As the questions filed by the conference’s app popped up on the screen at the Blockchain in Oil & Gas conference in Houston earlier this month, it was pretty clear there were two types of people in the audience.
The first were those who had a solid understanding of distributed ledger technology (DLT). Then there was the other group, people who knew something, but maybe not a lot. The anonymity provided by the question tool allowed some of those just getting their blockchain “legs” to ask those basic queries without fearing they might engender eye rolls and head shakes.
If you’re in the second group, here’s a very short primer: Blockchain is the technology used to power bitcoin. It is a type of distributed ledger technology, so it lacks a central data base.
Key Features of a Smart Contract:
The data held on it is considered “immutable.” What’s known as “truth”—that the seller of a piece of property, for example, does actually own it—is confirmed by “consensus,” the affirmation of ownership, financial status, etc. shared by the many on the ledger. And it’s decentralized, so that there is no one particular party in charge, nobody that can slam the brakes on a smart contract processing transactions, and it is the network, not a central authority, that approves the commerce and information on the ledger.
There’s one question I always ask myself when new blockchain issues are discussed. It goes kind of like this: how does use of a distributed ledger improve upon a centrally controlled database, like an active commodity contract? When I asked that from the podium, I saw several heads shaking in agreement.
Which brings us to smart contracts, the topic of the presentation made by me and authored to a large degree by Platts’ Director of Innovation James Rilett. Once you ask that fundamental question about a distributed ledger application—what does it do that a current centralized system in commodity commerce does not?—the answers pour out.
A smart contract is a classic “if/then” process: if something happens, then something else will happen in response. In a commodity-related contract—whether it be an actual trade, reconciliation, a supply chain (which got a lot of attention at the conference)—the smart contract would take in multiple inputs, known as oracles in DLT-speak. An oracle could be a price assessment, like that produced by Platts; a bill of lading; a credit report; a weather input (e.g., high winds close a port). The oracles would be the “if” part of the equation, and when the contract has all its inputs, “then” an activity is triggered, such as the ownership transfer of a quantity of commodities. This isn’t all; smart contracts can support a wide variety of applications.
How’s this different from the aforementioned commodity exchange contracts? First, a smart contract is usually envisioned to handle far more types of activities in a supply chain, from initial sale to final delivery. Second, it can be shaped to any-sized market, many of which now operate without the transparency that theoretically one finds in a distributed ledger. Third, it allows the participants in the market at all time to be in control of their own data and their ownership. And fourth, because it is decentralized, there is no one entity in charge.
But somebody’s gotta be in charge, right? This is where it gets tricky.
The Houston conference had sponsors demonstrating ledgers they had built. A company called GuildOne exhibited a ledger for payment of royalties; a team from Accenture showed off a DLT-based tool to track payments to truckers in the oil patch. They weren’t there, but oil traders Natixis and Trafigura teamed up with IBM earlier this year on a blockchain-based trading initiative. There are plenty of others.
These are the seeds of the likely many ledgers that may, at some point in the future, be providing the backbone for the smart contracts that will drive commercial commodity activity. If the most optimistic visions become reality, gone will be contracts concluded through Word documents, the weeks or months to get paid, the terms that can vary from deal to deal, or are so rigid that building any sort of exception becomes a jobs program for lawyers. All of these things can be built into the smart contract, designed for a particular segment of the industry, big or small.
But somebody needs to begin the process. Although the ledger, once in motion, doesn’t have anybody to hit a stop button, there is still going to need to be a central force to pull the various interested parties together in the first place, create the rules that the contract will run under, fund the software development, maintain the ledger and its permissioning going forward…it’s a long list. A question that arises is that although trading companies have stepped up to lead initiatives so far, does the fact that they are rivals to pretty much everybody mean they will need to yield their position at some point to further acceptance of the ledger? (Think of the early trading company ownership in Intercontinental Exchange, which ultimately morphed into a publicly-traded, enormously successful trading platform.)
If there is one message that came out of the conference, it was this: don’t be afraid to ask questions. We’ve all got ‘em.