What is encrypted goods?

Goods are encoded to represent fractional ownership of real assets through digital tokens on the blockchain, while maintaining their tangible value.

Encoded goods are the digital versions of real-world items like gold, oil, or agricultural products, recorded on the blockchain. Each Token represents a portion or the entirety of the goods, making division and trading easier. This simplifies the process of buying and selling small fractions for investors, increases liquidity, and opens up access to previously hard-to-trade markets.

Imagine you have a giant pizza that one person cannot finish alone. Instead of giving the whole pizza to one person, you cut it into many small slices. Each person can then buy and enjoy the portion that suits their needs.

Physically-backed goods work similarly when encoded. A commodity, such as gold or oil, is like the giant pizza. Instead of buying the whole (often very expensive and inconvenient), it is divided into smaller portions called Tokens. Each Token represents a small part of that commodity, making ownership and trading more convenient.

The Asset Tokenization Process

Have you ever thought about owning a small portion of a barrel of oil or a gold bar? This is where encoded goods come in - where blockchain technology meets traditional assets.

Encoded goods are converted into digital Tokens, opening up new trading channels and creating opportunities for investors to access markets more easily. Here are the steps in the tokenization process:

• Token Creation: First, Tokens representing the goods are created. One way to do this is by verifying the identity of the asset owner as a legal entity. These Tokens allow the owners to hold a portion of the value of the encoded goods.
• Smart Contract Deployment: Smart contracts execute the distribution, monitoring, and profit distribution processes of the digital Tokens. Once activated, these programs operate automatically without human intervention.
• Token Distribution and Sale: Tokens are distributed to investors through smart contracts via private sale, public sale, or a whitelist model. The whitelist model allows only pre-approved users or organizations to participate.
• Asset Management: After the Token sale, the new Token holders can participate in the management of the underlying goods. The smart contract clearly defines the control rights and how investors can use the Tokens to make decisions related to the asset.
• Secondary Market Trading: After issuance, Tokens can be traded on secondary markets, creating liquidity. Unlike traditional commodity investors who struggle to sell their assets, Token holders can more easily sell their ownership fractions.

The tokenization process not only optimizes trading but also expands the reach and increases the liquidity of commodities that were previously difficult to buy and sell.

Examples of Encoded Goods

Encoding goods is becoming increasingly common and is expected to democratize the global market. According to a Deloitte report, the global tokenization market is projected to reach a value of $4.9 billion by 2027, highlighting the growing importance of this technology in the financial sector.

Gold

As one of the most stable investment assets, gold is still seen as a safe haven, even as Bitcoin emerges as a new alternative. Tokenized gold allows you to own physical gold without the hassle of storage and security.

The tokenized gold market has grown significantly, with an estimated market capitalization of around $1 billion. PAX Gold (PAXG) and Tether Gold (XAUt) currently dominate the market share. PAXG represents one troy ounce of a London Good Delivery gold bar, making it easy for owners to hold and trade gold.

However, there are still barriers to converting these tokenized assets into physical gold, such as transaction fees and related restrictions in the redemption process.

Rare Minerals

In addition to gold, many other valuable minerals have been tokenized. Atomyze, in partnership with Rosbank, has launched a tokenized palladium product, giving investors the right to claim financial instruments equivalent to the market value of palladium supplied by Nornickel, a leading global mining company.

Additionally, Diamond Standard has introduced a digital currency backed by diamonds, with standardized value and liquidity. The diamonds are integrated into physical coins, stored in vaults, and represented by Ethereum Tokens for trading on multiple exchanges.

Energy Sector

Tokenization is laying the foundation for significant changes in the financial ecosystem of the oil and gas industry. Tokenization helps unlock untapped investment sources, increase liquidity, and simplify transactions, expanding the scalability of assets.

A prominent example is Petro (PTR) - a cryptocurrency issued by the Venezuelan government and backed by the country's oil reserves. Petro has been promoted for various purposes, from oil trading to tax payments. However, due to Venezuela's ongoing economic issues, widespread international acceptance of Petro remains challenging.

Beyond fossil fuels, Flowcarbon and Watr have partnered to bring DeFi to voluntary carbon markets, demonstrating the potential of tokenization in environmental and sustainability domains.

Agricultural Products

Agriculture has always been a pioneering field in the application of new financial tools. In fact, the futures market was born out of the need of farmers to mitigate seasonal risks. Now, tokenization has the potential to transform the agricultural industry by opening up investment opportunities in crops, livestock, and land.

Beyond just fractional ownership, tokenization can also streamline the supply chain, directly connect farmers with investors, and provide real-time market data to help investors make informed decisions.

Furthermore, tokenizing agricultural commodities can also provide security and traceability, ensuring the integrity of the invested products. A notable example is the collaboration between Gluwa and the Lagos State Government to integrate agricultural assets onto the Blockchain as Non-Fungible Tokens (NFTs), helping to drive growth in this sector.

Comparing Tokenized Commodities and Commodity-Backed Cryptocurrencies

Commodity-backed cryptocurrencies are digital assets designed to be more stable than highly volatile cryptocurrencies. This stability is achieved by linking their value to tangible commodities such as real estate, gold, or oil.

An organization or company will hold the physical commodities and issue tokens representing a specific quantity of that commodity. The token's value fluctuates based on the value of the underlying commodity.

For example, commodity-backed cryptocurrencies like Tether Gold and Pax Gold are backed by physical gold. Similarly, other cryptocurrencies may be backed by oil or other valuable assets.

Here is a comparison table highlighting the differences between tokenized commodities and commodity-backed cryptocurrencies:

Benefits of Tokenizing Commodities

Tokenizing commodities offers several benefits, such as clarifying ownership, enabling fractional ownership, simplifying transactions, and enhancing market activity.

Let's explore the advantages of tokenized gold as an example of tokenized commodities.

• Increased Liquidity: One of the key benefits of tokenized commodities is increased liquidity. By converting physical commodities like gold into digital Tokens, these assets can be easily traded on Blockchain platforms. Investors can buy and sell fractional amounts of the commodity without intermediaries, reducing transaction costs and time.
• Fractional Ownership: Fractional ownership is another significant advantage of tokenized commodities. This allows multiple investors, including those who cannot afford to purchase an entire commodity unit, to gain exposure to these assets. As a result, portfolio diversification becomes more feasible and accessible.
• Enhanced Security and Transparency: Tokenization using Blockchain technology acts as a digital ledger, recording all transactions. This immutable record ensures transparency and security, as anyone can verify the ownership of the asset.
• Convenient Trading: Traditional commodity trading methods can be complex and time-consuming. In contrast, digital Tokens enable users to trade conveniently anytime, anywhere, simplifying the investment process.

Tokenizing commodities not only optimizes transactions but also expands market access for investors and enhances the efficiency of the financial markets.

Risks of Tokenized Commodities

Despite the promising prospects, tokenized commodities face several challenges. The legal framework is not yet entirely clear, as existing regulations may not adequately cover this emerging asset class. Additionally, the underlying technology powering tokenized commodities requires thorough testing to address the complexities involved in creating and trading these Tokens.

Let's continue exploring the risks associated with gold-backed Tokens and tokenized commodities in general:

• Liquidation: Tokenization of assets will not be effective if the secondary market is not large enough to handle the trading volume. Building market depth requires trust between institutional investors using blockchain technology and traditional market participants.
• Standardization and interoperability: To seamlessly integrate tokenized commodities into the current financial system, standardization and interoperability between platforms are necessary. Compatible token standards, smart contracts, and data formats across multiple blockchains and commodity markets are essential to ensure efficient transaction settlement and asset transfer.
• Cybersecurity: Protecting the integrity of tokens, private keys, and sensitive transaction data requires robust security measures such as encryption and two-factor authentication (2FA). Continuous monitoring is crucial to prevent theft, cyber-attacks, and vulnerability exploitation.
• Regulatory challenges: Tokenized commodities must comply with regulations on securities, commodity trading, and financial markets. To ensure legal compliance, a strong governance mechanism must be established to prevent fraud, market manipulation, and regulatory violations.

These risks underscore the importance of developing a robust legal and technical infrastructure to enable the sustainable and secure development of tokenized commodities in the global financial environment.