Everyone is well aware that cryptocurrency is extremely volatile. But there’s one type of digital asset that may offer a solution to the unpredictable swings: Commodity Backed Cryptocurrency.
Volatility is at odds with one of the main goals of most cryptocurrencies, which is to become money. In order for something to be a useful currency, it must have certain qualities. One of these qualities is the stability of value.
A good currency should be relatively stable because people need to be able to save and plan for the future. If the value of your money changes 30% on a daily basis, it makes that almost impossible. One week you can buy an entire loaf of bread and the next you can only buy a slice. This is not practical or feasible.
Some people argue that cryptocurrency being outside the control of corruptible centralized banks makes it worth the price risk. However, I think that hasn’t been the case thus far, at least in most countries. And even if it was the case, it doesn’t mean we shouldn’t try to find ways to create stable currencies on the blockchain for people to use in daily life. For that, we need stable stores of value.
Representative money is a currency that represents something else of value. The U.S. dollar is one of the most often cited examples of this in recent memory as it used to be the “Gold Standard”. Back then, the dollar was pinned to the price of gold, 1.6 grams of gold to be exact. But the U.S. went on to abandon the gold standard officially in 1971.
While gold is a good example of a commodity, you can also have other things ranging from crude oil to coffee beans. Often it is some kind of raw material resource such as food or metal.
It is also sometimes referred to as commodity money, although normally, commodity money refers to money that is made out of the actual commodity, as with a gold coin. Whereas representative money is more like an IOU or a receipt of ownership which could be physical like a paper, a coin, or a digital token on a blockchain.
How representative money evolved
Representative money evolved from commodities because it allows you to move larger amounts of value without needing to carry around large amounts of metal, food material, or animals. This opened up a lot of new opportunities for trade. The roots of many English words that relate to money come from commodities.
Fee comes from a German word for cattle.
Salary is from the Latin word salarium, which means salt. Roman soldiers received payment in salt as part of their wages.
Representative and commodity money have been around much longer than “fiat” money as there is intrinsic value to people with most commodities. You can eat rice and salt for example. Due to the Lindy effect, it is likely that those commodities will continue to be a medium of exchange longer than fiat currencies will. But we’re no doubt preaching to the choir because many crypto enthusiasts are against fiat anyway.
Although cryptocurrency may mitigate some risks of modern currencies, it doesn’t mitigate all of them. This is partly why it hasn’t been adopted by the masses.
Why commodities as money is good for crypto
Commodity money could help the cryptocurrency economy by allowing more options for traders and investors. These commodity backed tokens can act as a stablecoin to weather out times of volatility and help keep that money and value on the blockchain rather than flowing back into traditional bank accounts.
Additionally, if cryptocurrency or blockchain-based payments become commonplace (along with payment interoperability), then it will allow for mass adoption of cryptocurrencies, for the first time in hundreds of years, of a traditional form of money.
Instead of dollars, you could have coffee-backed tokens. You might want to have coffee in your portfolio if you think that soft commodities will increase in value. Perhaps if you are hedging your bets against climate change this might be an idea that you like. If you are right, the exchange value of the commodity will increase in value and will offset the future purchase price of coffee for you.
The coffee tokens are fungible enough so that you can then go spend it the next time you buy something, like a cup of coffee. Coffee, as it turns out, is less volatile than Bitcoin.
If you diversify with several commodities, you may have a portfolio that is roughly less than the volatility of most fiat currencies. But with all the fungibility and none of the risks associated with fiat currency. This can help solve the problem of cryptocurrency volatility as it could be years or even decades before cryptos like Bitcoin have low enough volatility to be a feasible replacement as the new global reserve currency.
Commodity Backed Tokens
Commodity-backed cryptocurrencies or tokens could be an important part of the crypto-economy for people wanting to seek more stability in a time when many are becoming worried about another global recession. Because of their intrinsic value, they can be a good store of value, after all, people will always need to eat.
Some critics of commodity-backed blockchain tokens say that they are just as bad as fiat currencies. They still rely on centralized institutions to actually store the commodity in a physical facility. This still has some risks as there is potential for theft or accidental damage of the commodity.
Using DAOs to regulate and operate these token issuing companies may help them mitigate the risks. And as the market becomes more saturated, it will favor the most trustworthy projects. There are already gold- and silver-backed tokens actively traded on the market.
Digix Gold Token
DigixDAO is an organization based out of Singapore that is one of the oldest commodity-backed token issuers in the cryptocurrency space. They have a two-token structure with both of them built off the Ethereum blockchain. The first is the DigixDAO token (DGD), which is for voting on proposals and development of their platform. The second token (DGX) represents 1 physical gram of gold held in storage. This allows users to get exposure to a commodity without having to physically own it.
The smart contract for the DGX token includes two fees: 0.13% per transaction and 0.60% per annum. These fees help to keep the physical gold reserves and other aspects of the platform secure. After all, there are still some overhead costs with security and maintenance.
Power ledger is a project that focuses on building blockchain-based infrastructure and markets for renewable energy. They also have a multi-token scheme. The POWR token is for interacting with the platform and its various smart contracts. It has a secondary token called, Sparkz. These tokens correspond to the price of energy in local fiat currency and are tradeable on peer-to-peer markets. If you generate excess electricity, you can use Sparkz to sell it to your neighbors who might need it.
It is still early days for commodity-backed tokens. Digix has been tossing around the idea of adding other precious metals to their platform, such as silver. And there are a handful of other projects that are also commodity-backed, but most of them are for silver or gold.
Eventually, most commodities will probably be trade-able as blockchain tokens. We can say this with some confidence since there are several firms that are running experiments and pilot projects. Transoil International and Solaris Commodities are two such companies.
In the near future, regular people will have easy access to commodity markets via blockchain technology. This will give people even more options in the world of crypto trading. Surely it has the potential to complement the crypto economy and the economy at large. It may even foster adoption of the technology as people seek stable and reliable assets.