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Commodity-Backed Crypto Tokens and Redemption Value

Article Quant Q&A · Author: Homunculus Reticulli
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Summary

The document considers how a hypothetical cryptocurrency linked to a currency and a quantity of wheat might be priced, and whether market supply and demand alone would determine its value. Its answer focuses on legal redemption rights: if each token gives its holder enforceable title to the referenced commodity and the holder can surrender the token to receive that commodity, the token should be worth the commodity it represents.

This provides a basic no-arbitrage intuition for a redeemable commodity-backed token. The claim depends on genuine fungibility and the holder’s ability to exchange the token for the underlying asset. The text does not explain the pricing of tokens that lack redemption rights, nor does it examine custody, delivery costs, legal enforcement, liquidity, or deviations from parity. It therefore offers a narrow principle rather than a full valuation framework for asset-backed cryptocurrencies.

Key ideas

  • A token with enforceable rights to receive an underlying commodity should track the value of that commodity.
  • The key condition is that holders can surrender tokens and claim the referenced asset.
  • This redemption mechanism gives a no-arbitrage anchor for a commodity-backed token’s value.
  • The discussion does not cover custody, transaction costs, or tokens without effective redemption rights.

Tags

CryptoCommoditiesArbitrage
Full text
# How are asset backed cryptocurrencies priced?


# How are asset backed cryptocurrencies priced?












I am trying to understand the pricing of crypto currencies.

Assuming there is a fictional cryptocurrency that is pegged (say) the Chinese Renminbi and the price of Wheat (the relation being the Renminbi amount needed to buy 1000 bushels of wheat), how will the price of the cryptocurrency be determined?

Will it be determined solely by market forces (i.e. supply and demand)?

## Answer by ZRH (score 1, accepted)

https://quant.stackexchange.com/a/44826

If there is fungibility, i.e. the owner of the cryptocurrency has legal title over the referenced commodities, that is can demand an exchange where he surrenders the crypto units and receives the commodity, one unit should have the exact same value as the referenced commodities.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.