Where Crypto Holders and Loan Borrowers Can Meet
When consumers buy the latest version of iPhone every given year, no one seems to mind that the present iPhone is almost a copy of a previous one with a few exceptions. The same applies to Sony, Google Pixel, Samsung and all the other brands that together constitute a smartphone market.
Each next BMW model inherits 90% of both design and characteristics of a prior model. The same applies to Renault, Mercedes, Toyota, and even Tesla, that together constitute a car market.
Whatever serial product on the market is observed, a definite sectoral oversupply in terms of products’ similarity takes place. We call it a competition. None of us tries to blame Apple and BMW for multiplication of similar models year after year without offering something hitherto unprecedented instead. Moreover, we never expect that each recently appeared new brand in some segment offers a revolutionary product having nothing similar to what all the rest competitors do. We all appreciate sweet but slight innovations which can make our favorite products a little bit better in a course of their evolution without affecting their principal stability.
Now, let’s look at what the majority of crypto enthusiasts expect from each new crypto startup. Not less than either a revolution or disruption every new crypto product should bring to a crypto economy to be recognized as viable and successful. Forking a popular blockchain is bad manners, improving an existing solution with some advanced features is a plagiarism, each new coin must be absolutely unique, each new blockchain must provide capabilities that the others cannot. Exchanges, Dapps, payment services, staking platforms all must impress a crypto public with mind-blowing novelty and originality. Probably cryptowallets only are left beyond the criticism due to either their purely utilitarian functions or the mass character they have.
Figuring out why such a double-standard approach we have to both a conventional economy and crypto is a perfect topic for a scientific thesis for associate professors at some department of economics at some university. The present post, in fact, is not about it. This is about how sectoral products and services seem to evolve within a crypto ecosystem. An exemplary case on that later.
A new sector of tokenization of commodities is emerging in a crypto economy. It is highly expected being not contrary to common sense. Once virtual crypto assets in the form of coins and tokens are successfully evolving, why not to tie some real-world commodities to crypto?
Blockchain-based ledgers for real estate, cars, diamonds, collection wines, as well as for many other valuable things from a real economy are occupying their specific niche in a crypto ecosystem. The majority of such ledgers, nevertheless, do not represent what can be called the true fusion of real valuables and virtual crypto assets. They play a role of some extra level at the real commodities’ evaluation. A blockchain-based virtual passport of a bottle of some expensive alcohol helps the latter keep its high price through the enhanced trust from consumers. But another similar bottle which has not such a passport can most likely be priced the same.
Another approach to a fusion of real-world commodities and crypto assets belongs to attempts to securing crypto with precious metals. Not just gold and silver are applied to this, but the so-called battery minerals such as cobalt, nickel, copper, and lithium start becoming an appropriate backing for crypto due to a growing demand (and, therefore, value) for them in a rapidly developing “green-electric” economy. Various solutions are available in that process. Some of them are enough technology-intensive but still at a stage of idea (like this one), the others are purely utilitarian and quite primitive in terms of crypto technology. An exemplary case of the latter belongs to Russian giant “Norilsk Nickel” that is going to issue its own crypto backed by its own nickel. The reason for it is obvious — “NorNickel” is going to enter a crypto market with its own stable coin to secure its nickel production through diversifying revenue streams. The appeal of such stable coin is quite narrow — Norilsk Nickel itself along with some partners and customers will derive value from the coin. At best, a group of professional speculators aka traders will be able to earn some extra profit from buying-&-selling the NorNickel coin.
Hence, a niche where real-world commodities are backed by crypto assets might seem too special to apply for a significant mass adoption. In the case of NorNickel, all the other nickel manufacturers have nothing in NorNickel’s crypto. They might appreciate the very approach on the giant from Norilsk being at the same time unable to issue their own cryptos. And what about numerous metal-trading companies that do not produce nickel having, nevertheless, significant deposits of this energy metal at their stock houses?
Let’s consider another use case: a land lord who owns quite a large piece of agricultural land leases it out to farmers. How can that land lord enlarge the liquidity of the land? Is it possible to monetize the land somehow without selling it out?
Almost nothing except issuing equities a conventional economy can propose to that land lord. In contrast to it, a viable and original solution can be developed in a crypto environment. Moreover, such a solution can appear applicable to not just a particular land lord or similar land lords only. It can be designed as a universal platform where a wide range of real-world valuable commodities can be backed with cryptos in order to bring extra profit to various involved entities.
Below you can see a scheme where mutual interactions between different participants of such a platform are defined.
Why just those entities are involved and how the very process runs can be explained as follows:
1. There are two main groups of users of the service — owners of some valuable real-world commodities and crypto holders (hodlers, for people in the know). Both groups meet at the platform even though they have opposite objectives. The owners of real commodities look for an opportunity to monetize their valuables without having to sell them. A classic approach for such a situation is a bank credit — you can get it if you have some collateral. However, a number of limitations is inherent in it:
- not everything you may consider a valuable commodity can be accepted by banks as collateral,
- the amount of credit will never be equal to the cost of your collateral (be happy if you receive 50% from what your commodity is worth commercially),
- bank requirements to borrowers are often so severe that the procedure appears unbearable for many of them,
- in many developing Countries the bank annual interest reaches such insane percentage (up to 23% in Ukraine, for instance) that any credit becomes senseless.
That’s why the owners of valuable commodities can likely be interested in some alternative to bank credits. The promise of the platform sounds attractive for those who own land, real estate, deposits of natural resources (oil, gas, ore, etc), agricultural products (grain, sugar, etc), resources of drinking water, production and/or deposits of valuable metals (gold, silver, cobalt, nickel etc), and even energy sources (power plants of various sorts). All the commodities that have a definite market price and good liquidity can be offered by their owners as a backing for different crypto deposits.
What benefits may those owners account on using the platform? They can get crypto loans against their commodities. The loans will run under automatically executed smart contracts that exclude possible negative human factors which, sometimes, turn such deals into fraud. Each deal will have certain terms and conditions recorded at the level of code in a smart contract. A period of time for each loan, an agreed value of commodities in crypto, conditions at which the property rights for commodities pass from a borrower to a creditor, and the other related rights and obligations of both parties will constitute the content of smart contracts.
Hence, leaving their commodities where they are, the borrowers can receive a significant sums in crypto to invest in the activities that potentially provide profits from a crypto turnover. Trading on exchanges and staking services are the most popular cases for such activities. Those who does not accept crypto speculations can deposit crypto at multiplying staking platforms to get up to 18% of annual profit (crypto.com).
Is it risky in terms of owning property? Of course it is. But the very intent of the borrowers to participate in such deals is built on the risk to loose commodities when their contractual obligations are not fulfilled. Is the game worth the candle then? In depends on who seeks to what. Imagine an owner of some recently purchased commercial real estate. Let it be a large storage facility leased to some trading company at commercial rates. The rates are average over the local real-estate leasing market and imply 10-year period of the initial investment reimbursement. Ten years constitute more than a sufficient period for a crypto economy at least to double any investment. Everyone should consider oneself whether it is reasonable for the owner to try to monetize the facility through a crypto loan in order to decrease a reimbursement period or not. Just waiting for 10 years watching how inflation eats your money is hardly the best solution.
2. While the commitments of borrowers look quite grounded from a business perspective, why should crypto holders be interested in participating in such deals? Holders are holders by definition — they hold their crypto assets being reluctant to move them somehow. Why would they accept propositions from some commodity owners to change crypto for metals, land, and the other real-economy valuables? A discrepancy between different interests is apparent.
I felt that there had to be a strong reason for it when I came across this question first. One of the crypto podcasts helped me to articulate such a reason. The intro to the podcast represented one of its sponsors — Vaultoro exchange which encouraged users to invest in crypto hedged with physical gold. That advertisement put all thing in their places. What remained for me was to answer the question what was the most horrible thing for crypto holders? I knew the correct answer — volatility.
Namely volatility is anathema to crypto deposits the holders hold in their cold wallets while the same volatility is a blessing for crypto traders. So, the need to hedge their crypto deposits against volatility can make crypto holders look for some reliable non-volatile backing. Vaultoro offers gold in bank safe-deposit boxes. Great. Why not to endow some other different physical valuables with a similar hedge function? Especially if a certain choice between various contractors with different valuable commodities is available. It seems the puzzle comes together.
3. A specially designed service platform-as-a-hub can be created to make both groups of users meet. The platform should have a special hybrid nature: all the commercial issues within the deals must run on a smart-contract protocol, a search function along with evolving users’ databases should be human-operated. The platform is considered as a browser-based application working with Metamask extension to stay quite universal for various users. At the same time, such service as IPFS system for storing deals’ data is highly recommended. The platform should provide both crypto holders and borrowers with an ability to find the most appropriate counterparty for each case. That’s why two lists of users should be available: a list of those who look for crypto loans against some particular real-world commodity and a list of crypto holders who look for an opportunity to hedge their deposits with some non-volatile real-world valuables. A set of options with specific variables will constitute a “select your counterparty” section. When a potential partner is chosen, a user should be able to pre-design a smart contract of a deal to confirm it with both lawyers (more on such participants later) and a partner. When a deal is agreed by all involved parties, a related smart contract starts running. A special encrypted section with a highly private access can represent both the final content of the smart contract and how the contract is proceeding.
4. A significant portion of a potential of a crypto economy would be missed if no proprietary crypto asset appears somewhere in between the users of the platform. This is about a business model the platform should practice. A simple option of getting service fees from both parties does not look sufficient in the days when hundreds and thousands of zero-value tokens and coins collect millions of dollars from crypto investors. A service through which multi-billion deals can be potentially executed bringing profits to both crypto holders and owners of real-world valuables might have its own crypto asset.
A crypto coin running on its own blockchain can be created to facilitate various aspects of the platform’s functionality. For example, the crypto holders who hedged their deposits with real commodities (which do not change their initial location while a related smart contract runs, as we know) could receive a certain amount of the platform’s crypto as a special insurance deposit. The deposit will remain in a crypto holder’s wallet as a compensation for some operating costs when a relevant smart contract ends up forcing a borrower to pass the rights for his/her real commodity to the crypto holder.
Will such a platform-related crypto be in demand? Why not if it reflects interactions of parties full of value — crypto deposits, on the one hand, and real-world commodities, on the other hand. Can the crypto coin bring extra income to the platform owners? Undoubtedly it can once the value of coin will grow in accordance with the volume of transactions passing through the deals on the platform. Besides, such a proprietary crypto asset can enhance the very flexibility of interactions occurring between various involved parties on the platform. The Proof-of-Stake consensus method seems an ideal solution for the platform’s blockchain once the participants very likely accepts the crypto to hold in their wallets in significant amounts. Bonuses, penalties, and even a native platform-based staking service can be realized through the crypto as well. Will the platform’s coin appeal to a crypto public in a convincing manner to create a strong network effect? It seems so, once the bigger number of interactions happens on the platform, the greater public attention it will draw. It can create something like a proof-of-activity.
5. Lawyers, insurance companies, and custodial services seem to be an integral part of interactions on the platform. When it comes to assets and commodities whatever forms they can have insurance always goes hand in hand. Smart contract run automatically, no humans are needed to execute the smart-contract provisions. The are grounded on the famous IFTTT coding principle. But what about the very content of smart contracts? Who will decide about all those “IF” and “THAN”? Once the contracts will determine movements of property rights, nobody but lawyers must be involved in the contracts’ creation. On the other hand, the clients for whom the contracts are created will always remain humans with their inherent biases, misconceptions, and, sometimes, a wish to bend the rules. That’s why disputes and litigation can happen even if provisions of smart contracts do not imply any inconsistency. It would be unreasonable for the platform not to have a legal support. Besides, the regulations on crypto differ very much from country to country. A legal localization of smart contract, therefore, should be a must-have feature of the platform.
6. Let’s simulate a typical outcome of a deal on the platform: a borrower received 5000 BTC against his metallic cobalt deposits for a 6-month period from a crypto holder. After the period expired, he could return back neither BTC nor its fiat equivalent to the creditor for some reasons irrelevant to the present simulation. Now, the crypto holder becomes an owner of the borrower’s cobalt. Cobalt is in a great demand on a battery market, so it is not a problem to sell cobalt at an average market price. The trade will cover 5000 BTC even at a present exchange rate, not to mention the one taking place 6 months before (as crypto optimists we assume by default that BTC was growing during the period). The crypto holder received a certain amount of the platform’s crypto as a compensation for inconvenience he might face when monetizing his new property — the cobalt deposit. Everything seems looking brilliant for the creditor, right?
However, the process of transforming cobalt into BTC is not straightforward: first, it requires to sell cobalt for fiat at some metal exchange. After that, fiat should be exchanged for BTC either at a crypto exchange or through an OTC purchase. Hence, a creditor should be personally (or via some trustee, no matter) engaged in quite specific and significantly different interactions on both the metal market and crypto one. While the latter is more or less familiar for our crypto holder, how to deal with cobalt might create certain problems for him. In fact, our crypto holder appears at the place of his former borrower — now he owns a real-world commodity seeking crypto meanwhile. In addition, all that stuff can require quite a long period of time to be completely fulfilled (only newbies in crypto may think that buying 5000 BTC is a simple task). And who knows what can happen somewhere along the procedure. That’s why the availability of a special on-platform service enabling real commodity-to-crypto instant swaps seems reasonable, if not compulsory.
It can be provided by some third-party participants whose business model excludes a fiat intermediary in deals with a physical property and crypto. If such a participant is easily imaginable when it comes to gold-to-crypto contracts, the other different commodities such as land, battery metals, energy sources, and agricultural products implies agents I have never heard about yet. But who says that such service providers must exist before the platform sees the light? Maybe the platform itself will entail the emergence of such entities — we are talking about development of a crypto economy, aren’t we?
On the other hand, the platform can arrange such instant swaps through its inner resources: nobody but the platform knows best who needs what within the crypto-&-real valuables’ paradigm. A special section on the platform might offer namely this type of instant contracts where third-party exchanges, markets, banks, and companies could participate in addition to both on-platform borrowers and creditors. This is where another source of income can appear for the platform owners when the platform’s native crypto coin is applied in a proper manner, by the way.
Now we are approaching the topic announced in the beginning of this post: how crypto economy is to evolve in terms of a sectoral competition. The exemplary platform above shows the way to a great variety of services where real-world commodities can be transformed into crypto and vice versa. Such services similar with their business models should gradually become a norm in the emerging fusion of physical valuables and virtual assets. They may differ with particular options and features just like numerous available crypto wallets do today. But we have more that enough room in a present crypto environment for dozens and hundreds of quite typical solutions whose main function is to be blurring the line between crypto and metals, crypto and land, crypto and food, crypto and water, crypto and energy, and so on and so forth.
I have created the present concept by myself alone on the go. The idea was, what you call, bouncing around in thin air. But I was far from believing that some similar insights never came over many other crypto enthusiasts around the globe. That’s why I publish this post with a light heart. I believe in a competition, in a natural selection. If someone else can build the described platform strictly in accordance with the present content I will be happy. I will never get tired with saying that just discourse creates phenomena, not opposite. This is my creative gift to practitioners. Who knows how many decent crypto ideas are still spinning in our collective consciousness?
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Thanks for reading.