This is the second article on DeFi and inflation. One way to protect your portfolio against inflation is hold part of your money in commodities which tend to appreciate with inflation. In DeFi, you can invest in commodity-based stablecoins, i.e., those digital assets backed by gold, silver, diamond or other commodities. They perform well in inflationary regimes.
The previous article:
https://www.publish0x.com/real-world-assets/nuon-protocol-the-first-flatcoin-wtf-it-is-xmyqxmk
Introduction
A commodity-backed stablecoin (CBS) is a digital asset that is backed by reserves of physical commodities. These commodities can be precious metals, such as gold and silver, or oil, or other commodities. Think of these stablecoins as the same commodities represented on blockchain.
Commodity-based stablecoins are generally more volatile than their fiat-collateralized peers, such as USDT and USDC. The chart of PAXG, one of most popular CBS confirms this. However, a stablecoin can be much more liquid than the commodity to which its price is pegged to. They also make commodities, an asset class mostly not affordable to retail investors, accessible.
Another advantage of CBS is that they are more inflation-resistant. In fact, during high inflationary periods they can be expected to appreciate in value. It should also be noted CBS are much safer than algorithmic stablecoins which, at least in their current design, can fail spectacularly which was infamously proved by UST in 2022 May.
Agricultural commodities
Farmland is a stable, low-volatility asset class which tends to appreciate over time. Thus, it’s also a good hedge against inflation. Besides capital appreciation in land value, farmland also offers landowners to earn regular cash flow by renting it to farmers.
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.
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.
The whole ecosystem works as follows. 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.
It’s difficult to predict that digital assets backed by agricultural commodities will prove to be a good idea. But Agrotoken’s cryptograins tokens were already accepted as collateral by Santander Bank. Three tokens, namely SOYA, CORA, and WHEA, which are backed by physical soybean, corn, and wheat, back the loan the farmers (producers) will take out. That SOYA, WHEA, and CORA had already been listed on Matba Rofex, was a pivotal factor to convince such a large bank as Santander to cooperate with the project.
One thing should be mentioned here. Though the cryptograin tokens are referred to as stablecoins by the Agrotoken platform itself, this is not and cannot be true. Since the tokens are backed by grains, their value will move in parallel to those physical commodities. It is correct to say that one token is always equivalent to one tonne of grains, but its price will always fluctuate based on the underlying commodity’s price.
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 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 lay 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.
Precious metals
Gold remains the most popular commodity for desgining 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, which is $1,837 as of February 22, 2023. 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.
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. Thus, you’ll benefit not only from silver price appreciation but also from the fact that your investment will increase periodically.
There are CBS pegged to other precious metals, such as palladium and platinum.
The failure of several fiat-backed stablecoins will accentuate the importance of commodity-based tokens. They make the whole asset class of commodities more accessible and affordable to retail investors. Especially if inflation proves to be persistent, people will seek inflation-resistant assets on-chain which will make CBS more important. If you want to invest in investment-grade gold or silver but don’t want to storage the physical commodity, CBS are the answer. If you want to support farmers in communities where funding is hard to obtain, CBS are the answer.
