Commodity Trading: How It Works and How Blockchain Can Help?

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Written by
Shivani Tripathi
Published on
October 14, 2022

Commodity trading is the buying, selling, and trading of commodities. Today, you can directly trade in commodities on the markets.

Commodity trading allows investors to grow their portfolios beyond regular securities. Investing in commodities can help you balance your investments in securities like stocks and bonds.

You can invest in commodity products like commodity stocks, funds, options, and futures. Commodities that can be traded today fall into certain categories such as metal, energy, livestock, meat, and agricultural products. 

What is the Existing Setup for Commodity Trading? 

Commodities are traded on public exchanges through standardized contracts. 


Commodity Exchanges 

Commodities are traded publicly, which means you trade them on the public exchange, like stocks. Some exchanges allow you to invest in a variety of commodities. Other exchanges focus on certain types of commodities, such as metals or a group of commodities.

Like stocks, there are indexes for commodities too, which help track the performance of a commodity. 

Some of the well-known commodity exchanges include: 

  • Chicago Merchantile Exchange
  • London Metals Exchange 

Standardized Contracts

The exchange works by enabling you to enter into a standardized contract with another person or entity where one of you is buying a commodity that the other is selling. The standardized contract will prescribe the following:

  • Standard quantity
  • Standard Quality
  • Minimum price
  • Standardized delivery

Subject to the minimum price, the price of a commodity is determined by supply and demand through the buyers and sellers on the market. 

How Do You Invest in Commodities? 

Commodity trading

As an investor, you can buy and sell commodities directly on the commodity exchange. However, most investors invest in commodities through commodity stocks, funds, or options in futures contracts. 

Commodity Stocks 

Invest in a company that produces a commodity or is involved in the process of producing a commodity.

Commodity Exchange-Traded Funds (ETFs) or Mutual Funds

These are funds that invest in a particular type of commodity and products of that commodity, such as commodity stocks and futures contracts.

Options on Commodity Futures Contracts 

You can invest in options on commodity futures contracts. These contracts create an agreement to buy and sell commodities and a legal obligation to do so. 

What is a Blockchain? 

A blockchain is a dadigital tabase or ledger that stores information and is connected to a shared computer network. It contains a digital record of financial transactions.

Blockchain maintains the security of these records without the need for any third party to be involved in maintaining the data. It provides a useful network and secure transactional framework for commodity trading. 

Blockchain and Commodity Trading 

Blockchain technology is increasingly being used for more efficient and secure commodity trading. Small and major players in commodity markets and trade finance have taken to blockchain to support their trading activities. 

Blockchain-shared ledgers enable better tracking of goods for multiple parties involved. The advantage of a shared ledger is that all the parties involved can track the status of the delivery of goods or the transaction with reduced scope for misinformation and fraud.

Blockchain enables better security since the information cannot be tampered with. It also reduces the involvement of clearinghouses in transactions. By reducing the gap between the transaction and the actual settlement, blockchain can reduce risk and allow for swifter settlements. 

Blockchain smart contracts are useful for recording and executing digital agreements between buyers and sellers. 

Blockchain Technology in Use

Blockchain technology like enterprise blockchainEthereum, and Hyperledger provide secure data storage and efficiency for commodity transactions and interactions between different stakeholders. 

Enterprise Blockchain

Enterprise blockchain is a blockchain network used for enterprise-level requirements to handle organizational demands. Most enterprise blockchains are permissioned blockchains

Permissioned blockchains are blockchains under the control of specific users, such as the companies that are using them. It is useful for commodity traders to streamline their processes like international payments and tracking goods. 


Ethereum is decentralized blockchain technology - it is not under the control of a central authority. It also has a cryptocurrency of its own - Ether. It is beneficial for international trade transactions because it reduces the role of banks and intermediaries.

This enables swifter, more independent transactions and settlements. Ethereum has been used by commodity traders, corporates, and other trade finance stakeholders. 

The two key features of Ethereum are:

1. Smart Contracts 

Smart contracts are digital agreements that are programmed to be automatically carried out when their conditions are triggered. This is particularly useful for commodity trading. It reduces the scope for default by a party and thereby reduces the risk involved. 

2. Programmable 

Ethereum is programmable, which means that it can be programmed by businesses and users across the Ethereum network to suit their specific requirements.


Hyperledger is an open-source, non-profit network that allows businesses and enterprises to use its tools and code libraries to create their own distributed ledgers. 


Cryptocurrencies are digital currencies that allow you to make secure transactions without any third-party intermediaries being involved. 

Cryptocurrency uses blockchain technology to secure transaction records. Blockchain ensures greater transparency and decentralized access to the network and records, so there is no central control over the transactions.

This offers the potential to make commodity trading transactions more secure, more independent from state regulations, and less vulnerable to fraud. 

Summing Up

Whether you are involved in direct trade or trade finance, commodity trading is an important market for all stakeholders.

 From enterprise blockchains to crypto-currency, blockchain is increasingly playing an important role in trade finance. Blockchain provides a secure database for digital transactions and a reliable technology for digital agreements between trade parties.

 Whether it's tracking goods or executing contracts, the trade uses of blockchain are multifold.  

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