Smart Contract Price Basis Optionality in Commodity Settlement
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Solution Overview
Problem
Current systems lack the ability to effectively create and manage optionality in commodity contract pricing, particularly in futures contracts, where price determination is often fixed or not dynamically adjustable, limiting flexibility and risk management for both sellers and counterparties.
Innovation Solution
A computer method and graphical user interface (GUI) that utilizes smart contracts on a distributed ledger to establish commodity contracts with variable prices, allowing for future determination of the price basis, enabling sellers and counterparties to agree on deposits, transfers, and settle contracts based on selected price bases, which can be automatically determined or chosen by either party.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If a fixed price determination system is used in commodity contracts, then contract simplicity is maintained, but flexibility and risk management capability deteriorate
Solution Approach 1:
The patent implements dynamic pricing mechanisms where the price basis can change based on predefined conditions and selections made by contract parties. The smart contract allows the price determination method to transition from static to dynamic, enabling adaptation to different market scenarios while maintaining contractual framework integrity.
Solution Approach 2:
The system enables parameter changes in price determination by allowing parties to select from multiple price basis options (e.g., different exchange benchmarks, time periods, or calculation methods). This parameter flexibility is embedded in the smart contract, which can adjust pricing parameters based on agreed-upon criteria without requiring contract restructuring.
2Reliability
If optionality in price basis is added to commodity contracts, then risk management capability is improved, but contract complexity increases
Solution Approach 1:
The patent segments the price determination process into distinct, modular components that can be independently selected and configured. The smart contract is divided into separate functional modules for price basis selection, deposit management, and settlement calculations, allowing complex risk management capabilities to be built from simpler, standardized building blocks.
Solution Approach 2:
The smart contract acts as an intermediary layer that manages the complexity of optional price basis selections. It automatically handles the coordination between multiple price determination methods, deposit allocations, and settlement processes, shielding parties from the underlying complexity while providing robust risk management functionality.
3Adaptability or versatility
If future price basis determination is allowed, then adaptability to market conditions is improved, but uncertainty in pricing increases
Solution Approach 1:
The patent applies preliminary action by establishing predefined rules, criteria, and selection mechanisms for future price basis determination at the time of contract formation. Parties agree in advance on the available options and selection processes, reducing future uncertainty while maintaining adaptability to actual market conditions when the price is ultimately determined.
Solution Approach 2:
The system incorporates feedback mechanisms where price basis selections and market conditions are continuously monitored and evaluated. The smart contract provides transparency into the pricing process and allows parties to see how selections are made based on agreed-upon criteria, maintaining pricing certainty through visible, rule-based decision-making rather than arbitrary future determinations.
Data Source
AI summary
A computer method for creating optionality of price basis in a commodity contract includes establishing a smart contract for a transfer of a commodity using a distributed ledger and graphical user interface (GUI). The smart contract includes a variable price with a provision for a future determination of a price basis. The computer method includes receiving agreement on the smart contract between a seller and a counterparty, receiving a deposit on a total price from the counterparty, transferring at least a portion of the deposit to the seller, and transferring a token representing the smart contract to the counterparty. The computer method includes, at a future date, receiving a selection of the price basis for the smart contract from one of the counterparty or the seller, and notifying the other of the seller or the counterparty of the selected price basis and a resultant settlement price.