Layer One: Onchain commodities trading surges as speculators seek 24/7 outlets

Welcome to Layer One: the newsletter and podcast on the intersection of crypto and the real world. Hosted by Steven Gates and Kelvin Sparks, Layer One brings you inside the conversations driving blockchain forward.

Last time on the podcast, the team was joined by guest co-host John Wu, President of Ava Labs, and Carlos Domingo, CEO of Securitize, to discuss onchain equities and the “end of the beginning” for tokenized assets.

In this edition of the Layer One newsletter, we're taking a look at how commodity traders and investors are embracing tokenization, and what this means for the future of these markets.

Onchain commodities trading surges as speculators seek 24/7 outlets

Last time on the podcast, Carlos Domingo shared his insights into how tokenization is increasing access and efficiency across financial markets. Domingo's own company, Securitize, was recently engaged by the New York Stock Exchange to build a tokenized securities platform allowing for 24/7 trading of equities.

While the likes of Securitize are busy modernizing the plumbing of TradFi, traders are increasingly looking to DeFi to pick up the slack when traditional markets are in recess. This is true not only for equities, but also commodities.

Since the start of the US military action in Iran in late February, decentralized exchange Hyperliquid has seen a massive increase in oil perpetuals trading volume, driven by speculators keen to capitalize on a period of volatile geopolitical jostling. The Block this week reported that seven of the top ten pairs on the exchange were non-crypto assets, with equity and commodity futures filling out the rankings.

Trading activity on oil futures surged throughout March, leading into an April peak which saw daily volume graze $3 billion. JPMorgan analysts attributed this to the always-on nature of decentralized finance, with traders forced to look elsewhere when traditional exchanges, such as the CME, are closed over the weekend.

This trend was a central driver in pushing open interest on Hyperliquid’s HIP-3 markets to highs of $2.38 billion last week (an 8.5x increase from the start of the year).

Commodity traders may be increasingly making their way onchain, but the same isn’t necessarily true for every underlying asset class they deal in. Overall, tokenized commodities — meaning tokenized versions of the goods themselves, rather than derivatives instruments —  currently make up an impressive $7.3 billion in RWA volume (up ~285% year-on-year).

However, this isn't evenly distributed across each asset class: most subcategories have modest-to-low volume, while the vast majority is held in precious metals. Paxos Gold and Tether Gold alone account for $5.1 billion. In contrast, oil and gas make up just 0.06% of the total — growth among most commodity subcategories appears to be lagging behind other tokenized asset classes.

Last week Anthony Milewski, a veteran financier in the energy and minerals industries, presented the case for why these markets should embrace tokenization, evolving beyond the “analog” systems which have been the norm for decades. The benefits he lists include fractionalization, democratization, greater price accuracy, 24/7 trading and instant settlement.

In addition, Milewski also points out that tokenization can bring transparency to some notoriously opaque industries. He argues this is especially relevant given recent geopolitical turbulence, as blockchain-verified provenance offers a “strategic lever in a world where access to raw materials is increasingly tied to national security.”

However, challenges still remain —- particularly in relation to regulation and custody infrastructure — before the broader onchain commodities space can scale to the level that tokenized gold has achieved in recent years.

Podcast Recap: Securitize CEO on the trillion-dollar future of tokenization

In the Headlines: The stories driving the conversation this week

• Bitwise has launched its Avalanche exchange-traded fund on the NYSE. The crypto-native asset manager — which currently holds $11 billion in AUM — plans to stake the AVAX tokens held in the fund, which trades under the ticker BAVA. The ETF is the second of its kind, following in the wake of VanEck's own Avalanche fund, launched in January this year.
• Polymarket has initiated an audit of ecosystem projects claiming to help users profit from insider trading. The investigation will focus on certain copy-trading startups that allegedly allow users to track accounts with unusual trading activity, suggesting insider knowledge of geopolitical and sports events. Polymarket has come under increasing pressure to curb insider trading in recent months, after some major incidents drew the ire of US senators.
• Astronomy DePIN Skymapper has set out to build an onchain record of night sky observations. The newly launched project aims to build a worldwide network of telescopes and observatories, all contributing to an immutable database stored on a custom Avalanche L1 chain. Already 52 contributors are plugged into the network, including the SETI (Search for Extraterrestrial Intelligence) institute, with 1,000 expected by the end of the year.

Top of the Charts: Precious metals account for almost three quarters of tokenized commodities

Keep up with the latest in tokenization, DeFi, and institutional adoption by subscribing to Layer One's weekly market insights.

Layer One is brought to you in collaboration with Avalanche.