Blockchain for Commodities: Trading Opportunities in the Digital Age

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The European Enerchain project aims to enable large-scale peer-to-peer trading for wholesale natural gas and electricity, which makes it unique in its focus, size and disruptive potential.

More than 35 companies are involved in the Enerchain wholesale project, including major European gas and electricity traders such as E.ON, Enel, Iberdrola and Vattenfall.

The volumes these big beasts could bring to a new market could disrupt the business model of the brokers and exchanges that facilitate wholesale electricity and gas trading today.

The project also encompasses smaller regional players – those in the midst of a distributed power boom who wish to trade without the fees, settlement risk and compensation associated with the conventional market.

German tech company Ponton came up with the idea for Enerchain in 2016 and demonstrated a first commercial test on a blockchain prototype in November of the same year.

He set up a small group of pioneering companies to work on the idea, and in February 2018 he was able to conduct several live transactions using Enerchain software powered by the open-source blockchain engine Tendermint. The trades involved Endesa and Gas Natural Fenosa, Energie AG and Stadtwerke Leipzig, and Verbund and Salzburg AG, and demonstrated proof of concept.

But, with no fixed launch date for trading, Enerchain’s challenge to the existing order remains a vision for the future.

As of mid-2018, the companies involved had yet to agree to governance, form a legal entity, and then begin serious negotiations. The software itself is evolving and has limits in terms of transaction speed. Several participants are there to observe and learn, and it remains to be seen who among the big beasts are really serious.

Participants are thought to create a registered non-profit cooperative, similar to a Genossenschaft in Germany or a Stiftung in the Netherlands. This entity could carry out commercial operations for the benefit of its members if these operations reduce barriers to entry and are in the public interest.

While some attendees say their interest in Enerchain is more about understanding the potential of blockchain, not leading a revolution, others are serious about turning the concept into reality.

“The potential of blockchain technology lies in disintermediation,” E.ON’s Thorsten Kuehnel told S&P Global Platts. “It creates a real disruption; everything else is innovation or incremental optimization. Enerchain is one of the very few projects, outside of the financial sector, that has real potential for disruption.

Speed ​​restrictions

A key issue for participants is how quickly Enerchain software can add transaction data to the blockchain.

Products must “fit the software,” Ponton’s Rex Kempcke told S&P Global Platts. “This is young technology, with a block building time of one second [per block]. There are restrictions on the speed of transactions, and we need to build trust within organizations – they are not going to trade all their assets for new technology. »

The potential is there to increase block building time to over 100 per second, and possibly as high as 300, depending on available computing power.

While 100 blocks per second is not fast enough for high frequency spot trading, it is sufficient for many, if not all, of the futures and specialty load curve contracts that several Enerchain participants have in mind. for the platform.

Enerchain is focused on testing and offering physical electricity and gas spot and forward products for all European delivery areas, including standard and non-standard products. But it is possible to extend this to post-negotiation reconciliation services.

Once a transaction is executed on Enerchain, it is transmitted to the company’s electrotechnical information model systems, from where it follows the traditional reconciliation cycle.

“We started on the front end because there’s less integration with legacy systems,” Kempcke said. “Once the blockchain framework is in place, however, it can be extended throughout the business cycle.”

The idea is that Enerchain covers the entire cycle, from pre-trade to reconciliation, with third-party platforms or services (such as screen providers) tied to the blockchain infrastructure.

Lower risk

One of the benefits of blockchain is to reduce settlement risk, removing the need for clearing. At the time a transaction is executed, value is transferred using a digital currency or token. This makes it easier for smaller players to join a private blockchain, like Enerchain, due to lower collateral requirements.

“Fiat currencies, like the euro and the pound, are not yet digital – you cannot transfer euros or pounds through the blockchain, so you need a cryptocurrency token,” said Kempcke.

A trustee issues the token and holds the fiat currency equivalent in trust. The transfer and the settlement are carried out by the symbolic currency. In the longer term, fiat currencies themselves could have digital versions, although central banks are proceeding with understandable caution.

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