Tokenization Taxonomy: ESG — Part 2: Agriculture

Published in

RWA World

12 min readNov 17, 2023

This article is the second in a series on ESG asset tokenization — you can find the first installment on ESG assets here.

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Agriculture involves cultivating land, raising crops, and feeding, breeding, and raising livestock. As one of the oldest human activities, agriculture is essential for food production and maintaining the global ecosystem.

Types of Agriculture

There are five distinct types of agricultural methodologies:

Subsistence: This type involves small-scale farming primarily for consumption by the farmer and their family.
Commercial: In contrast, this type involves large-scale farming aimed at mass production of crops and livestock for sale.
Sustainable: This approach focuses on producing food while maintaining the environment’s health.
Industrial: Characterized by a high level of inputs like fertilizers and labor to maximize output.
Organic: Emphasizes using natural substances and processes to maintain soil fertility and control pests.

Market Size and Growth

The global agricultural market is a multi-trillion-dollar industry. As of 2023, it is valued at approximately $8 trillion, accounting for about 10% of global GDP. While the sector is projected to grow around 2–3% annually in developed economies like the United States, global growth rates are even higher at 5.66%.

Technological innovations continue to be the primary driver in yield increases across agricultural sectors, with over 80% of yields derived from machine operations. This trend is poised to continue, with smart farming boasting a significantly higher growth rate of over 13%. Managing how these new technologies interface with existing systems is increasingly important to agricultural sector profit margins.

An outstanding 13% of global food perishing within the supply chain, highlighting the need for increased investment into the comparatively small agricultural supply chain management sector. Valued at $0.78 billion in 2021 and projected to reach $2.1 billion in 2031, this industry subsector may improve global financial yields by making the most of existing agricultural ones.

The Role of Agriculture in Combating Climate Change

Agriculture plays a complicated role in climate change. Traditional farming practices contribute to greenhouse gas emissions through livestock methane emissions, deforestation for cropland, and fossil-fuel-based fertilizers. However, innovative agricultural practices have the potential to mitigate climate change while still feeding humanity. These practices include improved soil management, agroforestry, and cover crops. The shift towards sustainable and regenerative agricultural practices is vital in reducing the sector’s carbon footprint and enhancing its role as a solution to climate change challenges.

Tokenization of Assets

The Concept of Tokenization

Tokenization is the process of converting rights to an asset into a digital token, often on a blockchain. These tokens can represent partial ownership of tangible assets, access rights, or specific values. They can be traded like electronic securities, with blockchain ensuring immutability, transparency, ledger homogeneity, and facilitating transactions without intermediaries.

Benefits of Tokenizing Assets

Tokenization offers several benefits depending on the asset, including but not limited to the following:

Increased liquidity of traditionally illiquid assets
Immutability showing a censorship-resistant record of account
Enhanced transparency through blockchain’s immutable record-keeping
Broader access allowing more people to invest in qualified assets

Tokenization can simplify the process of buying, selling, and trading assets, reducing the need for intermediaries and lowering transaction costs.

The Process of Asset Tokenization

Asset tokenization involves a handful of essential steps, all of which must be undertaken in the context of regulatory compliance with relevant jurisdictions:

Asset Selection: Choose tangible or intangible assets suitable for tokenization, such as collectibles, real estate, bonds, or securities.
Market Research: Conduct comprehensive research to assess demand, competition, and pricing strategies.
Jurisdiction and Compliance Framework: Select the appropriate legal jurisdiction and establish a regulatory-compliant framework for tokenization.
Legal and Financial Structuring: Set up legal entities like funds and SPVs, define the ownership structure, and evaluate the assets.
Product Strategy and Roadmap Development: Create a detailed product strategy, including financial models, user and money flow designs, and a development roadmap.
Technical Infrastructure: Design the technical architecture, choose blockchain and token standards, and develop smart contracts and connectivity solutions.
Documentation and Regulatory Filings: Prepare prospectuses, terms and conditions, risk disclosures, and complete KYC/AML documentation.
Security and Quality Assurance: Perform security audits, establish monitoring systems, and ensure the platform’s integrity through quality assurance.
Launch Preparation and Marketing: Develop marketing strategies, community-building efforts, and prepare customer support and documentation for launch.
Secondary Market Integration and Scaling: Initiate secondary market trading platforms, implement growth strategies, and provide ongoing support and enhancements.

These tokens can then be issued to investors, representing their ownership stake in the asset.

Blockchain Technology and Its Role in Tokenization

Blockchain is often integral to contemporary tokenization initiatives. As a decentralized ledger, it records every transaction and token that moves through the system, ensuring definitive asset ownership and secure and efficient asset transfers. It also facilitates asset interoperability, reducing database redundancies and improving the cost of capital.

Smart contracts, programmable sets of rules within a blockchain, can automate many aspects of the issuance and trading processes. They can also enforce rules and compliance automatically without the need for intermediaries. Smart contracts work seamlessly with blockchain to enhance asset management practices and user experiences.

Tokenization and Agriculture

Tokenization in agriculture refers to converting rights or ownership of agricultural assets into digital tokens. This innovative approach leverages blockchain technology’s decentralized, secure, and transparent nature to enhance various aspects of agricultural financing, management, and investment.

Types of Tokenized Agricultural Assets

The following is a non-exhaustive list of tokenized agricultural asset types:

Land Ownership Tokens: These tokens represent fractional ownership or rights over agricultural land. They allow investors to purchase small portions of agricultural property, enabling them to participate in the land’s revenue or value appreciation without significant capital outlay.
Crop Yield Tokens: Investors buy tokens linked to the future yield of crops. This method provides farmers with upfront capital for cultivation, while investors receive a portion of the profits from the crop sales.
Livestock Tokens: Similar to crop yield tokens, these represent a stake in livestock, where the token’s value is tied to the livestock’s future yield or sale price.
Agricultural Equipment Tokens: This tokenization offers shares in agricultural equipment. Token holders can earn some of the revenue from the equipment’s use or lease.

While non-exhaustive, the types of tokenized agricultural assets listed currently comprise the majority of sector offerings.

Advantages of Tokenized Agriculture

Tokenization in agriculture increases accessibility and diversification, allowing small-scale investors to engage in agricultural ventures. This approach promotes inclusivity and offers improved risk distribution across different types of assets.

Enhanced liquidity is another significant advantage, making agricultural assets more attractive to investors by facilitating easier entry and exit strategies. Additionally, tokenization streamlines the flow of capital to farmers and agricultural enterprises, offering an efficient alternative to traditional financing routes. These forces work together in a positive feedback loop enabled via tokenization.

The transparency and traceability provided by blockchain technology ensure clear tracking of asset ownership and transactions, which fosters trust among investors and stakeholders in the agricultural sector. This transparency further benefits agricultural assets that decide to utilize tokenization.

Challenges and Limitations of Tokenized Agriculture

Despite its benefits, tokenization in agriculture introduces several unique challenges. The regulatory landscape for tokenized assets is complex and still in development, presenting a specifically difficult challenge to cross-jurisdictional legalities.

Market adoption of tokenized agricultural products requires a paradigm shift from traditional practices, which can be a slow, asymmetrical process. While interface improvements have begun to solve this issue, the heavy reliance on blockchain technology can be an additional barrier to tokenization.

Finally, managing the risks associated with digital asset volatility and the unpredictable nature of agricultural production, like weather dependency, is crucial for protecting investors and stakeholders. This necessitates the development of robust risk management strategies to mitigate the interrelations between endogenous blockchain data and exogenous real-world assets.

Agriculture Tokenization: Case Studies in Social Good and Investment

Tokenized agriculture is a natural evolution in the tech-forward agricultural industry. This section will outline the two overarching themes within the tokenized agricultural market — social good and yield refinement. Note that the “yield” in “yield refinement” relates to economic yield improvements, agricultural improvements, or both. We’ll examine case studies and real-world examples of companies using tokenization to drive these initiatives forward, highlighting their unique approaches, challenges, and opportunities.

Investment Platforms

Investment in agriculture predates human writing. Tokenization is the latest chapter in this ever-evolving journey that strongly defines humanity. These platforms focus on facilitating investment in various tokenized agricultural assets, offering a way to experience cutting-edge access to one of the oldest sectors.

Arbol

Overview: Arbol is transforming climate risk management, empowering organizations and individuals to achieve financial climate resilience and focus on building for the future. Using data from dClimate, Arbol offers a unique approach to actively managing climate risks, providing robust and data-driven solutions.

Tokenization Approach: Arbol uses Ethereum for the internal tokenization of climate data. This approach allows Arbol to provide efficient and transparent coverage processes, driving its next-generation climate risk solutions.

Key Achievements: Arbol stands out for its rapid contract payouts and efficient risk management, significantly outpacing industry standards. Its unique partnership with Chainlink integrates real-world weather data into blockchain solutions, enabling innovative, on-chain insurance and derivatives. With over $500M in dedicated risk capacity, Arbol can offer tailored solutions that other companies might not venture into, showcasing its market leadership and innovation.

Unique Selling Points: Arbol’s unique selling proposition lies in its data-driven approach, using industry-leading climate data and models for underwriting parametric coverage products. Its proprietary AI underwriter analyzes thousands of variables, offering optimal pricing swiftly.

Challenges Faced: Arbol navigates the complex landscape of combining cutting-edge blockchain technology with traditional climate risk management. While this innovative approach positions Arbol at the forefront of the industry, it also presents challenges in mainstream adoption, as the integration of advanced tech like smart contracts and AI might seem daunting to some clients.

Bru Finance

Overview: Brú Finance offers fractional bonds backed by commodities, creating a robust financial ecosystem that benefits commodity supply chain participants like farmers, traders, and processors.

Tokenization Approach: The platform tokenizes commodities via a proprietary custodian node, ensuring the verifiable tokenization of pledged commodities stored in third-party asset custodian warehouses. These tokenized assets are then transformed into unique, transparent, and decentralized NFTs, locked into smart contracts for lending purposes.

Key Achievements: Brú Finance’s fractional bonds mechanism has a 6-month tenure and ensures the security of their investments via highly liquid collaterals. The proceeds from these bonds are utilized to provide short-term, duration-matched loans to key players in the commodity supply chain.

Unique Selling Points: The platform’s integrated approach — connecting borrowers, custodians, asset tokenization, and lending — merges DeFi with traditional finance. This combination is Brú Finance’s core USP and offers a high level of efficiency and security.

Challenges Faced: r Bru.Finance faces the challenge of navigating the complex landscape of regulatory compliance across various global jurisdictions. This entails striking a balance between blockchain’s inherently decentralized nature and traditional finance’s stringent regulatory demands.

AgriFi

Overview: Agrifi is leveraging decentralized finance (DeFi) to create greater opportunities for emerging market agricultural finance. Focusing on countries like Uganda, Nigeria, and South Africa, Agrifi aims to transform how farmers access markets and maintain sovereignty. By digitizing processes for transparency, Agrifi ensures more fair and inclusive agricultural markets.

Tokenization Approach: Agrifi uses the ToroNet blockchain ecosystem to address real-world challenges at scale. The platform uses tokenization and zero-knowledge-proof KYC technologies, enabling farmers to create digital, verifiable business profiles.

Key Achievements: Agrifi has experienced initial success in connecting smallholding farmers, often overlooked by traditional financial systems, with global capital. The platform is live on mainnet and uses advanced monitoring technologies like satellite imagery to ensure quality and yield, enhancing investment security.

Unique Selling Points: Agrifi pre-matches crop buyers, significantly reducing farmers’ market risks. The platform’s first loss credit guarantee, backed by USAID and its DFC partner, offers substantial risk mitigation for investors. Additionally, Agrifi’s continuous farm monitoring and comprehensive KYC and loan guarantee protections are pivotal in bridging the gap between decentralized finance and impactful real-world applications.

Challenges Faced: While Agrifi is a regional market leader in agro-financing innovations, its reliance on advanced technologies and DeFi might pose adoption challenges among traditional farmers and investors. The complexity of blockchain technology and smart contracts could be daunting for unfamiliar users, potentially limiting the platform’s reach.

EthicHub

Overview: EthicHub is a distributed lending platform connecting unbanked smallholder farmers with global lenders. It facilitates low-cost, collateral-free loans for farmers, primarily in developing regions. The platform democratizes access to credit and improves livelihoods by fostering a global, community-focused lending ecosystem.

Tokenization Approach: EthicHub uses tokenization to represent lending transactions. This approach enables the creation of digital loan agreements, offering transparency and security. The platform’s tokens represent either a share in a loan or direct lending agreements, making it easier for global investors to engage in micro-lending.

Key Achievements: EthicHub has successfully bridged the gap between international lenders and local borrowers. By focusing on unbanked agricultural communities, the platform has significantly improved borrowers’ access to capital while offering lenders attractive returns, fostering significant social good.

Unique Selling Points: EthicHub stands out for its focus on ethical lending and creating a positive social impact. Its model allows smallholder farmers to access affordable credit, often neglected by traditional banking systems. EthicHub offers lenders a tangible way to contribute to global development and potential financial returns.

Challenges Faced: EthicHub’s main challenge lies in balancing the risk management inherent in lending to unbanked populations and offering attractive returns to lenders. Additionally, educating borrowers and lenders about the platform’s technology and approach is crucial to expanding its user base and maintaining its community-driven ethos.

Tokenization Platforms

Tokenization can potentially revolutionize agriculture to the same degree as mechanization — perhaps even more. The environments in which these initiatives experiment and succeed with tokenization are crucial for laying the groundwork. The following platforms leverage tokenization in the agricultural sector, finding new ways to conceptualize one of humanity’s oldest activities.

Agrotoken

Overview: Agrotoken is a digital platform for tokenizing agricultural products like soy, corn, and wheat. It bridges traditional agricultural markets and the digital economy, enabling farmers and traders to leverage their produce as digital assets for trading and financing.

Tokenization Approach: Each Agrotoken represents a specific quantity and quality of an agricultural product, stored in verified warehouses. This approach ensures traceability and reliability of the underlying assets. The tokens are traded on Agrotoken’s platform, providing a novel way for commodity exchange and financing.

Key Achievements: Agrotoken has successfully integrated agricultural commodities into the digital asset space, creating a new market for farmers and investors. Its reliable framework for tokenizing tangible assets ensures their real-world value is accurately represented and preserved digitally. The platform has enhanced liquidity for tokenized agricultural products and provided new financing avenues for producers.

Unique Selling Points: Agrotoken can provide real-time liquidity to farmers by converting their produce into digital tokens. This mechanism allows farmers to unlock the value of their assets without having to sell them immediately. The platform’s robust and transparent verification process for tokenized commodities instills confidence among traders and investors.

Challenges Faced: Agrotoken faces challenges bridging the two worlds of physical agriculture and digital product management. This process requires extensive education and trust-building among conventional farmers and agricultural traders to embrace this new digital paradigm. Additionally, regulatory uncertainty in the digital asset space poses a significant challenge.

LandX

Overview: LandX uses tokenized perpetual vaults to offer users exposure to farmland commodities such as wheat, corn, soybeans, and rice. They aim to bridge the gap between farmers needing capital and crypto investors seeking diversified, inflation-hedged investments.

Tokenization Approach: Real-world farmers provide a portion of their crop yield in exchange for capital, represented by xTokens. These tokens, specific to each crop type like xWHEAT, xCORN, xSOY, and xRICE, grant investors daily yields in USDC.

Key Achievements: LandX has successfully brought agricultural commodities on chain for general investment purposes. LandX has pioneered a novel way to gain exposure to commodities by establishing a direct link between farm yields and blockchain assets.

Unique Selling Points: LandX benefits investors and aids farmers by providing much-needed capital using flexible DeFi infrastructure. Its governance token, LNDX, further involves users in decision-making, creating a community-driven approach to agricultural investment.

Challenges Faced: The primary challenge for LandX is bridging the knowledge gap between traditional farming and the complexities of blockchain investments. Establishing trust and operational synergy between DeFi investors and real-world farmers also presents ongoing logistical and educational challenges.