Natural Resources on the Blockchain: The Tokenization of Oil

There are endless potential applications of blockchain technology. The first, and most familiar, is in the creation of purely digital assets, like Bitcoin. But blockchain technology can be applied to votingland registrymedical records, and even the energy industry. 

WHAT: A Tokenized Oil Industry

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An asset-backed cryptocurrency refers to a blockchain-based coin or token whereby rather than letting simple supply and demand determine the value of each unit, the value is tied to a real-world asset (such as barrels of oil). Presumably an asset-backed cryptocurrency gains all of the benefits of a blockchain-based digital currency (Bitcoin, Ethereum, etc.) while still having a tangible asset with a known value behind it. Setting aside issues of deliverability and adoption, there are two primary ways that an asset-backed cryptocurrency can be created.

The first method, which is how the Venezuelan government’s new PETRO cryptocurrency will operate, is to simply create a fiat currency. In this case, fiat, which comes directly from the latin word fiat, meaning “let it be,” refers to the fact that although the value of PETRO will be nominally based on Venezuela’s oil reserves, that is simply by decree. There is not a 1:1 relationship between oil being harvested out of the ground and new PETRO being minted.

The second method for creating an asset-backed cryptocurrency (i.e. tokenized natural resource) is to use a trusted oracle that will trigger the creation of new cryptocurrency units (“tokens”) as it is collected from the Earth. In other words, the number of tokens has a direct relationship to the amount of natural resources that are collected, and that number is maintained automatically by trusted, open-source computer code, rather than by bureaucrats.

Let’s dig a little bit deeper into how an oraclized asset-backed cryptocurrency would work. In this example, we’ll use an Ethereum-based ERC20 token that represents one barrel of crude oil — let’s call it OIL.

ERC20 tokens are secondary tokens created on top of the Ethereum blockchain (Ether, the “native” token of Ethereum obtained by mining, being the primary token). In other words, ERC20 tokens do not require dedicated miners to secure the blockchain because they are inheriting all of the miners of Ethereum itself. The value of an ERC20 token is not necessarily related to the value of Ether (ETH) and can be freely traded; for all intents and purposes, it is its own “coin,” but piggybacking on another blockchain.  

ERC20 tokens are created and controlled by smart contracts. Smart contracts are small computer programs whose source code is on the blockchain and they are executed by nodes/miners on the blockchain network (in this case, the Ethereum blockchain). In this example, the ERC20 smart contract for the OIL token (our oraclized asset-backed cryptocurrency) is programmed to mint new OIL tokens when an oracle reports that new oil has been drilled out of the ground, and those OIL tokens would be automatically credited to the company drilling for that oil. The tokens aren’t granted by a trusted organization but rather the impartial smart contract that simply responds to flow meters measuring the new oil.

The flow meters used in the oil business are certified/standardized by industry organizations such as the American Petroleum Institute, constantly calibrated and audited for accuracy, and in this case would act as the trusted oracle for the smart contract. In the world of smart contacts, an oracle refers to something (typically an application running on a server) that writes data from the real world on to the blockchain, where it can then be read and acted upon by a smart contract.

SO WHAT: What is the Value of the Blockchain?

There are two main areas that would benefit from tokenizing oil (or any asset) on a blockchain.

The first of which being accounting/accountability. Blockchain records are signed, timestamped, and immutable–not only do we know when a record was created on the blockchain, but once it has been entered it cannot be modified or deleted. And because the tokens are created when an oracle reports data to the blockchain, all data/events that lead to the creation of new tokens are also part of the permanent record. In other words, it makes it much more difficult to create false records, and any attempt to ‘doctor’ the past would stick out like a sore thumb because any changes made after-the-fact would have a timestamp that does not match the rest of the data.

The second benefit of tokenizing an asset is because of the ease of transfer. Assuming OIL tokens were redeemable 1:1 for barrels of oil by all those participating, it would be possible to trade with anyone and anywhere there is an internet connection. The blockchain (Ethereum in this case) enables companies to trade directly with each other without the need for an exchange or other fee-taking middleman. The OIL token would always represent a barrel of oil, and the exchange rate between OIL and USD or other currency could fluctuate to reflect the current market price.

NOW WHAT: Making an Idea Into Reality

While the example above may sound like some far off dream, the fact is that we already have all of the pieces needed to complete the puzzle. Blockchain-based smart contract platforms such as Ethereum enable all of the functions necessary to create and trade tokenized blockchain assets. Projects like and others like it are hard at work developing robust systems for building trusted oracles that will report the creation of new resources to be tokenized. Decentralized asset exchanges like EtherDelta are facilitating trades using only smart contracts. In reality, the hardest part is not going to be building the technology but gaining the public’s trust in the technology and getting people, companies, and governments to adopt it. Zap’s own Nick Spanos spoke about smart contracts, oraclization, and the future at the World Government Summit in Dubai this past week and is on a tour educating the world about the benefits of decentralization and blockchain technology.

Disclaimer: The information in the post above is for informational purposes only. Zap does not endorse any of the individuals or organizations mentioned.


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