcing contracts. A smart contract is transparent without revealing the identity of market participants. The transaction is stored on a decentral system and it is secure due to cryptographic keys. What sounds unspectacular at first glance is considered by some experts as the technology that will eventually replace legal advisors.
Once on a Blockchain any asset can be exchanged – so far nothing new. With a smart contract this exchange of assets can now take rules and penalties into account that previously would have been placed in a traditional contract. And these rules are not only considered but they are actually enforced as the exchange of assets will only be completed on the Blockchain if all the required obligations are completely fulfilled.
What could the application of smart contracts mean in the context of metalshub? Let’s look at an example. A commodity producer (Seller A) has nickel cathodes stored in a third-party warehouse. A sells these cathodes to a Commodity Trader (Buyer B). The sales and purchase agreement will be uploaded as a smart contract to a Blockchain infrastructure. Information which are part of the smart contract are amongst others price, lot number and payment term. In this example, the payment term is “cash against conditional release”, which means that the warehouse company releases the cargo to the Buyer B as soon as the Seller A’s bank confirms that the full amount has been received. How will this transaction take place in a smart contract on a Blockchain?
- Once the contract is closed, Buyer B and Seller A confirm the parameters of the smart contract on the Blockchain
- Seller A uploads the Certificate of Analyses to the Blockchain; an automatic check takes place whether the lot conforms with the specifications agreed in the contract; conformance is required to proceed with the transaction
- The warehouse company confirms on the Blockchain that it is currently storing the Nickel Lot on behalf of Seller A
- Buyer B makes a telegraphic transfers (T/T) of the purchase price to Seller A’s bank account
- The Seller A’s bank confirms on the Blockchain that the full purchase price has been received
- The warehouse company, sees on the Blockchain that cash has been received and sets the status of the lot to “released”; A carrier nominated by Buyer B is automatically informed via the Blockchain
- Buyer B confirms on the Blockchain that the product has been received in accordance with the sales and purchase agreement
- If all contractual obligations are satisfied, the nickel lot changes ownership on the Blockchain
Now, let’s look at the benefits of implementing this process using a smart contract:
- The process becomes much more transparent and auditable – today it takes place in a very fragmented data space
- Potential for fraud is significantly reduced – Buyer B can now proof to a Bank or a future Buyer that it has purchased and owns a specific lot of nickel
- Tracability also improves – If Seller A uploads a Certificate of Origin to the Blockchain, the Buyer B can proof that the nickel comes from a conflict free country
- As transaction interdependencies are logged in one database less double work takes place and the potential for error is reduced
And what will be the role of metalshub? metalshub is working on the parameterization of smart contracts and is currently holding discussions with Blockchain infrastructure providers to select the right technology partner. More to come, keep following!
Your metalshub team