Editors’ notes from Grant –
I want to start by saying when we were looking at interesting projects to cover that were currently being built LandX was high on the list. What I will also say is that during 2017-18 I would have thought this Real-World Assets movement was never going to happen. Many came to the industry and said they would bring everything on-chain and it rarely amounted to anything substantial.
My opinion changed when I saw MakerDAO invest in off-chain treasuries and bonds with great success. I then began to see on-chain yield basically evaporate into nothingness and looked for who is building semi-reliable real-world assets in DeFi and LandX came up.
This area of DeFi will only increase and is such a simple narrative to sell the normies which helps its case.
Anyway, enjoy the article, It is a good one.
LandX is a new frontier for DeFi.
All these graphics have been provided by our friends at ELi5 DeFi – Go check them out!
Introduction to LandX
If you have been exposed to the concept of DeFi for even a few seconds, then I’m sure you are aware of the idea of liquidity mining/yield farming. Farmers i.e. liquidity providers use their tokens/liquidity to farm rewards in terms of inflationary token emissions and a share of protocol fees on various DeFi protocols as supply-side participants.
Of late the idea of real yield is popping in the DeFi landscape. People are fed up with hyperinflationary token emissions as rewards – which is simply dilution protection at best and an outright Ponzu at worst. “Value” is effectively being generated out of thin air and once the demand side for said tokens dwindles, prices converge to zero.
However, have you ever pondered whether we will only see magic internet money (no pun intended) or if we will ever see more real-world productive assets and commodities on the blockchain producing real yield too? Well, I sure have.
I am here to tell you that with LandX, that, in part is about to change. Also hopefully, the terms yield farming and farmers as I previously alluded to are about to get new meanings too – you’ll understand what I mean later…
Folks, there’s a new kid on the block when it comes to the real yield narrative. LandX is a perpetual commodity vault protocol. Commodity vaults provide investors with a return backed by a legal contract secured by underlying farmland and real landowners/farmers with an alternate fundraising avenue. LandX makes commodity vaults for a variety of crops available as a liquid, digital and tradable assets.
In simple terms, the LandX protocol has taken a small part of the yearly harvest from various farmlands across the world, put it on-chain and streamed its value to the wallets of investors wanting to diversify their portfolios. The protocol offers real-world farmers an alternative way to access capital and offers investors exposure to farmland crop share payments in the form of a liquid and tradable token.
This is not your traditional DeFi yield. This is real crop yield that is generated on farmland by harvesting actual crops. If Alameda were still kicking, then this is one project they can’t yield farm, kek. In essence, LandX is bringing farmland yield to the blockchain through their proprietary perpetual commodity vaults protocol. Through the protocol, investors can hedge against inflation and have direct exposure to farmland commodities including wheat, corn, soybeans, and rice.
It is important to note that through the LandX protocol, users aren’t speculating on the price of these commodities, but actually owning the underlying crop yield in perpetuity via holding a token. Therefore, the protocol tokenizes the crop yield that is generated on farmland annually.
I will dive deeper into what the protocol is and how things work, but first, let me briefly outline the broad investment thesis, and why you could be interested in such an opportunity.
The global world population just hit 8 billion and we are projected to hit 9.2 billion by 2040. It doesn’t take a Giga brain to figure out that the world population is and has been on the rise since… erm, forever and that seems likely to continue for the foreseeable future if Elon Musk has his dirty way. Add to that the fact that we as a collective have got to feed all these people, right?
Interestingly, about 83% of global calorie consumption comes from plant-based foods. However, all of this plant-based food is grown on only about 23% of agricultural land. The remaining 77% of the agricultural land is not suitable for producing plant-based foods. On top of that, the quantity of agricultural land that is suitable for producing plant-based foods, and generally too isn’t increasing – in fact it is on the decline.
Due to the expansion of cities, industries and overall economic activities, as it is we’re losing tillable farmland. A significant part of farmland is also being lost due to soil erosion and other such calamities. Therefore, we’re in a situation where there is no new farmland, however, the human population is growing. Thus, we’re in a scenario of growing demand (for food) – as the population rises against declining supply or at best constant supply – as tillable farmland to produce these crops is scarce. Logic and basic economics would tell us that the price of such productive farmland and the crops that it yields would only rise in the medium to long term. This may also be the reason why Bill Gates is apeing into farmland in the US, becoming the single largest farmland owner. NFA.
The aim of the LandX protocol is to provide crypto and DeFi native investors with a previously inaccessible investment opportunity and landowners/farmers around the world with a new avenue for raising capital. Also, the overall supply and demand dynamics look appealing from an investment perspective.
As more capital will flood into this overlooked asset class, hopefully, farmers and landowners from around the world will be able to raise capital with relative ease, and that will promote investment in improving their operations, looking at better and sustainable means for farming, and overall development for the agricultural landscape. The inflow of fresh capital in any industry is a boon after all.
Also, as things are, farmers/landowners currently avail capital at often very exploitative terms (they need capital to fund further expansions and run operations), which in turn forces them to manually inflate their crop yields by using chemicals, which as you can probably guess isn’t great for the long-term health of the farmland, and chemical fertilisers degrade the topsoil. So LandX at the same time will promote sustainable farming practices too – as farmers are able to obtain capital on fair terms.
Before learning in-depth how the protocol works, it’d be beneficial to learn about the various stakeholders within the LandX ecosystem. For a protocol to be a success, there need to be multiple win-win situations for all parties involved.
The LandX protocol constitutes of 3 key stakeholders, and they are:
Let me explain the role of each stakeholder in detail.
Farmers: Well, they are the farmland owners whose real-world crop share (paid in perpetuity) is getting tokenized and sold on the blockchain. They commit a fixed amount of their annual harvest to LandX to access capital from investors. Their commitment is secured by a lien on the underlying farmland.
Validators: Hold your horses, these aren’t the block producers of a PoS blockchain, but something else. They are the bridge between farmers and the protocol. They’re responsible for onboarding new farmland and assisting with the process’s legal and economic contracts. In essence, they help tokenize the farmland crops through a decentralized legal and economic framework.
Investors: These are the crypto and DeFi native investors and users, who deploy capital in exchange for exposure to real farmland assets through xToken perpetual commodity vaults.
LandX Project Overview
Let me now explain how things actually work. I’ve introduced the protocol and mentioned all the key stakeholders. Now how do they interact with each other so that things come to fruition?
From the infographic above, we see that the protocol works as follows:
- The protocol provides real farmers’ capital in exchange for a legal share of their crop in perpetuity.
- The contract is ensured by a farm audit, security deposit, and lien on their land. This means that if the farmer decides not to honour their promise of paying their crop share for the xTokens that they’ve minted on-chain and sold in the open market, then the protocol has the documentation in place to claim their land. Moreover, as you can guess, the security deposit too will in that case be non-refundable. I will explain this in greater detail later.
- The farmer’s crop share payments become an ERC20 tokenized perpetual vault (minted xToken). A couple of points to note here:
- Only a farmer with a verified and audited farmland, with the help of a validator, can mint an xToken against committing (in perpetuity) a defined crop share.
- 1 xToken entitles the owner of the token to receive 1 kg of crop yield for the underlying crop every year in perpetuity.
- Investors can buy these xTokens from the open market, the price of which is determined by the forces of demand and supply and gain exposure to real farmland commodities through the xToken.
How does LandX Work?
Let me outline the entire workflow on how things pan out within the LandX ecosystem. This is as mentioned in the docs.
The LandX process begins with farmers committing a portion of their land’s crop-share through a legal contract known as a lien. Their farmland is also subject to an extensive qualification process to ensure its reliability. The resulting legal and economic contracts are represented by an NFT. The NFT is fully backed by the underlying farmland.
Farmer deposits the NFT minted against the obligation to pay crop share into a smart contract and receives xTOKENs equivalent to the amount of the crop-share they agreed to (i.e. if a farmer commits 1000kg of soybeans per year, they receive 1000 xSOY tokens).
The LandX platform requires farmers to keep 12 months of crop share payments on the platform in order to hedge against potential default. Additionally, LandX requires a 12-month security deposit from every farmer to ensure protocol has enough time to complete the legal process in case crop share payments default.
Crop share payments will be ensured by cost-effective parametric crop insurance. Insurance will be offered to farmers to ensure the remaining crop at the same rates providing additional value.
To access the capital, farmers sell their xTOKENs on-chain to interested investors. The crop share paid to the protocol becomes the yield investors receive. Each xTOKEN entitles its owners to receive 1 kg per year of the commodity yield (CY) in perpetuity. Commodity Yield is paid out in cTokens.
cTokens can be sold at the protocol level for USDC at the current market price of the commodity delivered by a Chainlink oracle.
The LandX protocol streams commodity yield to the xTOKEN holders. Yield is guaranteed by the farmer’s contract. Investors can convert their cTokens into USDC at any time.
If a farmer wants to exit their crop-share obligation, they must buy back the xTOKENs they originally received. Once the xTOKENs are returned to the smart contract, the NFT commitment will be returned to the owner and the contract will become annulled.
- A farmer commits a fixed amount of commodity (e.g 3000 kg of Corn) per year in perpetuity, represented by an xToken.
- Crop share becomes yield the xToken holders receive in cTokens – which is secured by the security deposit and the farmland itself. cToken can be exchanged for USDC anytime at the market price of the commodity.
- The NFT issued to the farmer is backed by the underlying farmland.
- The farmer can sell the minted xTokens on the open market to access capital.
- Owning 1 xToken entitles the owner to 1 kg of the underlying commodity every year, which is paid in cTokens and can be traded for USDC based on the Chainlink oracle price.
- If the farmer wants to exit their obligation, they will need to buy back the same amount of xTokens that they initially received. Once they have the required amount of xTokens returned to the smart contract, the NFT will be returned to the owner and the commitment to paying crop share will be void.
I’m sure you still have some lingering questions. However, hopefully, the overall concept of the protocol must be clear now.
This graphic will clear the process/workflow further
It is important to note that the landowner/farmer owns the xTokens and not the validator.
xBAsket is an ERC20 token which represents a basket of equally weighted xTokens. This provides further diversification offering exposure to all four agricultural commodities in a single index fund token.
Users can at any time mint or redeem their xBASKET for the individual underlying xTokens. xBasket is a self-compounding vault. Yield received by xBasket tokens gets sold and more xTokens are purchased inside the xBasket.
Let me now try and explain in greater detail what xTokens and cTokens are.
What are xTokens – LandX?
Simply, xToken holders are entitled to 1 kg of the underlying crop per year in perpetuity, backed by real-world farmland. The Commodity Yield (CY) is paid daily to holders and can be claimed in USDC at any time. xTokens are tokenized exposure to the crop share of farmland commodities. They’re also a long-term hedge against inflation.
Therefore, xToken can be seen as a tokenized right to real crop-share payouts representing 1 kg of the underlying crop every year in perpetuity. They are yield-bearing tokens, providing a real yield in cToken.
As an example, 1 staked xWheat earns 1 cWheat per year which is exchangeable for USDC based on the per kg price of Wheat as determined by a Chainlink price oracle.
Benefits of xToken
Let me outline some of the benefits of holding xTokens.
- Hedge Against Inflation: xTokens provide exposure to farmland commodities and act as a natural long-term hedge against inflation. Historically speaking, this is true. NFA.
- Instant Liquidity: xTokens are traded 365 days a year on decentralised exchanges such as Uniswap.
- Collect Daily Real Yield: Crop yield is added daily and can be claimed in USDC anytime. Each xToken adds 0.0027 kg of the underlying crop per day, equating to 1 kg per year.
- Diversify Your Portfolio: Exposure to commodities provides an uncorrelated diversification from crypto, stocks, and bonds.
The average value of U.S. farm real estate per acre from 1970 to 2021.
NFA, but historically the per acre price of US farmland has only gone in one direction, up only. This isn’t to say that this trend will continue forever, but as I mentioned the supply and demand dynamics earlier, it looks likely. The only way I see the trend breaking is if someone due to some technological innovation will rapidly increase the quantity of tillable and productive farmland. Which, don’t get me wrong, would be great for humanity but highly unlikely. It takes 1,000 years to generate 1 cm of topsoil.
You’ve got to remember that with xToken, you aren’t investing directly in farmland, but in the crop yield that will be produced on that farmland in perpetuity. Meaning that owning an xToken won’t give you the right to own farmland, it will give you the right to receive 1 kg of the underlying crop in perpetuity every year. I know the difference is minute, but it is a difference nonetheless.
However, one could argue that if LandX is successful it will bring liquidity to this critical but underexposed asset class. It could actually help with the accurate price discovery of various farmlands around the world based on the market-determined xToken price.
What are cTokens – LandX?
I believe it must be understood by now, but still, cToken represents the commodity yield that is distributed to xToken stakers in cTokens. cTokens can be exchanged via the platform at the market value of 1kg of the underlying commodity.
cTokens are derivatives designed to track the price of an agricultural asset. cTokens are tradeable via an internal marketplace that collects landowner yield in USDC and offers it at market value for cTokens. cToken exchange prices are updated via a price oracle that uses pricing data from traditional commodity exchanges.
I have explained the basics, but let me now dive deep into the various steps that entail the landowner and the validator.
LandX provides funding based on the market value and production levels of the farmland – which is used as collateral. By tapping into a broader, more sophisticated investor base LandX creates higher interest in agricultural derivative products which translates to higher valuations for the landowners.
The funding is structured so that the payments by the farmers are denominated in a fixed amount of crop share over a perpetual rolling 49-year period. This minimises the financial impact on the landowner each year, ensuring the payments are fixed at a level that cannot exceed the MACS (Maximum Allowable Crop Share). This financing structure removes currency or commodity price risks from the farmer..
LandX establishes a Maximum Allowable Crop Share (MACS) for every type of crop and region as a percentage of farmland yield that farmers are able to tokenize. MACS is one of the parameters that the LandX DAO will vote on. MACS is currently established at between 10-15% depending on the type of crop and region.
Step 1: The farmer provides the validator with production yield data for five years, the cadastral records of the property, its geo coordinates, and ownership information.
Step 2: Validator verifies the data, models the crop share and payout, and presents the expected financing terms in USD.
Step 3: Property titles are pledged against the obligation to pay crop share for rolling 49-year periods. A legal contract known as a lien is registered with local authorities.
Step 4: An NFT is minted with the terms of the contract.
Step 5: Farmers deposit the NFT into the smart contract to receive the xTokens. Farmers can sell the xTokens on the market or create an OTC deal with the LandX OTC desk.
Step 6: At any time the farmer can buy back the xTokens at market price on decentralised exchanges or OTC which will end the crop-share obligation.
LandX validators are intermediaries between farmers and the LandX protocol. Validators connect real-world farmers across the globe to the opportunities of LandX.
Validators are responsible for:
- Evaluating the farmland and onboarding the landowners to LandX
- Assisting farmers with legal and financial contracts
- Staking LNDX token – will cover the token later
In return for their hard work, LandX validators receive:
- Earn commissions for bringing on farmers
- Earn a percentage of protocol fees
- Vote on governance decisions
A validator in the context of LandX can be simply thought of as a middleman who’s responsible for handling the technical and legal stuff surrounding the protocol.
Protocol Revenue Model
When it comes to the protocol revenue, platform fees are set to 10% initially and distributed in USDC as follows:
- 60% LNDX token holders
- 35% LandX Treasury
- 5% LandX Choice
The platform fee comes from two sources, and those are:
- 10% tax on the investors when they cashout the cToken for USDC.
- 3% tax on the farmer when they receive their xTokens. The validator earns a percentage from this as their commission for onboarding the farmland.
LandX Choice is a fund by the LandX Foundation that aims to help disseminate technologies aimed at creating more sustainable methods of farming practices around the world to make agriculture a climate-positive industry.
Protocol Governance & LNDX Token
LNDX token holders govern the LandX protocol. LandX is structured as a decentralised autonomous organisation (DAO) with voting rights belonging to holders of the LNDX governance token.
Apart from being a governance token, LNDX also accrues value from 60% of the revenue share that the holders receive from the protocol revenue. Thus, the token is anything but a worthless hyperinflationary farming token. It accrues real yield and acts as a governance token as well.
LNDX token can be thought of as a more volatile investment in the LandX ecosystem, which will possibly capture a higher upside – if the protocol is a success.
Validators are required to stake LNDX tokens as part of their commitment to the land agreements they set up.
In the end, I’m super hyped and excited about the launch of the protocol on the Ethereum mainnet. Not only from an individualistic investment perspective but also for the overall upliftment of the agricultural sector. We need to find sustainable, climate-friendly, and scalable solutions to this problem, and LandX in my opinion can be a part of the solution. I understand that injecting money into the market won’t alleviate all problems, but it will give farmers an opportunity to expand their operations and not be forced to artificially and manually inflate crop yields to repay expensive bank debt. This model is a burden on the farmer, the soil degrades drastically, and the output is also not optimal.
That isn’t to say that the protocol won’t face challenges. The fact is that at least as of now, a lot of the activities will happen off-chain, and so there’s an element of trust that needs to be established in a trustless and code-driven system. Unfortunately, as things are with all real-world asset projects, most of the legal work cannot happen on-chain, so the investors will rely on LandX. But I’m sure the team will relay important information to the investors, and ensure there’s a proper communication channel and transparency mechanism in place. Ideally, we’d want to be in a world wherein everything happens on-chain. I’m sure we’ll get there too in due time.
Well, that’s all for today folks. I hope you’re as excited about the protocol launch as I am. I tried to be as detailed as possible, but I’m certain you have further questions. If so, check out the below-mentioned resources.
#AgTwitter #AgFinance #Agriculture #Ag #CropInsurance #Cropshare #SaveSoil #Farming