The commodity market is very exclusive, mostly accessible to institutions and high net-worth individuals due to its complexity regarding financial structures, custody and access.
Now, consider a world where anyone can access these assets and achieve the same returns as institutional players. Thanks to the tokenization of real-world assets (RWA), this is becoming a reality. The nominal value in the Commodities market worldwide is forecasted to reach US$139 trillion in 2028, according to Statista Market Insights. This presents a significant opportunity to bring these assets into the blockchain and broaden market access.
Source: Statista Market Insights
Here’s a summary of what we’ll be exploring in this article:
- Why commodity tokenization matters
- Addressing double-spending in commodities
- Opportunities for tokenized commodities
- The rising demand for tokenized gold
Why commodity tokenization matters
While revolutionary, the blockchain is often criticized as a “solution in search of a problem”, this argument falls short when applied to commodities.
Accessing the commodities market as a retail investor can be complex. By bringing energy resources, agricultural products, precious metals, and other tangible assets to the blockchain, we can lower barriers to entry through fractionalization. For example, we can tokenize $1 million worth of gold bars into 1 million tokens, allowing investors to trade smaller units, opening the asset class up to more financial market participants and fostering greater liquidity.
Additionally, tokenization could prevent double spending, which has been known to shake commodities markets in the past. The Qingdao scandal of 2014 highlighted vulnerabilities in the commodities market that blockchain technology and tokenization could have prevented. Let’s dive into this further in the next section.
Addressing double-spending in commodities
Double-spending is when the same physical commodity — barrels of oil or sheets of copper — is borrowed against several times over to secure credit from multiple providers. A notable example of this issue was the Qingdao scandal.
The Qingdao scandal involved Dezheng Resources issuing fake warehouse receipts for metals such as aluminum and copper. These fake receipts, used as collateral for financing from various tier one banks and financial institutions, allowed Dezheng to secure billions in funding.
If there was a default on the loan, who would get the metal? Following this event, there was a tightening of credit in metal transactions, improvements in warehouse receipt security, and legal disputes to recover losses.
The scandal reflects the “double-spending” challenge that blockchain technology sought to mitigate upon its inception — create an immutable database where value can be moved around and ownership recorded in a transparent way. The same token can not be used in multiple lending and borrowing protocols, which removes the risk of double spending.
However, tokenization has its own set of problems. The attestation process needs to be watertight so that token holders trust their tokens pertain to the physical commodity that is supposed to be backing them.
Opportunities for tokenized commodities
As highlighted earlier, there are trillions of dollars in the commodities market. But how can people actually benefit from asset tokenization?
Here are three examples:
- DeFi integration
An aspect that is really exciting is the integration of RWAs with DeFi platforms. Picture a scenario where you have a tokenized version of oil that can be used as collateral on a lending platform to secure a loan for purchasing other crypto assets during a bull market…
This essentially allows you to activate your assets by lending and borrowing against them, freeing up capital for other opportunities.
It opens up new ways to diversify and explore alternative and complex investment strategies on-chain.
- Diversification in on-chain portfolios.
Diversification is crucial when managing on-chain portfolios. Often, crypto projects face challenges in allocating their treasuries due to limited options beyond volatile crypto assets or non-yield-bearing stablecoins.
Tokenizing commodities offers a solution, enabling them to diversify their reserves across various and uncorrelated asset types. This strategy allows projects to capitalize on different markets while maintaining a balanced portfolio.
- Commodity-backed stablecoins
Another example could be the use of tokenized commodities to back overcollateralized stablecoins.
MakerDAO is a prime example, having integrated US Treasury bonds into the collateralization of DAI, alongside stablecoins like USDC and crypto assets like ETH. Incorporating tokenized commodities would provide another avenue for further diversification, including precious metals, energy resources, and agricultural products.
These commodities represent an uncorrelated asset class compared to traditional crypto assets or bonds, providing additional stability and resilience.
Source: Daistats as of May 9th, 2024
The demand for tokenized gold
In times of political tension, gold is a safe-haven asset in high demand among investors looking to protect their portfolios. Making gold easily accessible through the blockchain expands global accessibility, particularly benefiting individuals in developing nations facing high inflation and political instability.
There are gold products currently available on public blockchain platforms; however, the predominant offerings are not fully decentralized, as the involved parties possess the authority to alter the asset backing at their discretion. Additionally, these products face limitations regarding physical redeemability.
Despite owning a tokenized version, individuals are unable to redeem an actual gold bar to their address. Thus, there exists an ongoing necessity for a more transparent and flexible tokenized gold product.
Source: Goldprice.org
Closing Thoughts
While the concept of blockchain tokenization may seem abstract at first, it has concrete applications such as preventing incidents like the Qingdao Scandal and fostering a more inclusive and efficient commodities trading ecosystem.
Swarm is building the connection between traditional financial assets and the blockchain. Currently, users can already access tokenized stocks and bond ETFs on-chain.
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