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LandX: The Perpetual Commodity Bonds Protocol

A recurring theme for Frogs Anonymous is a focus on protocols that produce a sustainable yield. This means yields derived from protocol revenue, not native token emissions or prices. These sustainable yield protocols are essential right now during this bear market, as the price downturn has led to a severe drop in yields for protocols that relied on their native token continuously going up in price.

So far, we've covered GMX, Umami, Cytus, and Gains Network. Today we have another entrant to that list, which may be the most interesting yet.

Today's spotlight is on LandX and its novel perpetual commodity bond.

Chances are you probably have never heard of perpetual commodity bonds, and you definitely haven't seen one on-chain before. Don't worry; this article will explain what it is, how LandX brings it on-chain, and how it can earn you a sustainable and inflation-resistant yield.

But first, let's talk about the commodity market in general, and specifically the agricultural commodity market that LandX focuses on.

Commodities: An Untapped Market

To start, agricultural commodities are a necessity in all market conditions. Rain or shine, bull or bear, it doesn’t matter: people need to eat all the same. What feeds them? Wheat, soy, beans, rice, etc.

Because of their necessity, the size of the agricultural commodity market has steadily grown. To make things even better, it is not correlated with crypto and stocks. Can you say portfolio diversification?

Global Derivatives Volume

Global Derivatives Volume

Even though it's big, the agricultural commodity market isn't as big as it could be. Farmers have difficulty accessing the capital needed to reach maximum production, and a lack of interest from traders has left agricultural commodities constituting just 5% of the derivative market. Add in how food demands are increasing due to the ever-growing population, and it's clear that there still is a lot of room for agricultural commodities to run.

At this point, you're probably thinking, "this all sounds fine, but why would I invest in agricultural commodities over crypto?" or "I'm interested, but I don't know where to start."

Both are fair questions. Let's discuss.

You should consider investing in agricultural commodities because they are uniquely attractive to crypto investors:

● They are a necessity. You can sleep well at night knowing there's no food bubble on the verge of bursting. Your soy, wheat, corn, and rice will always be valuable.

● They are inflation-resistant. As currencies become less valuable, food doesn't also become less valuable. It gets more expensive. In contrast, crypto tends to do poorly in periods of high inflation because interest rates are hiked to control inflation, which causes a liquidity crunch and a risk-off atmosphere. Not so with agricultural commodities.

● They are ideal for portfolio diversification. Too many people think of diversification as having different crypto assets. The problem with "diversifying" in that way is that crypto all tends to move together. When one of your tokens drops, chances are the others are too. Proper diversification would be having a portfolio of assets that don't move together so that when one falls, the others still hold strong. Agricultural commodities are a good option for this, as they have historically moved independently of the crypto market.

As to where to start, up to now, there was no place to start. On-chain agricultural commodities did not exist. Not until LandX and their perpetual commodity bond came into existence.

Wait, their what?

Quick Overview of Perpetual Commodity Bonds

The perpetual commodity bond is at the heart of LandX, and it sounds like a bunch of financial mumbo-jumbo. So before we jump into how LandX brings it on-chain, let's break it down piece by piece.

  • Perpetuals are financial agreements without an expiry date.
  • Commodities are agricultural products.
  • Bonds are a financial instrument in which borrowers pay an interest rate to lenders.

Add it all up, and you see that perpetual commodity bonds are financial instruments that pay an indefinite yield to investors who lend to agricultural producers.

What LandX is doing is bringing perpetual commodity bonds on-chain to the benefit of both investors and farmers.

The LandX Plan

Now that we know why agricultural commodities are a worthy investment and what perpetual commodity bonds are, we can finally get into what LandX actually does.

xTokens and cTokens

At the core of LandX are xTokens and cTokens.

LandX's xTokens

LandX's xTokens

xTokens are liquid bonds backed by agricultural products. There are five xTokens: xWHEAT, xSOY, xCORN, xRICE, and xBASKET (an index fund of the previous four). Each xToken provides a yearly perpetual yield paid in cTokens, on-chain commodities representing 1KG of the underlying product. For example, if I have five xSOY tokens, over the course of a year, I would receive five cSOY tokens as my yield, which represents 5KG of soy.

Because xTokens are synthetic versions of agricultural products and their yields are equal to the value of 1KG of the underlying asset, their value and APR are decided by the market value of the commodity and investors' pricing of the bond. For example, if wheat is $0.40/kg, and the market decides that 5% APR is fair, then xWHEAT will trade at $8.

The plan is for xTokens to be primarily traded on Uniswap v3. LandX is initially aiming for a 7% APR for each xToken. Knowing this, initial prices can be calculated using the target yield with the formula:

xTokenPrice=MarketCommodityPrice/0.07.xTokenPrice = MarketCommodityPrice / 0.07.

Meaning at current market prices, the initial seed liquidity would look like this:

Source: LandX Whitepaper

Source: LandX Whitepaper

The beauty of xTokens is that they encompass everything good about agricultural commodities but with some extra benefits.

● They are an excellent inflation hedge as not only does their underlying asset increase in price with inflation, but you are being paid a yield by that increasingly valuable asset. In other words, as the price of agricultural commodities increases, so does the price of the xToken and the yield that xToken is paying. Double the gains.

● They diversify your portfolio but allow you to keep your liquidity on-chain. You don't have to worry about bridging in/out; all you need to do to purchase xTokens is use Uniswap like you have a million times before.

● With xBASKET, it is easy to gain exposure to and earn yield from various agricultural commodities in one product. Maybe you can find an agricultural commodity index fund in traditional finance, but good luck finding an instrument that simultaneously earns you a yield from wheat, soy, corn, and rice.

● Finally, you are doing a public good by purchasing xTokens. It's not often that your DeFi liquidity actually helps people in the real world. Buying xTokens and providing farmers with liquidity doesn't just help the farmers, but because of the extra production it enables, it helps the planet.

cTokens, on the other hand, will be traded on an internal marketplace. The beauty of cTokens is that they make agricultural commodities composable in DeFi. It would be extremely difficult to take your real-world soy and earn a yield on it. However, you can easily take cSOY and throw it into another DeFi protocol for extra yield on top of the regular xToken rewards.

The Process

At a high level, this is how LandX flows from start to finish:

LandX's Infrastructure Graph

LandX's Infrastructure Graph

It all begins with the landowners. It's only fitting, as they are the most important part of the whole system. Without them, there are no agricultural products, which means no yield for investors.

Acquiring capital is not easy for landowners. It's confusing, overly bureaucratic, and time-consuming. Similar to RWA lending protocols, what LandX does is provide landowners with access to DeFi capital. In return, landowners sell a portion of their future harvests by committing a part of their crop share to LandX via a lien (legal contract establishing collateral) against their farmland.

Validators are the ones who go and find these capital-starved landowners. Validators are the bridge between landowners and LandX. They vet the farmland, model the crop shares and expected payouts, draw up the legal contracts, and provide the pool of first-loss capital through staking LNDX tokens. In many ways, the success of the protocol rests on their shoulders.

Once the lien and crop share agreement is set, landowners must keep 12 months of crop share as a security deposit and prepay their crop share obligations in advance. At this point, the lien contract and farmland collateral are turned into an NFT. Once the landowner deposits this NFT into the protocol, they receive xTokens equal to the crop share agreement. For example, if the contract was for 10,000 KG of Soy, they would receive 10,000 xSOY tokens.

After they receive their xTokens, they are free to put them on the market and sell them to investors. This is how they receive capital. All they need to do now is provide the payments, which are denominated in a fixed amount of crop share over a perpetual rolling 49-year period. If they default, the lien enables LandX to make a legal claim to the land and replace the non-paying farmer. Farmers are free to exit anytime; they just need to buy back and return the xTokens. Once the xTokens are returned, the contract NFT is released, and the commitment is void.

Each party is happy in the end. Landowners receive capital they otherwise would not be able to attain. Validators receive a commission fee and a share of the protocol's fees. Investors receive a perpetual yield equal to the value of 1KG of the underlying agricultural product, which is claimable at any time.

Win-win-win.

LNDX Token

LNDX is the native governance token for LandX. Although the total supply, initial distribution, and emission schedule have not yet been released, we have concrete details on how it plans to serve the protocol: by aligning the interests of validators, token holders, and the protocol.

Each validator must stake LNDX tokens as a pool of first-loss capital in the event land under their watch defaults. By making validators put some skin in the game, LandX aligns the validator's best interests (don't lose their stake) with the protocol's best interests (pick productive farmland).

LNDX holders earn 60% of the protocol fees (distributed in USDC). They are also the ones who govern the protocol, meaning that it is in their best interest to govern the protocol well so that the fees are high, as this would increase their rewards. Ideally, this becomes a system where good governance begets more good governance, benefiting both the protocol and LNDX token holders.

It's still early days, but the LNDX tokenomics look promising.

Potential Risks

Although LandX looks and sounds really good, I still have some potential areas of concern:

● A key pain point for protocols attempting to incorporate RWA is how to pick where to put their funds. For LandX, this would be picking which farms to invest in. I'm no expert on farmland, and LandX has complex models for evaluating farmland that include terms like geospatial imagery and normalized difference vegetation index, so I'm sure they have put a lot of thought into this. ● However, if, for whatever reason, LandX picks enough losing farms, then the protocol just doesn't work. Even just one losing farm in the early period could be catastrophic for LandX, as investor confidence would likely be irreparably damaged. ● However, as they grow and become more established, this will become less of a risk.

● U.S. regulation is probably going to be an issue. The SEC is on the warpath, and I don’t see an argument for perpetual commodity bonds not being securities. It seems like LandX is trying to get ahead of this by blocking U.S. citizens from accessing its website. Obviously, this is not ideal, as it eliminates a large market, but you gotta do what you gotta do.

● As the recent Nomad and Solana hacks have reminded us, there is always a smart contract risk involved with crypto projects.

Conclusion

LandX is bringing something new to DeFi. Not only is it bringing something new, it’s bringing something that produces value for both the real world and DeFi. In a world of endless forks and VC cash grabs, that is something to be celebrated.

Do I see retail investors rushing in to buy xTokens and cTokens? To be honest, I don’t know. On the one hand, even though the yield is real and uncorrelated to crypto, I’m not sure it’s high enough to draw retail in over “sexier” and higher-paying protocols. On the other hand, the composability of cTokens opens up a world of possibilities to earn extra yield, which could entice people to join the fray. It will be up to the LandX team to market their product properly. Hopefully, they succeed.

DAOs and investment firms, on the other hand, I can absolutely see purchasing xTokens and cTokens. Diversification and inflation resistance matter most for large sums of capital, which DAOs and investment firms have. Especially for DAOs in which most of their treasury is in their native token, which describes a remarkable amount of DAOs, xTokens and cTokens present an excellent opportunity to diversify not just out of their native token but towards real world assets.

Regardless of how LandX ultimately turns out, it is amazing to see what DeFi enables. As LandX puts it, "It has never been easier to connect an investor in Manhattan with a farmer in Pará." That is really incredible when you sit down and think about it. The future is bright for DeFi; bear markets be damned.


This post was sponsored by LandX.

For more information, find them on the web or follow them on Twitter.

Published on Aug 09 2022

Written By:

TheHeathen22

TheHeathen22

@TheHeathen22
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