July 2017

BLOCK CHAINS, SMART CONTRACTS, AND THE FUTURE OF PULSE TRADING

Back in 2000, someone decided to let me have a hand at marketing a chickpea crop that had just topped one million acres for the first time.    I quickly discovered the established Mexican and USA trade was already using a completely different quality and calibration methodology than what we were trying to do at home.   Shake the sample 10 times this way, 5 times that way and figure out how much is over a certain screen size.   It seemed much more logical to drop 40 or 50 grains into a scale until it reached one ounce (US or Spanish? Maybe this was never going to be simple).   Why weren’t we making an empirical calculation like the Mexicans and the Americans?   “It’s all about the mystery!” I was told tongue in cheek by my peers.   For a long time, this type of answer has been acceptable for Canadian special crops marketers.   We had a lot of stuff and could dominate as suppliers in a growing trade.   That domination rode the rails of trust granted to Canadian shippers more than what had ever been truly earned.     

I think we can safely say the knife cleanly cuts both ways in buyers and sellers trusting each other.  We have matured as an industry over the last 20 years, but have foregone our innocence.   Any Canadian exporter who says he has not experienced hard lessons while naively navigating the global marketplace is lying.     Any Canadian exporter who has not actively fudged a bit to execute a shipment is lying.   As a result, these days it would be difficult to argue that a Canadian should automatically be granted the high ground in any trade dispute.

Times change (as they should.)  Buyers and sellers of specialty crops cannot rely on formal institutions to protect themselves from each other.   It is now time the industry turns its attention away from its emphasis on greater production to an emphasis on greater execution.   The trade has grown past current methods of contract management and used up our goodwill.    There is too much money moving to0 fast between too many hands with too many variables.   Many countries other than Canada are now competing for scarce buyers.   The Africans, Argentinians, and the Eastern Europeans to name a few are all becoming better producers and have the ability to sell cheaper.   In the future, the winner will be the one who is able to harness the trust gap and deliver certainty among its members.    Trust has always been the fundamental currency of commerce.   The country/group that can bridge this gap will separate itself from having to slug it out with price as its lowest common denominator.       Since current contracts are barely worth the paper they are printed on.   This is a massive opportunity.   But where to begin?

We need to forget the banks, forget about fancy apps, forget GAFTA, forget government agencies, in fact, forget all the institutions that we hoped would protect us from being on the wrong end of unscrupulous trades.   They won’t.   The trust gap needs to be rebuilt using decentralized databases and smart contracts in peer to peer networks.     Today, uncertainty can be lowered through technology alone.    Major advancements in cryptography and decentralized computer networking will change how we trust across borders without reliance on many of traditional mechanisms.       The new tools will be block chains and smart contracts.    It is beginning to happen now across the globe and we should be discussing and working toward it.    

For inspiration with these ideas.  Check out Nick Szabo @ www.unenumerated.blogspot.ca 

<Couple of definitions from WIKI>

A blockchain[1][2][3] – originally block chain[4][5] – is a distributed database that is used to maintain a continuously growing list of records, called blocks. Each block contains a timestamp and a link to a previous block.[6] A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. By design, blockchains are inherently resistant to modification of the data.

Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary. Smart contracts often emulate the logic of contractual clauses. Proponents of smart contracts claim that many kinds of contractual clauses may thus be made partially or fully self-executing, self-enforcing, or both. Smart contracts aim to provide security superior to traditional contract law and to reduce other transaction costs associated with contracting.

I can imagine the following:

Buyers and sellers belonging to the network are talking and exchanging information as we do now.  Taking inquiries, quoting prices, and discussing shipping positions.   When they are ready to finalize business, they enter a NEW VIRTUAL TRADING ARENA in which the performance of both the buyer and seller are be monitored and underwritten by insurance protocols and the contract they make is frozen on a large industry ledger.    They make a simple or complex contract in any way they choose.   However, that contract would remain intact until execution.   This smart contract is now part of the blockchain on a network of computers which becomes the basis of protection for both sides of the agreement.     In the future, either the buyer or seller could transfer their responsibility in the contract to another party in the network.    Simple contracts would allow traders could buy and sell it many times at a premium or discount until the product was finally shipped.   More complex contracts with more detailed quality constraints could also be handled the same way but would become less liquid.   The key would be every transaction and change of ownership would of this continually uploaded and confirmed across one long ledger until execution.   

At shipping, an independent surveyor automatically receives an inspection instruction containing all the parameters of the contract including a picture if necessary.   The Surveyors (SGS/Transloaders/etc) verify the quality and weights directly to the network which could draft the export documentation from the database.    Payment can automatically be programmed to follow according to the contract.  

With tools like blockchains and smart contracts, a global utopian pulse trading system is actually within our grasp.    The question is, are we truly ready to take full responsibility for our actions, or do we all still need a little bit of mystery?

Enjoy the summer.   Crop update in the August report.

Dgn 06/27/2017