Creating agri-assets - tokenisation part one

Geora’s platform has pioneered agri-asset tokens for over three years — but what’s the payoff? In this article, we dive into the history of tokenisation, their application to agri-supply chains, the unique challenges faced in representing physical commodities, and our vision for tokenised agriculture.

A brief history of tokens

When the Bitcoin ledger went live in 2008, it represented not only the first decentralised public blockchain, but also the first mainstream token. Bitcoin proved the utility of fungible cryptocurrencies¹, which are borderless, liquid, transparent, and decentralised. But it wasn’t until six years later that tokens in general took off, and sparked a revolution in decentralised finance.

What caused such an epochal shift? In a word: standardisation. Ethereum’s ERC-20 standard reconciled the requirements for fungible tokens to a single, simple interface. Developers no longer wrote custom code for every token; users no longer needed a wallet for every cryptocurrency; and a new ecosystem of decentralised applications was made possible. The complimentary ERC-721 standard soon followed, supporting non-fungible assets (NFTs), encouraging asset uniqueness and added data. Today there are over 500,000 ERC-20 tokens deployed on Ethereum². With a market cap of $46 billion USD³, just one of these tokens, USDC, would be the world’s 86th largest economy by GDP (narrowly behind Lithuania)⁴.

The surrounding ecosystem has kept pace with the explosion of new tokens. Decentralised and trustless exchanges like Uniswap allow currency trading without intermediaries. Cross-chain bridges like Celer expand the reach of interoperable tokens from Ethereum alone into a world of other blockchains, each with their own characteristics and advantages (including, crucially, consensus mechanisms which are far more sustainable and energy-efficient than the de rigueur proof-of-work⁵).

The domains of finance and currency have reaped enormous benefit from the token revolution. But less digitised and technology-aware industries have so far missed out. At Geora, we aim to change that, and bring agriculture into the token age.

Tokens and agriculture

Agricultural commodities, or agri-assets, pose some interesting challenges when it comes to tokenisation. While discrete vertical supply chains, like those of essential oils, are straightforward to represent with NFTs, most staple products like wheat and rice are bulk commodities and not NFTs — they’re blended, mixed, and substituted through every stage of the supply chain. They’re not entirely fungible, either: under increasing demand to provide sustainable, high-quality products, modern farmers are continuing to implement value-adding practices on their farms. Not all wheat is equal: regenerative, organic and sustainable agriculture should be rewarded, as should produce with low food mileage and reduced carbon emissions.

How, then, do we reconcile the history of an asset which is at times fungible and at others not? The answer comes in the form of semi-fungible tokens⁶. While these originated in the world of ticketing and vouchers, they fit agriculture perfectly. Consider a wheat supply chain. A farmer harvests a truckload of wheat — it’s organic, high quality, and the farmer has taken great care to use as little water as possible. At this point, the asset is non-fungible, with value-adding information captured against it. Next, the farmer delivers to a bulk handler. Her grain is mixed with deliveries from other farms, and within the context of a silo or other storage container the wheat becomes fungible! The silo itself remains uniquely identifiable, and therefore non-fungible, and this higher-level token can record events like fumigation and cleaning. When the physical grain emerges, it’s a combination of the farmer’s physical and legal data and the physical data of all other tokens in the silo. And so the supply chain continues, through traders, processors, and distributors, and all the while the wheat oscillates between fungibility and non-fungibility.

Geora’s technology respects this base truth, rather than hand-waving it away. Agri-asset tokens can shift between levels of fungibility; be split, blended, or merged, so as to capture the supply chain as accurately as possible. The token’s journey is then analysed and simplified to a history which respects the bulk nature of the commodity while highlighting its sustainability credentials and the value added by care and investment at all stages of the supply chain. With this model, the farmer and consumer can have the best of both worlds.

Why tokenise?

The key benefit of blockchain has been touted for years: a verifiable, immutable, and trustless history, which when applied to agricultural supply chains means unparalleled transparency for consumers, more sustainable and valuable commodities, and therefore a higher sale price for farmers. But we believe that these benefits are table stakes; for over three years, Geora’s blockchain has recorded the complexity of global agri-supply chains using NFTs and other forms of token, and traceability will be ubiquitous sooner rather than later, even in mostly-centralised systems⁷.

Why, then, do we think that the future of agricultural assets is tokenisation?

Under massive pressure to modernise their operations and implement sustainability practices, farmers, primary producers, and processors are in desperate need of capital. The finance gap for smallholder agriculture, those farms which are owned by families for generations and struggle at the best of times, runs to $170 billion USD per year⁸. Meeting the UN’s Sustainable Development Goals will require at least $5 trillion USD per year in additional investment⁹. But financiers are traditionally wary of investment in small operations, due to high perceived risk, and despite smallholder farmers having a 98% repayment rate¹⁰.

Here, tokenisation can help: an immutable production history reassures lenders that a farm will have the capacity to repay their loan. Furthermore it allows agri-assets themselves to serve as collateral. If the token becomes a requirement to entry for trading and marketplaces, it serves as a de-facto title; smart contracts on the blockchain can then automatically repossess title if a loan isn’t repaid. The growers and producers benefit too: they can demand a higher price for their products, with their sustainability and value-adding actions made visible and verifiable.

On top of improving access to traditional lending, tokens built to established standards like ERC-20 unlock a new and growing pool of capital: decentralised finance. With $74.6 billion USD already locked in DeFi¹¹, enabling direct investment into farms and agri-assets using cryptocurrency would go a long way towards reducing the finance gap. Bridging the divide between agriculture and DeFi has two further advantages. Firstly, providing a “foot in the door” for farmers to onboard to DeFi through asset finance is essential in allowing them to benefit from the wider ecosystem — like hedging against bad weather through decentralised futures or prediction markets, or staking capital from a good harvest during the off season. Secondly, a more transparent commodity market means improved price discovery, particularly for specialised commodities (for example, there is no public price for organic grain in Australia, and growers therefore have no way of knowing if they’re being paid their fair share).

Beyond asset-backed finance, tokens can improve the sustainability of agriculture in other ways. Agri-asset tokens could be bridged to tokenised carbon marketplaces, like Nori or Regen, and their sustainability metrics automatically checked and used to issue carbon credits, providing another source of income for farmers and a strong incentive to pursue carbon capture and regenerative agriculture. Lenders could then build sustainability-linked, or green, loans, which require a certain level of carbon capture to execute, or incentivise growers to lower their water usage through automatically-reduced interest rates.

Tokenising agriculture, therefore, goes beyond trustless and immutable asset histories. Yes, consumers and traders faced with proof of added value are inclined to pay a higher price, and the farmer reaps the benefit. But the true benefit of tokenisation is interoperability, and the applications it enables. Agri-asset tokens can help bridge the immense finance gap, particularly for smallholder farmers, and provide growers the capital they need to make their farms more sustainable. They can unlock new markets and pools of capital, through decentralised finance, and encourage farmers to reap the broader benefits of DeFi. Finally, they can further incentivise sustainable practices through carbon marketplaces and green loans. If we are to achieve the Sustainable Development Goals, and ensure that smallholder farmers aren’t left behind in the process, agricultural tokenisation becomes not a matter of if, but when.

About Geora

Geora provides simple and secure technology for farmer networks to track and finance agri-supply chains. Co-founders Bridie Ohlsson and Cadel Watson have been working at the junction of blockchain and agriculture since 2015. Sign up to the Geora platform today to make your data work harder for your agribusiness. For more information get in contact with our team at hello@geora.io.

For more information, visit geora.io

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1. Fungibility meaning each token, or part of a token, has the same value and is therefore interchangeable — like dollars, Bitcoin, and Maltesers.
2. As of 16 March 2022, the number sits at 503,529 (https://etherscan.io/tokens)
3. https://etherscan.io/tokens
4. https://www.worldometers.info/gdp/gdp-by-country/
5. https://medium.com/tqtezos/proof-of-work-vs-proof-of-stake-the-ecological-footprint-c58029faee44
6. https://www.coindesk.com/tech/2021/08/17/what-is-a-semi-fungible-crypto-token/
7. See Amazon’s QLDB
8. https://www.idhsustainabletrade.com/news/technology-and-partnerships-to-close-the-agriculture-finance-gap-the-kenya-pilot
9. https://www.unpri.org/download?ac=5909
10. https://www.monash.edu/__data/assets/pdf_file/0009/925695/financing_smallholder_agriculture_an_experiment_with_agent-intermediated_microloans_in_india.pdf
11. https://www.defipulse.com/

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