Tokenization of Real World Assets (RWA) using web3 technologies represents a significant evolutionary step in the financial sector.
At its core, tokenization involves converting rights to RWAs into digital tokens on a blockchain, enabling seamless, secure, and transparent management and transfer of assets. This significantly eliminates intermediaries and lowers associated costs.
Web3 technology, embodying a decentralized and open web, plays a crucial role by providing the necessary infrastructure for these tokenized assets to be created, managed, and exchanged.
Up until now, RWA tokens have focused mostly on real estate, and already liquid assets like gold, silver, or equities. These use cases have proven that tokenization can work as an easier and more efficient way to invest. Now, it’s time to pivot to more illiquid assets to really put this idea to the test, and uranium is by far the most compelling use case.
There are many markets that are complex, opaque, and illiquid that often do not reveal the true value of a given asset. These goods often change hands through privately negotiated, off-exchange sales that take a long time to negotiate through intermediaries and involve significant amounts of paperwork — resulting in vastly increased costs and delayed processing times.
People and firms have been trying to solve these problems for as long as commodities have been traded. As a result, the majority of these commodities are traded easily and most can be physically delivered in a reasonably efficient manner. But what about those that aren’t as widely traded or transacted in? Are they relegated to forever being treated as the red-headed stepchild? Not anymore.
Asset tokenization enables significant efficiencies in illiquid markets, including increased liquidity, fractional ownership, global access, significantly lower costs, increased transparency, faster settlement, and faster physical delivery.
A Broken Market
Looking at resource usage across the globe, the one that sticks out most is uranium, due to political tensions and the move toward a net zero carbon future. It is a vitally important commodity that is somewhat thinly traded but remains in high demand. It will become increasingly important as time goes by — and yet it transacts in what amounts to a black box.
Uranium has a publicly quoted price, but that is calculated once per day through a survey of various brokers to reach a number that they mostly agree is the “spot price” of one pound of U3O8, also known as yellowcake.
The problem with this price is that it bears little resemblance to the price anyone would actually pay to have uranium physically delivered to them. That rate often wildly diverges from publicly available prices because there is no actual spot market for uranium like we see in equities, gold, oil, and other liquid commodities. This is shocking to many, simply because of how highly regulated, valuable, and crucial uranium is to the energy independence of many nations.
And that’s only the tip of the iceberg….
This month, a large broker seeking physical delivery of uranium put out a request for proposal (RFP) for 100,000 pounds of U3O8 to be delivered in roughly two months. They sought pricing within three days and then had to sift through a torrent of bids that likely saw significant variations in price. Those bids will probably be negotiated down and once the price is finally agreed upon by both counterparties, the delivery will take place.
It’s even difficult if you’re an individual investor who simply wants to buy exposure to uranium price movements. In this case, you’re limited to two options; both are individual trusts that trade off-exchange in North America and Europe. Both have high costs payable regardless of performance and very little transparency into how the uranium they hold is priced. These instruments are not very investor friendly, when compared to other investment vehicles, and they do not enable physical delivery for qualified parties.
Is This Normal?
In traditional commodities markets, futures contracts are purchased at a set price with a predetermined expiry date. This enables the holder of the contract to take physical delivery of the commodity — let’s say jet fuel — shortly after that time, should they choose to exercise the contract.
Famously, Southwest Airlines is able to hold down airline fares through a prolific trading desk that locks in their energy costs well in advance of seasonal spikes. This strategy enables them to secure supplies to avoid shortages, realize significant cost savings, and confirm costs far ahead of time, which in turn means they can smooth out volatility and offer mostly consistent pricing to fliers.
A New Asset Class
The best way to bring liquidity, access, and efficiency to inefficient, illiquid assets is through tokenization — and uranium is the perfect case study. A token that is backed 1:1 by a single pound of U3O8 solves a number of these problems and opens up additional opportunities to a wider base of individuals and entities.
Accessibility: Tokenization allows fractional ownership, meaning virtually anyone can own a fraction of a uranium token. This makes uranium investment accessible to a broader range of people, enabling them to participate in the potential financial benefits of uranium transactions without the significant capital required to invest in a trust.
Global participation: Investors from around the world can now participate in uranium markets, with the exception of people from sanctioned countries. This democratization ensures a more diverse group of stakeholders and broader inclusion.
Enhanced price discovery: Holders can buy and sell uranium tokens on secondary markets with ease, leading to higher demand and deeper liquidity than non-tokenized assets. This leads to far more transparent pricing than what is possible in the current market structure.
With tokenized uranium, for example, Uranium3o8, ownership is democratized so that investors of all types can buy exposure to the price movements of U3O8 for pretty much the first time in history. This development is coming at a time when demand far outstrips supply. Nations are increasingly turning to nuclear power to combat climate change as part of a cleaner energy mix involving wind, solar, hydroelectric, geothermal, flared natural gas, and other sources. Even Japan is bringing all of its nuclear reactors back online, and the United States is expanding capacity as public opinion tilts in favor of the move.
About Uranium. Source: Uranium3o8.com
What About Physical Delivery?
The most amazing aspect of tokenizing uranium is that RFPs will no longer be needed. Instead, our broker friends in the RFP cited above would only have needed to hold 100,000 U tokens and could then simply request delivery at the price the token is quoted.
With U, the acquisition process is greatly streamlined compared to current practice; once the buyer proves they hold the requisite licenses to receive physical uranium in the jurisdiction where they are physically located, it’s on the way.
Once delivery is confirmed, the tokens that are physically backed by the uranium being delivered are burned; they are removed from circulation the minute the yellowcake is on its way to the receiver.
Is It Really That Simple?
There are stringent regulations around the redemption of Uranium3o8 tokens for physical uranium, but it is legal for approved entities. For retail investors, the obvious benefit is far easier price exposure to a highly liquid uranium market than has traditionally been possible.
We believe this is an elegant solution to a significant problem, one that will create an entirely new asset class and open up a world of opportunity for individuals looking to participate in the price action of these spicy rocks.
Ryan Gorman is the head of strategy at Uranium3o8, a project bringing a physically-backed uranium token to market. He has worked as a consultant to web3 and digital assets firms since 2015, most recently as Chief Communications Officer at Valkyrie Investments. Previously, he advised market venture capital firms and hedge funds, exchanges, prime brokers, and more; he was previously also a journalist and worked on Wall Street at two large financial firms.
trewkat is a writer, editor, and designer at BanklessDAO. She’s interested in learning about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
Kornekt is a writer, editor, and content manager at Bankless Publishing. He is deeply fascinated by crypto, web3, and blockchain technology.
Tonytad is a graphic designer who has worked locally and internationally with organisations and firms on over 200 projects, which includes branding, logos, flyers, cards, and covers.
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