From Bullion to Bytes - Commodity backed tokens

Precious metals

Gold

Gold remains the most popular commodity for designing CBS. Paxos Gold or PAXG is an ERC-20 token developed by Paxos Trust Company, a financial services company specialized in blockchain. Its price is tied to the price of one fine troy ounce of physical gold in the London Good Delivery market. PAXG allows investors to invest in investment-grade physical gold without any hassle associated with physical commodities, such as storage or security costs.

Another gold-backed stablecoin is XAUt (Tether Gold token) which was developed by Tether, the company that issues USDT. Like PAXG, XAUt is also pegged to the price of one fine troy ounce of physical gold. Both Tether Gold tokens and PAXG can be redeemed to gold bullion bars subject to payment fees.

Silver

Gold is not the only precious metal upon which stablecoins are developed. SLVT, an ERC-20 token, represents the ownership of physical silver. One SLVT token is backed by 1.035732 ounces (about 29.5 grams) of investment-grade silver. When SilverTokens are transferred, investors pay transaction fees, half of which are spent to add more silver to the platform’s vaults. This increases the amount of silver each SLVT token represents which, in its turn, implies that investor’s silver holdings rise every month. So, you’ll benefit not only from silver price appreciation but also your investment will increase periodically.

Diamond

Diamond industry is a large market with $1.2 trillion (yes, trillion) value. Despite its huge size, the commodity lacks the price discovery and transparency, and has been inaccessible to retail investors. There have been several failed attempts to bring investors to this precious commodity market. Diamond Standard is one of the largest and first players in the field.

The company offers two products – Diamond Standard Bar and Diamond Standard Coin, the former having the value equivalent to the value of ten Coins. It works in the following way. When an investor purchases a Bar or a Coin, he has two options: he can request the diamond to be delivered to him, or he can hold his physical commodity with Diamond Standard’s custodian. In this case, he’ll get a digital token approving his ownership of the diamond. The token will be available for trading on forthcoming Diamond Standard Spot Market. The token and the physical commodity can be exchanged at any time upon holder’s request.

To make it more affordable to retail investors, Diamond Standard has developed Bitcarbon, an ERC-20 token representing a fraction of Bar or Coin. It is planned that initially 1 Bitcarbon will be equal to 1/10,000 of a Coin or 1/100,000 of a Bar. Though it’s expected that Bitcarbon price will be in line with that of Diamond Standard Coin or Bar, the idiosyncratic crypto market factors will likely impact its price.

Fossil fuels

Oil

Oil is one of the most traded physical commodities in the world. Moreover, its “paper” counterparts, WTI crude oil futures and Brent futures are among the commodity derivatives with the most trading volume. Ins spite of this popularity, there is no a successful cryptocurrency project backed by oil reserves. There were several attempts to tokenize physical barrels into digital assets but none of them gained traction.

One of the first oil tokenization endeavors came from Venezuela, a country with huge oil reserves. Announced by the president Nicolas Maduro in December 2017 and launched two months later, Petro coin was created to evade international sanctions imposed on the Venezuelan economy. The project failed to get popularity almost from the beginning. Being launched on the NEM blockchain which is not widely used didn’t help. Another, perhaps the most important reason for Petro’s fiasco was that it was nearly impossible to redeem the token for physical oil because Venezuelan “black gold” is not easily traded in international markets and exchanges due to sanctions. If a holder of Petro token would want to redeem his asset into physical barrels, he couldn’t do it. The project was finally shut down in January 2024 with all the holdings liquidated.

A more recent attempt to launch a oil-backed digital asset is put forward by Spydra, an asset tokenization platform. Despite its name, Oil Token Reserve is backed not only by physical oil but also by gas, oil and gas futures and “interests in oil-producing properties”.

Natural Gas

Oil is not the only fossil energy source used as an underlying commodity for asset tokenization. GCN, issued by IBAX Crypto UAB, is an asset-backed token representing natural gas, namely a particular kind of natural gas called coal bed methane (CBM). Natural gas projects tend to be capital-intensive and highly illiquid, locking up investor funds for some time period. By fractionalizing ownership IBAX aims to expand its investor base and increase liquidity in natural gas projects.

The first underlying project for the GCN token is production of natural gas by Ravetch Investments Limited through its subsidiary Discovery Investments in Zimbabwe. This is one of the largest CBM deposits in the world. IBAX has already acquired a significant ownership of this project and launched the first phase of GCN issuance. Apart from the potential appreciation in coin value, GCN holders will probably be distributed dividends on a regular basis as well.

Renewable energy and carbon credits

Uranium

Uranium is a crucial component of the global energy sector because it is used in nuclear plants to produce nuclear energy. Splitting of uranium atoms – the process known as fission – releases a huge amount of nuclear energy which then is utilized to generate electricity. This is clean energy and it decreases the dependence of the economy on fossil fuels.

If you want to support sustainable energy and get some exposure to it, then Uranium3o8 token is for you. Each $U token can be redeemed for 1 pound of certified uranium. Physical uranium market is opaque. Most trades are executed between uranium producers and end customers which are mainly utility companies and nuclear energy producers. The team behind $U token aims to create a liquid and transparent market for physical uranium exposure.

Carbon credits

That is a project with the goal to create a carbon-based currency. Users can buy its coin, KLIMA using BCT, the token of another crypto carbon project called Toucan which aims to build an infrastructure for Web3 carbon markets. KLIMA token is backed by one BCT 1:1 which, in its turn, is linked to carbon offsets from real projects.

When a BCT token is deposited into KlimaDAO treasury, more KLIMA is minted to the market. You can think of KlimaDAO as a blackhole for BCT – they lock away BCT and thus carbon offsets from the market pushing the price of carbon credits higher.

Agricultural commodities

LandX

Though there are multiple agricultural commodity futures traded actively in financial markets, it’s very difficult for lay investors to get real-world exposure to farmland. LandX is a DeFi protocol bringing agricultural commodities to retail investors. They link farmers with investors through perpetual commodity vaults.

LandX benefits farmers by providing them with capital. Once farmers commit crop share of their land, xTOKENs are minted corresponding to the crop quantity they committed. Farmers can sell their xTOKENs to investors thus getting capital to fund their business. Investors receive daily yield from xTOKENs than can be converted to USDC anytime.

Agrotoken

Another token backed by agricultural commodities is Agrotoken developed by the eponymous Argentine startup. Agrotoken is a grain tokenization platform where stablecoins (though technically they are not stablecoins about which we’ll talk later) backed by grains, such as soybean, wheat, and corn, will be traded.

Once a producer deposits his crop in an Oracle, a PoGR (Proof of Grain Reserves) certificate is minted. An Oracle in the Agrotoken ecosystem is a validator who approves grain reserves. Upon the producer’s request, the Agrotoken platform issues cryptograins with the value equivalent to crop deposited, i.e., 1 tonne grain = 1 cryptograin token. The producer gets cryptograins while the PoGR is held in custody of the Agrotoken platform.

The depositor can transfer his cryptograins to the Exchange where they can be traded. The cryptoasset can be closed at any time upon the Producer’s or Oracle’s request. Once they close or detokenize their positions by transferring their cryptograins to the platform, Agrotoken burns those tokens removing them circulation. To maintain the equivalence of cryptograins and tonnes of physical commodity, the platform return PoGR certificates which releases physical grain from pledge.

Conclusion

Commodity-backed tokens are a relatively new asset class. Unlike most digital assets, they are backed by real-world commodities and track the value of their underlying assets. Tokenization of physical commodities boost liquidity and efficiency in financial markets unlocking huge amounts invested in these commodities, such as diamond and uranium, which are mostly inaccessible to retail investors. As GCN project shows, commodity tokenization can also decrease transaction costs for producers and expand their investor base.