by David Drake
Blockchain has largely been seen as the technology that solves inefficiencies in businesses, reduces the risk of fraud and improves transparency. As such, commodity banks and companies have been tapping into the distributed ledger technology and piloting trials over the last 2 years.
Blockchain utilizes a distributed database that is able to process transactions and settle them within minutes. It is also able to update in real time and does not need a third party to verify transactions. The technology has become a backbone for innovative projects in the business sector including hedge fund trading platform, BQT, family smart contracts project, URAllowance, digital asset portfolio management platform, BlockVest, web mining optimization platform, Gath3r, online customer satisfaction platform, IOU and cryptocurrency coupon advertising platform, Qupon.
However, a recent report released by the Boston Consulting Group now concludes that application of this technology in commodity trading may have been overhyped.
The amount of trading that have been affected by the technology through different schemes has, so far, been negligible, and it is still early to tell when it could reach mass adoption. According to Antti Belt, one of the authors of the BCG report, there is a collision between the design of blockchain and the space within which it should be applied.
He says, “There are so many pilot schemes but none have become real production scale systems yet. One of the problems is that it’s not designed for physical trades. The fundamental issue: how do you track a physical entity in a virtual world? It’s two worlds colliding.”
But some players within the cryptocurrency space feel that blockchain shouldn’t be seen as applicable to every situation. According to Varun Mayya, CEO at Avalon Labs, the technology has very specific use cases.
He says, “Blockchain has very specific use cases and while the community has been attempting to tokenize everything, we’ve seen that the successful projects often involve systems internal to a company that are susceptible to internal fraud. That and smart contracts seem to be hot use cases of the Blockchain. It’s limited scalability in its current incarnation is also a drawback.”
Another challenge that could be hindering the scaling of blockchain, as identified by the BCG report, is terminologies. Belt terms the industry as “very old and everyone uses a different language”. “How do you define quality, shipment schedules,” he asks, arguing that “a lot of reconciliation is currently needed for both sides.”
On his part, James Lopez, CEO of HFC Coin, feels that standardization of terminologies in the blockchain space needs to happen to address this challenge.
He says, “The terminology used to describe blockchain falls in to the same category of optics. Standardizing terms that create separation from cryptocurrency will help transform the optics of how blockchain is perceived, in turn, helping larger businesses truly assess the financial viability of the technology. Artificial Intelligence has suffered from similar stigmas thanks to the Terminator movies and the dronings of Elon Musk and crew.”
In addition to these challenges, companies are also struggling with the question of financial justifiability. According to the report, some companies have spent an excess of $100 million in developing the IT systems that are currently in use. Is it possible that they would want to invest heavily in another system?
According to Steven Kok who co-authored the BCG report, widespread blockchain adoption in the commodity market will start when companies are solely driven by the need to certify the source of an asset like diamond, as opposed to a need to improve efficiency.
Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.