Introduction
Over the years, blockchain technology has seen a great number of applications across dozens of different industries. First considered as a means to buy bitcoin, blockchain has since immensely evolved, mainly due to the implementation of smart contracts.
And while blockchain can be used in various industries such as healthcare, insurance, or supply chain, it’s the finance industry that has been disrupted the most by this innovative technology.
With that said, commodities play a considerable role in the financial world. The global economy directly depends on natural resources such as oil, grains, gold, or meat. The prices of commodities are an important factor to observe at all times because all of the other markets ultimately depend on them.
So, how can blockchain help to improve the commodities market and make it more efficient? In this article, we will try to answer this question, by explaining one important feature of blockchain – tokenization. We will lay out the benefits of tokenizing natural resources and explain how they can eventually help the economy on a global level.
First, let’s quickly go over the basics of tokenization for those less familiar with the concept.
What is Tokenization?
Blockchain technology has enabled us to tokenize and digitize any real-world asset. Thanks to smart contracts and the metadata they contain, we can create a digital representation of anything of value.
For instance, we can create digital oil barrels, digital gold bars, or digital sacks of wheat- the possibilities are endless. Each of these tokens does not have any intrinsic value but represents something that is valued on the market by simple supply and demand.
Furthermore, each of these tokens contains unique data to the commodity that it is linked to. Once digitized, blockchain technology allows us to use this data to freely exchange them on the market, either for other commodities, fiat currencies, or cryptocurrencies.
And finally, worth noting is that all of this data is decentralized and immutable, making it extremely difficult to counterfeit.
Benefits of Tokenization of Natural Resources and Commodities On the Blockchain
But should we tokenize natural resources and commodities? What are the direct benefits of tokenizing natural resources? Let’s find out.
Traceability
We mentioned earlier that each digital representation of a commodity is represented by its unique metadata on the blockchain.
This allows us to track commodities from the beginning to the end of their life cycle. For instance, let’s take a kilogram of coffee. The immutable digital ledger on which the blockchain is based allows us to track this bag of coffee grains from the farm, up until the end consumer, with every logistic step in between.
The benefit here is twofold. First, it allows us to eliminate fraud, as every part of the coffee’s journey is recorded. Second, we can improve the efficiency of the entire process, eliminate waste and improve environmental actions such as recycling and sustainability.
While this can be applied to almost any natural resource, a great example of this is the tokenization of timber to fight unsustainable deforestation.
More efficient and inclusive market
Thanks to the permissionless and borderless nature of the blockchain, tokenized commodities can be traded by anyone and anywhere in the world. Furthermore, due to the automation smart contracts bring into the picture, transactions and payments become cheaper and faster.
Additionally, the commodity market is riddled with intermediaries that render the whole process inefficient and needlessly expensive. Tokenization eliminates the need for third parties, ensuring fair pay for the farmer and the producers of the commodity.
Finally, similar to cryptocurrency markets where the price of bitcoin fluctuates 24/7, commodities will become available for trade around the clock, opening new trading opportunities.
Increased liquidity
Blockchain tokens can be easily broken into smaller denominations. This allows for fractional ownership of expensive commodities. For instance, several investors can buy fractions of a gold bar digital token. This way, smaller investors can participate in the global economy, increasing the market’s liquidity.
And by allowing more people to trade with natural resources, the liquidity of the market will eventually increase. With more participants in the market, the price spread tightens, offering a fairer price for everyone.
With this decreased volatility, more investors will be interested to participate, as they will deem their investments as safe-havens, completing the market growth circle.
Conclusion
While blockchain tokenization of natural resources is still in a nascent phase, the benefits are undeniable. Investment firms like JP Morgan are betting on this trend, and there are already several applications of such derivatives in the DeFi ecosystem.
All in all, tokenizing natural resources will offer a more inclusive, efficient market, ridden of fraud and expensive intermediaries. The transparency and traceability of commodities will help humanity address sustainability and reduce waste and pollution in the long term.
