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By Alexis Pappas
The emerging digital economy is a strange place, where unexpectedly large volumes of capital flow, en masse, in very mysterious ways. In February of 2021, a piece of digital art – a collage made of images created by the artist Beeple over several years – sold as a blockchain based non-fungible token, or NFT, at a Christie’s art auction for just below US $70 million.
That’s nearly $40 million more than a red-hued Rothko fetched in October of 2020, also at Christie’s, and almost $30 million above the December 2020 price for a famous and ubiquitously replicated Hockney oil of California’s Nichols Canyon.
Dozens of household-name artists have recently had a piece sell at auction for less than Beeple’s collage – this March, a Van Gogh was bought for a mere $15.4 million. And unlike with those universally understood works of art, there is no physical analogue to “Everydays – The First 500 Days”.
As an NFT, it’s a purely digital work, sold as a purely digital asset, and all the pool of buyers received in exchange for their millions was a digital file and some general rights to present the image. And of course, the ability to sell their fractional ownership on to the next buyer. Previous Beeple NFTs have traded for 100 times their initial sale price.
What does this have to do with Canada’s energy sector? Marshall McLuhun’s suggestion that the “medium is the message” has never been more relevant, and in our new economy, the medium is also where the money is. Whether it supports a company’s growth or launches a new project, how investment is raised is becoming almost as important at what it’s being raised for.
For a capital-constrained industry like energy, close attention should be paid to the transformation happening in financial markets, because the current frenzy for tokens like NFTs is a sign of much deeper changes. The world’s oldest banks are embracing crypto and tokens, and even stock exchanges, like Switzerland’s SIX, are moving quickly towards blockchain-based platforms for token exchanges. Why is this the case?
Blockchain has widely-recognized benefits for financial services – as an immutable and cryptographically secured digital ledger, it creates a foundation of verified data that is cybersecure and fraud-proof. For public blockchains like Bitcoin and Ethereum, miners compete to solve complex mathematical problems to verify transactions and add blocks to the ledger, and this “proof of work” secures the network.
Other blockchain methodologies, including both private chains like R3’s Corda and public chains like Cardano, rely on mechanisms other than mining, like consensus by stakeholders, to verify transactions. Smart contracts, or pre-programmed agreements executed on the blockchain network, use the on-chain data to automate transactions, and attached data files include tamper-proof records that support the transaction’s value like asset descriptions, ownership rights and history.
Tokens are any database entry representing some form of value that is transacted on a blockchain network. In the case of NFTs, each token is verifiably unique – non-fungible, in that it isn’t interchangeable with another NFT – and just one of a variety of different types of digital assets and securities. Tokens can represent fractional ownership in a company, project, intellectual property or real-world asset like real estate.
The result is a system that drastically reduces the need for typical transaction intermediaries like lawyers, accountants and administrators. It lowers costs, democratizes access to private-company investment and allows for new types of value creation. Tokens are a revolutionary form of automation – and the future of global financial markets.
For industries like energy, this means that producers can take a particular project – like a new clean energy facility – tokenize it into fractional shares, and crowd-source funding in the new digital marketplace. Companies can monetize carbon credits and offsets as tokens, raise funds against in-ground reserves, and turn their actual measured production into commodity tokens.
All provable assets of a company have the potential to become market-traded securities – with a far lower cost and greater precision than public market listings, and more liquidity and market access than private investment. With Alberta’s self-certification program for investment accreditation, security tokens issued by private companies now have an even wider audience.
Another energy industry challenge that blockchain helps overcome is transparency – the immutable, tamper-proof data that supports each token transaction builds trust as well as new opportunities for realizing value. Data gathered throughout the oil and gas value chain and incorporated into the token can verify the carbon status of each BOE and support new products like certified net-zero or low-emissions oil.
Benefits aside, are NFTs and other token offerings turning into an unsustainable bubble? Maybe – it’s an easy argument that prices into the thousands or millions for memes, tweets and random video clips aren’t sustainable, not to mention that the main platform, Ethereum, is a massive energy consumer, with each NFT issuance equalling a 500-mile road trip in a gasoline-powered car.
However, the energy consumption challenges are rapidly being overcome with new token platforms like Cardano that, unlike most other public blockchains, don’t rely on mining for transaction verification and use a fraction of the electricity. But just like with the wave of ICOs a few years ago, or the technology boom-and-crash at the turn of the millennium, the irrational exuberance that precedes a fall often also sets the guiderails for a major shift in how economies operate.
It took only four years from the last tech IPO of the bursting dot-com bubble to Google’s public launch in 2004, which heralded the beginning of a new and very digital era, where technology giants rapidly eclipsed the rather more material mainstays of the Fortune 100 like car manufacturers and brick-and-mortar retailers. These turnarounds are moving far faster now, and tokens will be no different.
Will traditional resource sectors be motivated to participate in this shift? Canada’s energy industry urgently needs to increase the velocity, volume, and also variety of capital, and the digital economy has a unique power to create capital liquidity and momentum, while diversifying energy’s pool of investors with creative types of fractionalized assets.
Of course, not every energy industry project will fit into the new asset universe, or match the interests of the investors who, at least at this early stage, are leading the direction of the market. Token economics makes the most sense for funding innovation – green initiatives, net-zero production, carbon offsets, and clean energy production like hydrogen are all prime candidates for tokenization.
With oil and gas and clean energy token projects quickly moving forward across the world, including by majors like Shell, Canada has the opportunity to benefit from this wave of digital marketplace creation – but this requires a coordinated effort from industry, the tech sector and critically, our national and provincial regulators. Substantial progress has been made over the last few years in clarifying the regulatory status of cryptocurrency and tokens, and government should take an even more active role in developing the market infrastructure and models that will shape our new economy.
This is a rare moment in time, one in which the storm of disruption Canada’s oil and gas industry has experienced is forcing a creative reimagining of our future. The crash in energy prices, global movement towards sustainability and the challenges of the pandemic are all catalysts for systemic changes that, enabled by advanced technologies like blockchain, have the potential to support Canada’s energy growth decades into the future.
About Alexis Pappas
Alexis Pappas is a technology strategist and writer with diverse projects in clean energy innovation, industrial blockchain and digital finance. She is the Executive Director of the Canadian Blockchain Association for Women (www.cbaw.io) and the Director of Industry Digitization for the Canadian Blockchain Consortium (www.canadablockchain.ca).
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COMMENTARY: Canadians Should Decide What to do With Their Money – Not Politicians and Bureaucrats