Cryptocurrency prices have been soaring in 2021, with bitcoin leading the way and reaching a new all-time high of $40.000. This has driven retail investors to buy bitcoin with credit card, among other means of payment.
Thanks to this price surge, the technology responsible for their creation has gained immensely in popularity. An important аpplication of blockchain technology is the digitalization or tokenization of commodities.
Recently, the Russian palladium mining and smelting company Norilsk issued commodity-based tokens to its partners. These were later listed by the Deutsche Börse.
In this article, we explore some of the basics of blockchain and tokenization and its advantages for investors. We analyze how the interests of finance and the commodity industry can overlap and complete each other.
What is blockchain?
Blockchain is the technology behind the first cryptocurrency, bitcoin. It is an immutable, distributed ledger that keeps a record of all the transactions that take place on its network.
These transactions are organized in blocks and then chained together through the means of cryptography. Millions of computers keep an exact copy of the ledger, rendering the database entirely resistant to modifications.
Furthermore, the blockchain is decentralized and permissionless, meaning that no single entity has control over it. A consensus of all the participants is needed before major modifications of the database are allowed.
What are smart contracts?
Smart contracts were a natural evolution of the blockchain. They are computerized contracts stored on the blockchain which self-execute only when certain conditions are met. These decentralized applications allow blockchains to allow the transfer of anything of value, not just monetary transactions.
For instance, with the help of smart contracts, users can exchange different valuable assets on the blockchain, such as insurance premiums, real estate deeds, leases, medical records, digitalized art, and many more.
Using protocols such as the popular ERC-20, smart contracts allow us to tokenize anything of value and exchange its digital representation between peers. All this by conserving the all the decentralization and transparency benefits from of blockchain technology.
What are the advantages of tokenization?
Tokenizing assets and making them accessible through blockchain technology has a wide variety of benefits:
- Avoidance of third parties – thanks to its decentralization blockchain assets can be exchanged directly between peers. Furthermore, smart contracts allow for more autonomous exchanges, without relying on flawed human interaction.
- Decreased fraud – thanks to the transparency of the blockchain, counterfeiting tokens becomes impossible, and veracity is easily verifiable.
- Increased liquidity – by tokenizing illiquid assets such as heavy-duty commodities or real estate, they can be rendered highly liquid.
- Better transparency and traceability – thanks to the immutability of the blockchain, all data recorded on it is final. This allows for end-to-end traceability for all the tokens registered on the network.
These advantages have pushed companies like Norilsk to tokenize commodities and present them under the form of ETCs.
What is the Norilsk Nickel token?
Norilsk Nickel is a Russian mining and smelting company and is considered the world’s largest producer of palladium and high-grade nickel.
In early 2020, the company launched a testing platform for tokenizing commodities on Atomyze, a Hyperledger-based blockchain platform. The tokens on the platform are backed by various metals mined by the company such as palladium, cobalt, and copper.
Norilsk expects to tokenize at least 10% of its trading volume during the 1st year of the platform’s release. This number might grow to 20%, depending on demand from partners.
Finally, in December 2020, the first tokens on the platform were released to industrial partners Traxys SA and Umicore SA.
The main reason stated by the company for this move is that they wish to deliver Nornickel’s products to customers in a more efficient and transparent way. It’s another step for the company to allow for responsible sourcing and traceability for its metals.
Atomyze tokenizes assets by using Distributed Ledger Technology (DLT) with the goal to:
- Provide accessibility
- Reduce costs
- Increase transparency
According to Atomyze, the network runs on IBM’s public cloud and complies with the EU GDPR.
As of January 2021, and according to a press release from Nornickel, the digital exchange tokens have finally appeared on the public Deutsche Börse exchange. The company confirmed that this was only the first step of their ETC listing and that they plan to list the digital tokens on the London Stock Exchange in the following months.
Blockchain is only beginning to take on in the industrial world. The applications of this revolutionary technology are countless – tokenization, to supply chain, pharmacy, agriculture – smart contracts increase the efficiency of a wide variety of industries.
If the Norilsk project is successful, we are bound to see more of these crossovers between the financial world and the commodity industry.