top of page

The Basics of Tokenizing Raw Materials & Commodities

Updated: May 17, 2022

Commodities trading is as old as the oldest recorded civilization and is believed to have originated in Sumer (now modern Iraq). Funnily, it all started with tokens. Sources indicate that the people of Sumer used clay tokens in exchange for goats. Clay tablets included the number of tokens to be delivered (goats), and the amount, time, and date – and remind us of today’s commodities futures contracts.

The commodities markets are now drivers of the world’s economy and estimated at over $20 Trillion annual volume. The four types of commodities are energy, metals, agriculture, and livestock. Along with these “traditional” commodities, technological advances and innovation gave birth to new, digital commodities.

Let’s understand the history and some of the basics of these new commodities.

History of raw materials

People have used raw materials since prehistoric times. In fact, materials left behind are now used by anthropologists to learn about the cultures of our ancient predecessors. Stone axes and ceramics are some of the earliest materials left from the Stone Age, followed by the introduction of metals during the Bronze and Iron Ages. The ancient societies have used and traded raw materials for thousands of years, along with the trade of agricultural products and livestock. Commodity markets, in a primitive form, are believed to have originated about 4,500 BC, and gold was first evidently used in Egypt about 3,000 years BC.

Fast forward to 1,530, the trade of materials was “formalized” when the first stock exchange, the Amsterdam Stock Exchange, opened its doors as a market for the exchange of commodities. In the centuries that followed, the development of trade, paired with an abundance of natural resources and breakthrough inventions led to the birth of the Industrial Revolution in the UK in the 18th Century. In 1864 wheat, corn, cattle, and pigs were widely traded using standard instruments on the Chicago Board of Trade (CBOT), the world's oldest futures and options exchange.

What are raw materials?

A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished products, energy, or intermediate materials that are feedstock for future finished products. [1]

Examples of raw materials are steel, oil, corn, grain, lumber, natural gas, coal, gold, and minerals. There are direct raw materials (used directly in the manufacturing process), or indirect materials.

Why are raw materials important?

Since ancient times, raw materials have been important for the production of products and weapons, and as an indication of the wealth and success of individuals, tribes, and subsequently, of entire nations. Countries with abundant natural resources have traditionally been more successful economically than countries lacking such resources.

How are raw materials traded?

Raw materials are traded on commodity exchanges. The most common way to trade commodities is to buy and sell contracts on a futures exchange. Besides trading futures, investors can buy stocks in a commodity company, or invest in mutual funds, exchange-traded funds (ETFs), or exchange-traded notes (ETNs). And of course, some may even take physical delivery of their commodity, especially when it’s precious metals like gold, silver, or diamonds.

What is tokenization of commodities?

Blockchain technology (the underlying technology of cryptocurrencies), allows for the tokenization of commodities. Simply put, this involves the digitization of real assets and the recording of such on a blockchain. The use of blockchain creates a permanent and immutable (thus secure) record, offers transparency, and easy instant trading of these assets. A token itself has no intrinsic value, but commodity tokens are a representation of the underlying asset, and as such, they derive their values from that underlying commodity.

Why do we need to tokenize a commodity?

The main reason for tokenization is to make a commodity accessible to a wider pool of investors globally. What tokenization brings is the ability to fractionalize the commodity, giving smaller investors access to something they otherwise could not invest in. For example, instead of buying a barrel of oil or a bar of gold, investors could buy a tiny fraction in one of them or invest in five different commodities, leveraging their exposure and diversifying their portfolios. The resulting effect from opening the market to wider investor pools is that greater liquidity is achieved (more people = more trades = more liquidity) and there is a better price discovery and transparency. Additional benefits stem from the super low transaction costs, as many intermediaries are removed from the trade, and the 24/7 ability to trade (digital markets don’t sleep).

[1] Wikipedia

91 views0 comments