Blockchain Bingo
If you are reading this you're gonna make it!
If you don't work in a blockchain first company, you may have experienced something like I did in 2016.
My colleague Clare and I had set up a data base of 4000 Paprika and Birds
Blockchain Bingo
If you are reading this you're gonna make it!
If you don't work in a blockchain first company, you may have experienced something like I did in 2016.
My colleague Clare and I had set up a data base of 4000 Paprika and Birds Eye Chili farmers in Malawi, one of the worlds poorest countries. Alongside this, we set up an input credit facility for several groups of farmers. 'Facility' sounds very fancy, but we actually give them a loan and 'knew where they lived' kind of thing.
This was incredibly tough as we were both involved in registering most of these or eventually managing a tight knit team who did. I can't even claim too much credit for this as Clare was the star of that particular show, even sleeping overnight in a truck that broke down when torrential rain caused a road to subside. (Clare is gmi 😄).
When I was back in the UK, we discovered a start up competition which wanted to reward a start up tackling the worlds biggest problems with a scholarship to Singularity University. I applied, pitched our Malawi project at the University of Oxford and, unbelievably, we won! All we had to do was compete in Berlin and repeat my performance. Simple.
Several weeks later, I boarded a 530am flight from London to Berlin to make my presentation a few hours (and coffees) later. It wasn't great (maybe I am even being generous to myself), we didn't win and we lost the place at Singularity.
The pitch that did win was Agriledger, one of the seminal blockchain start ups in Agriculture. We didn't once mention blockchain, no utterance about distributed ledger, not a syllable about decentralising anything. The mentor assigned to me, congratulated me on my excellent project but suggested introducing blockchain. 🙁
Blockchain vision > non blockchain execution.
When we carried out our post mortem, one avenue we explored was whether we had just lost a game of Blockchain Bingo! We were not aggrieved that Agriledger - a great and similar project - won, or that we would not get to go to Singularity University for 2 sunny months in California. We actually felt we had lost out to blockchain.
Naturally, we set out to examine if blockchain was relevant to our project? Had we missed a huge opportunity by not implementing it? No and No we concluded.
In the rest of this article, I will jump into some of the latest trends in blockchain and give my opinion on whether they will be game changers for Agriculture or not.
Features
Before discussing NFT's, DeFi, DAO's and Traceability - in that order - I've included some of the key features of a blockchain or Distributed Ledger Technology (DLT) as per Primavera de Filipi and Aaron Wright in their excellent book Blockchain and the Law.
Distributed - databases supported by a network of computers rather than relying on a central actor.
Resilient - Tamper proof as no actor has the power to delete or change a record once it is stored.
Transparent - chains are clearly auditable and available for people to view (I would say in most cases, but not all)
Consensus - an ability to coordinate social and economic activities
Autonomous - once consensus has been reached the distributed network facilitates the execution of code via smart contracts.
NFTs and NFTrees
NFTs have gone a little crazy in the past few weeks due a huge increase in demand for them. Seriously, look at the price of these CryptoPunks where the cheapest one is $94,000 as I write this.
But as with all Crypto, price isn't really the point 🤷♂️. So what are NFT's and what role can they play in Agriculture, if any?
Describing an NFT
NFTs are Non Fungible Tokens.
That sounds very abstract because you may be still thinking about cryptopunks and jpgs. But actually it is quite relevant to the real world as most things in the real world are non fungible and non commoditised. And more and more physical items can come with a unique digital asset - including ag commodities, equipment, land or even containers of cashew.
If I wanted to get started in the crypto ecosystem, I would create an NFT and then you have a digital asset. 👈 That is not investment advice, just a friendly try this new thingy type of advice.
Is this really applicable to agriculture? Absolutely it is, for:
🏞 Land and other property title documents, which are great candidates. There is a an active market and a legal route to registering the title for land assets in most countries. You don't believe me? See Twin Falls Farm here on OpenSea - a major NFT marketplace - as an example.
🌳 Trees - see the Tree DAO here for NFTrees - I actually own one of these and it was a good means of understanding some of the issues and opportunities around NFTs (such as tax and regulation).
🌾 I also see an enormous potential use case in Digital Grain Warehouse Receipts. Think about it - it is a unique receipt which gives legal title when registered and represents ownership of a given quantity of grain, a specified quality and in a given location. It can be redeemed when specified conditions are met.
Yes, obviously someone can move the grain but that is called theft, as long as that unique digital asset complies with the laws of the land and has been registered accordingly.
Still seems like nonsense - why bother?
The main reason to create an NFT is that most asset ownership could be digitised and then it allows that asset to be posted as collateral and financed on a vast and growing DeFi network.
That is pretty attractive imo. So what on earth is DeFi?
Yield Farming and DeFi
Defi refers to Decentralised Finance, which is opposed to Centralised Finance or Traditional Finance, which refers to the traditional banking system. Volumes in 'DeFi' have shot up from under $2bn in August 2019, to around$100bn now 🚀 - check here on CoinGecko if you are interested.
Yield Farming is the practice of earning a return on any crypto native token holdings using DeFi structures, mainly from:
1️⃣ Pledging tokens to exchange liquidity providers and capturing a return on these by earning a cut on the fees. Or;
2️⃣ Lending tokens to speculators who use them for leveraged trading. In this example, you are effectively the bank. But don't worry, the protocols, such as Aave, Compound or Maker, do the risk management so you don't have to individually vet the borrowers.
Whereas DeFi deals with crypto native assets, TradFi deals with the real world. So..
How can agriculture replicate this success?
There is a major challenge of getting real world assets into DeFi structures. Valuation of assets is the main issue, especially when it comes to the non fungible assets.
For blockchain native assets which are exchange traded, there will always be a price as long as there is liquidity. This is not the case for most agricultural produce where the markets are opaque and lack transparency.
But grain NFT's right?
Grains are widely traded and priced on major exchange traded contracts and physical prices adjusted for basis. The value chain is mature and, importantly, the digital value chain is also maturing with companies such as Bushel making integrations easier.
Two companies collaborating in this space are AgriDigital and Geora to build out a DeFi product for Agri commodities. Emma Weston (AgriDigital CEO) and I did exchange some messages on this topic, but couldn't quite get a time to work for us both. But actually, I think that is a positive as it allows me to whiteboard things a little.
Here is how I think it will look 🧐:
Producers/ Elevators store grain in a registered site;
Physical grains are valued based on the location;
Legal charge taken on the assets;
Maybe a price hedging mechanism is put in place such as CME linked Future or Option;
The Warehouse receipt is converted to an NFT
Finance advanced on the derived valuation - up to 100% loan to value (as per the AgriDigital website);
This is pretty standard warehouse receipt finance where the receipt can become an NFT. The grain is fungible but the location, quality, quantity, legal conditions are not and hence the price can be adjusted for these.
So if it is standard, then what is the point of blockchain? Well, it is operational efficiency and scale. The steps above can be automated via smart contracts and anyone owning grains can have that cash in minutes.
I think some challenges will be scaling the collateral management, especially at any rural locations and also potentially scaling the legal charge registration or, rather, checking title.
What about Land?
This is also a very interesting use case, which I am sure will mature. In fact, it is already out there - MakerDAO have a live proposal for a loan facility secured on US Agricultural Real Estate. 👇
[P1-DROP] MIP6 Risk Assessment: Alternative Equity Advisors DROP: US Agricultural Real Estate - Domain Work - The Maker Forum
Legal Disclaimer: This communication is provided for information purposes only. This communication has been prepared based upon information, including market prices, data and other information, from sources believed to b…
As these TradFi structures blend into DeFi using better technology rails, there is another feature of blockchain, which I think is very relevant to Agriculture. This is the consensus feature and this is where Decentralised Autonomous Organisations or 'DAOs' come in.
DAOs
As the name suggests there are three components to this, being decentralised, autonomous and an organisation.
Decentralised - hive minds, community
Autonomous - smart contracts once conditions and preconditions are met.
Organisation - some legal personality.
DAO's, similar to Defi are crypto or internet native organisations but, interestingly, they have just received legal recognition in the state of Wyoming where you can register a DAO as a legal entity.
Product Management
I see a lot of DAO's already starting on Twitter as there no better place to find people with similar interests, who can hive together around a specific topic or product. These conversations inevitably move to Discord and then, I assume, a legal format. Product Management 2021.
Twitter -> Discord -> DAO
This type of organisation generates network effects by making your customers your shareholders - they are incentivised early on to give you feedback and help you find product market fit.
Cooperatives in Agriculture
Cooperatives are rarely used in Agriculture.
Traditional cooperatives have succeeded in agriculture for a long, long time. They tend to be based around physical infrastructure and physical needs such as agronomic advice, inputs, equipment and nowadays, technology.
If they were setting up now, they would probably use a DAO. An agricultural cooperative in a web3 world might have owned physical assets alongside its digital assets, digitised governance, digital payments and pooling of assets for both procurement and marketing.
The Future comes faster than you think
Shane at Upstream Ag Insights has covered autonomous tractors this week and it was fantastic as this was actually the example I was going to use for a DAO 😄. How about a Decentralised Autonomous Tractor Organisation or DATO?
Upstream Ag Insights - August 8th 2021 - by Shane Thomas - Upstream Ag Insights
Essential news and analysis for agribusiness leaders
When I read Shane's article, it really backed up my conviction that a DATO might actually be one of the best use cases for blockchain in Agriculture and in particular a DAO. Stakeholders could pool together to buy the Autonomous tractors, manage them, allocate them for payments which are settled using blockchain.
This asset-as-a-service model is one of the most interesting things happening in Fintech at the minute and why I think companies such as Hello Tractor offer very interesting models.
DATO - cooperatives of the future anyone?
What about processing or marketing?
But 'DATOs' aren't everything. I think from this perspective, this is where the network effect of the customer / shareholder / stakeholder relationship can be very effective.
D2C models for example become very compelling. In the beef example from above, you could effectively de-risk that opportunity by getting funding from committed buyers. Obviously, they would want to see your credentials to be able to import and manage the herd assets!
I think DAO's would be my bet of where Blockchain and Ag will really take off. People take food very seriously and the Kobe beef example is really not that outlandish. What would an inputs buying club look like? Maybe a different version of FBN?
Traceability and Grains-on-Chains
Traceability was one of the first use cases touted for blockchain beyond payments - at least thats how I seem to remember it. It seemed a bit of a stretch to me actually - yes it is a solution to the problem, but it could be one of many. A solution looking for a problem. I must admit, I have been sceptical about this.
However, I have changed my mind and this is why:
Blockchain/ Crypto is about an ecosystem, not standalone use cases. They are allocentric and collective, not egocentric. Community is King.
What are you talking about?
Imagine yourself being part of the DAO that buys Kobe beef.
This is where the traceability use case comes in. You want to make sure the herd you buy is exactly what you expect. You make sure the genetics fit the requirement and you want to make sure this is approved before you pay any funds across.
The product and use case can be anything people or community care about -- Nori are a leading example of this for Carbon. Sustainability and traceability go hand in hand and as these issues become front and centre, blockchain applications will flourish.
The traceability element serves to validate some of the actors or products within this ecosystem and initiatives such as Trace Harvest from Blockapps point the way forward.
Takeaways
When I started this, I genuinely wasn't sure how I felt about Blockchain in Agriculture. I am bullish on Agri-Fintech and Blockchain projects but there were few overlaps and few concrete examples of projects beyond concept stage. There is a huge disconnect between the operational efficiency of the technology and success in practice.
But I am better equipped to dig a bit deeper and you should be too.
Here is why:
▶️ Basic Product Management
Does blockchain use solve a problem? Standalone use cases for blockchain in Agriculture appear risky, and I think this is where some of the disconnect arises. Digitising just one part of a value chain will struggle to capture all of the benefits - if any at all.
This is where the use of DAO's to accelerate Product Market Fit start to look very interesting. At the very least, it would be useful to identify if your customers (or other stakeholders) will absorb the costs or investment of any blockchain technology.
As value chains reach digital maturity, such as with grains in North America, opportunities will be there to develop blockchain based products. For others it may not make sense. Because....
▶️ It is an Ecosystem play
The ecosystem needs to be have a shared value proposition and be in sync. By ecosystem, I mean gelling together the various examples we already have such as access to finance, governance and markets via DAO's.
If you are building a traceability solution for example, which buyer community is it for? Do they have representation in your governance structures. How are your Tokens governed? Who is underwriting buyers and underwriting investment or finance in your supply chain?
Blockchain Ecosystem > Blockchain Product.
In my next issue I will look at the preconditions for success of a marketplace which starts to answer some of the questions about ecosystems and how they work together.
I am sure there will be plenty more to cover in the blockchain space beyond that!
Blockchain Bingo
If you are reading this you're gonna make it!
If you don't work in a blockchain first company, you may have experienced something like I did in 2016.
My colleague Clare and I had set up a data base of 4000 Paprika and Birds Eye Chili farmers in Malawi, one of the worlds poorest countries. Alongside this, we set up an input credit facility for several groups of farmers. 'Facility' sounds very fancy, but we actually give them a loan and 'knew where they lived' kind of thing.
This was incredibly tough as we were both involved in registering most of these or eventually managing a tight knit team who did. I can't even claim too much credit for this as Clare was the star of that particular show, even sleeping overnight in a truck that broke down when torrential rain caused a road to subside. (Clare is gmi 😄).
When I was back in the UK, we discovered a start up competition which wanted to reward a start up tackling the worlds biggest problems with a scholarship to Singularity University. I applied, pitched our Malawi project at the University of Oxford and, unbelievably, we won! All we had to do was compete in Berlin and repeat my performance. Simple.
Several weeks later, I boarded a 530am flight from London to Berlin to make my presentation a few hours (and coffees) later. It wasn't great (maybe I am even being generous to myself), we didn't win and we lost the place at Singularity.
The pitch that did win was Agriledger, one of the seminal blockchain start ups in Agriculture. We didn't once mention blockchain, no utterance about distributed ledger, not a syllable about decentralising anything. The mentor assigned to me, congratulated me on my excellent project but suggested introducing blockchain. 🙁
Blockchain vision > non blockchain execution.
When we carried out our post mortem, one avenue we explored was whether we had just lost a game of Blockchain Bingo! We were not aggrieved that Agriledger - a great and similar project - won, or that we would not get to go to Singularity University for 2 sunny months in California. We actually felt we had lost out to blockchain.
Naturally, we set out to examine if blockchain was relevant to our project? Had we missed a huge opportunity by not implementing it? No and No we concluded.
In the rest of this article, I will jump into some of the latest trends in blockchain and give my opinion on whether they will be game changers for Agriculture or not.
Features
Before discussing NFT's, DeFi, DAO's and Traceability - in that order - I've included some of the key features of a blockchain or Distributed Ledger Technology (DLT) as per Primavera de Filipi and Aaron Wright in their excellent book Blockchain and the Law.
Distributed - databases supported by a network of computers rather than relying on a central actor.
Resilient - Tamper proof as no actor has the power to delete or change a record once it is stored.
Transparent - chains are clearly auditable and available for people to view (I would say in most cases, but not all)
Consensus - an ability to coordinate social and economic activities
Autonomous - once consensus has been reached the distributed network facilitates the execution of code via smart contracts.
NFTs and NFTrees
NFTs have gone a little crazy in the past few weeks due a huge increase in demand for them. Seriously, look at the price of these CryptoPunks where the cheapest one is $94,000 as I write this.
But as with all Crypto, price isn't really the point 🤷♂️. So what are NFT's and what role can they play in Agriculture, if any?
Describing an NFT
NFTs are Non Fungible Tokens.
That sounds very abstract because you may be still thinking about cryptopunks and jpgs. But actually it is quite relevant to the real world as most things in the real world are non fungible and non commoditised. And more and more physical items can come with a unique digital asset - including ag commodities, equipment, land or even containers of cashew.
If I wanted to get started in the crypto ecosystem, I would create an NFT and then you have a digital asset. 👈 That is not investment advice, just a friendly try this new thingy type of advice.
Is this really applicable to agriculture? Absolutely it is, for:
🏞 Land and other property title documents, which are great candidates. There is a an active market and a legal route to registering the title for land assets in most countries. You don't believe me? See Twin Falls Farm here on OpenSea - a major NFT marketplace - as an example.
🌳 Trees - see the Tree DAO here for NFTrees - I actually own one of these and it was a good means of understanding some of the issues and opportunities around NFTs (such as tax and regulation).
🌾 I also see an enormous potential use case in Digital Grain Warehouse Receipts. Think about it - it is a unique receipt which gives legal title when registered and represents ownership of a given quantity of grain, a specified quality and in a given location. It can be redeemed when specified conditions are met.
Yes, obviously someone can move the grain but that is called theft, as long as that unique digital asset complies with the laws of the land and has been registered accordingly.
Still seems like nonsense - why bother?
The main reason to create an NFT is that most asset ownership could be digitised and then it allows that asset to be posted as collateral and financed on a vast and growing DeFi network.
That is pretty attractive imo. So what on earth is DeFi?
Yield Farming and DeFi
Defi refers to Decentralised Finance, which is opposed to Centralised Finance or Traditional Finance, which refers to the traditional banking system. Volumes in 'DeFi' have shot up from under $2bn in August 2019, to around$100bn now 🚀 - check here on CoinGecko if you are interested.
Yield Farming is the practice of earning a return on any crypto native token holdings using DeFi structures, mainly from:
1️⃣ Pledging tokens to exchange liquidity providers and capturing a return on these by earning a cut on the fees. Or;
2️⃣ Lending tokens to speculators who use them for leveraged trading. In this example, you are effectively the bank. But don't worry, the protocols, such as Aave, Compound or Maker, do the risk management so you don't have to individually vet the borrowers.
Whereas DeFi deals with crypto native assets, TradFi deals with the real world. So..
How can agriculture replicate this success?
There is a major challenge of getting real world assets into DeFi structures. Valuation of assets is the main issue, especially when it comes to the non fungible assets.
For blockchain native assets which are exchange traded, there will always be a price as long as there is liquidity. This is not the case for most agricultural produce where the markets are opaque and lack transparency.
But grain NFT's right?
Grains are widely traded and priced on major exchange traded contracts and physical prices adjusted for basis. The value chain is mature and, importantly, the digital value chain is also maturing with companies such as Bushel making integrations easier.
Two companies collaborating in this space are AgriDigital and Geora to build out a DeFi product for Agri commodities. Emma Weston (AgriDigital CEO) and I did exchange some messages on this topic, but couldn't quite get a time to work for us both. But actually, I think that is a positive as it allows me to whiteboard things a little.
Here is how I think it will look 🧐:
This is pretty standard warehouse receipt finance where the receipt can become an NFT. The grain is fungible but the location, quality, quantity, legal conditions are not and hence the price can be adjusted for these.
So if it is standard, then what is the point of blockchain? Well, it is operational efficiency and scale. The steps above can be automated via smart contracts and anyone owning grains can have that cash in minutes.
I think some challenges will be scaling the collateral management, especially at any rural locations and also potentially scaling the legal charge registration or, rather, checking title.
What about Land?
This is also a very interesting use case, which I am sure will mature. In fact, it is already out there - MakerDAO have a live proposal for a loan facility secured on US Agricultural Real Estate. 👇
[P1-DROP] MIP6 Risk Assessment: Alternative Equity Advisors DROP: US Agricultural Real Estate - Domain Work - The Maker Forum
Legal Disclaimer: This communication is provided for information purposes only. This communication has been prepared based upon information, including market prices, data and other information, from sources believed to b…
As these TradFi structures blend into DeFi using better technology rails, there is another feature of blockchain, which I think is very relevant to Agriculture. This is the consensus feature and this is where Decentralised Autonomous Organisations or 'DAOs' come in.
DAOs
As the name suggests there are three components to this, being decentralised, autonomous and an organisation.
Decentralised - hive minds, community
Autonomous - smart contracts once conditions and preconditions are met.
Organisation - some legal personality.
DAO's, similar to Defi are crypto or internet native organisations but, interestingly, they have just received legal recognition in the state of Wyoming where you can register a DAO as a legal entity.
Product Management
I see a lot of DAO's already starting on Twitter as there no better place to find people with similar interests, who can hive together around a specific topic or product. These conversations inevitably move to Discord and then, I assume, a legal format. Product Management 2021.
Twitter -> Discord -> DAO
This type of organisation generates network effects by making your customers your shareholders - they are incentivised early on to give you feedback and help you find product market fit.
Cooperatives in Agriculture
Cooperatives are rarely used in Agriculture.Traditional cooperatives have succeeded in agriculture for a long, long time. They tend to be based around physical infrastructure and physical needs such as agronomic advice, inputs, equipment and nowadays, technology.
If they were setting up now, they would probably use a DAO. An agricultural cooperative in a web3 world might have owned physical assets alongside its digital assets, digitised governance, digital payments and pooling of assets for both procurement and marketing.
The Future comes faster than you think
Shane at Upstream Ag Insights has covered autonomous tractors this week and it was fantastic as this was actually the example I was going to use for a DAO 😄. How about a Decentralised Autonomous Tractor Organisation or DATO?
Upstream Ag Insights - August 8th 2021 - by Shane Thomas - Upstream Ag Insights
Essential news and analysis for agribusiness leaders
When I read Shane's article, it really backed up my conviction that a DATO might actually be one of the best use cases for blockchain in Agriculture and in particular a DAO. Stakeholders could pool together to buy the Autonomous tractors, manage them, allocate them for payments which are settled using blockchain.
This asset-as-a-service model is one of the most interesting things happening in Fintech at the minute and why I think companies such as Hello Tractor offer very interesting models.
DATO - cooperatives of the future anyone?
What about processing or marketing?
But 'DATOs' aren't everything. I think from this perspective, this is where the network effect of the customer / shareholder / stakeholder relationship can be very effective.
D2C models for example become very compelling. In the beef example from above, you could effectively de-risk that opportunity by getting funding from committed buyers. Obviously, they would want to see your credentials to be able to import and manage the herd assets!
I think DAO's would be my bet of where Blockchain and Ag will really take off. People take food very seriously and the Kobe beef example is really not that outlandish. What would an inputs buying club look like? Maybe a different version of FBN?
Traceability and Grains-on-Chains
Traceability was one of the first use cases touted for blockchain beyond payments - at least thats how I seem to remember it. It seemed a bit of a stretch to me actually - yes it is a solution to the problem, but it could be one of many. A solution looking for a problem. I must admit, I have been sceptical about this.
However, I have changed my mind and this is why:
Blockchain/ Crypto is about an ecosystem, not standalone use cases. They are allocentric and collective, not egocentric. Community is King.
What are you talking about?
Imagine yourself being part of the DAO that buys Kobe beef.
This is where the traceability use case comes in. You want to make sure the herd you buy is exactly what you expect. You make sure the genetics fit the requirement and you want to make sure this is approved before you pay any funds across.
The product and use case can be anything people or community care about -- Nori are a leading example of this for Carbon. Sustainability and traceability go hand in hand and as these issues become front and centre, blockchain applications will flourish.
The traceability element serves to validate some of the actors or products within this ecosystem and initiatives such as Trace Harvest from Blockapps point the way forward.
Takeaways
When I started this, I genuinely wasn't sure how I felt about Blockchain in Agriculture. I am bullish on Agri-Fintech and Blockchain projects but there were few overlaps and few concrete examples of projects beyond concept stage. There is a huge disconnect between the operational efficiency of the technology and success in practice.
But I am better equipped to dig a bit deeper and you should be too.
Here is why:
▶️ Basic Product Management
Does blockchain use solve a problem? Standalone use cases for blockchain in Agriculture appear risky, and I think this is where some of the disconnect arises. Digitising just one part of a value chain will struggle to capture all of the benefits - if any at all.
This is where the use of DAO's to accelerate Product Market Fit start to look very interesting. At the very least, it would be useful to identify if your customers (or other stakeholders) will absorb the costs or investment of any blockchain technology.
As value chains reach digital maturity, such as with grains in North America, opportunities will be there to develop blockchain based products. For others it may not make sense. Because....
▶️ It is an Ecosystem play
The ecosystem needs to be have a shared value proposition and be in sync. By ecosystem, I mean gelling together the various examples we already have such as access to finance, governance and markets via DAO's.
If you are building a traceability solution for example, which buyer community is it for? Do they have representation in your governance structures. How are your Tokens governed? Who is underwriting buyers and underwriting investment or finance in your supply chain?
Blockchain Ecosystem > Blockchain Product.
In my next issue I will look at the preconditions for success of a marketplace which starts to answer some of the questions about ecosystems and how they work together.
I am sure there will be plenty more to cover in the blockchain space beyond that!
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