I.
“Early agricultural development in North Dakota can be traced directly to development of the state's railroads…Concurrent with railroad building came the country grain elevator.”
“The limited range of horse-drawn conveyances necessitated construction of elevators six to nine mile apart, enabling a round trip by farmers in one day.”
“Farmers were now able to store their grain and sell it when prices were high, rather than immediately after the harvest.”
“Several waves of enthusiasm to organize [cooperative elevators] subsequently swept the state…Farmers organized cooperatives because they felt exploited by…existing elevators.”
“To the community, the elevator was an employer, customer, and investor, a vital commercial hub…On a grand scale, it was the community’s domestic and international connection.”
“Simply, what has rendered [elevators] obsolete is their limited storage capacity, the development of new and safer building materials, and changes in technology”
“the disappearance of country grain elevators marks the end of an era”
II.
My father hoped his children would know the value of a dollar, as he did. For more than a decade of his early life, he worked a grain elevator. This was, and remains, one of the deadliest industrial jobs in America. Grown men disappear under grain and dust explodes. The elevator put him through college, though and he knew the value of that. He wanted a less dangerous life for his family, and he hoped that hard labor was not required to foster a mentality of thrift. His son is a venture capitalist. Not an auspicious start.
My work did teach me the value of capital, which is close, but not the same. There are places with too much capital, and many more with not enough. More to the point, there are places with access to formal capital markets, and many places without it, by chance or by choice. I have lived and worked in both. In my short tenure as an investor, I have seen the value and the cost of this access, and working to bridge these gaps seems to me a worthwhile and profitable place to spend a career.
III.
Community-led investment is distinct from many other forms that share similar names. Bluntly, it relies on local, often informal networks to identify and manage investment opportunities. These investment opportunities are not appropriately valued by financial markets and would not be funded without significant community contributions in the form of knowledge, labor, and resources. Today, most of these community investments are treated as volunteer or non-profit contributions instead of the value-creating activities they are. Today, few of these investments are funded by outside capital, and communities often raise what internal cash they have to achieve their aims.
For some communities, the lack of engagement is a frustration, for others – particularly those facing systemic prejudice and bias – it is the point. The market brings resources, but it also brings demands. For one, it demands formality which has, at times, been used against the communities creating the value. For another, it demands rights. These have not always been well balanced against the rights and contributions of community-led structures. This is putting it mildly.
The challenges of the 21st century demand investment at scale, however, and the status quo cannot hold. Communities need financial capital. Financial capital needs more opportunities to deploy. Some sort of détente must be reached, allowing each to bring value and realize value.
Financial capital perpetually explores a tradeoff between certainty and control. When it perceives uncertainty to be high, it demands nearly complete control. This is true across the spectrum, from preferred director rights in venture to personal guarantees in debt. When it perceives uncertainty to be low, it will by and large, allow itself to be used without complaint. Investor behavior relative to US Treasuries or high profile startups is indicative. Most growth funding falls somewhere in between, balancing certainty and control through specific claims on asset collateral.
Despite popular narratives, most growth in the US is funded by loans. In the US, nearly 2/3rds of commercial and industrial loans are secured by collateral, as are more than 3/4ths of all individual loans. Smaller banks, which have less flexibility to accept losses than large counterparts, and which are lending to fewer large companies that “will definitely exist in ten years” according to Jim Cramer, issue collateralized loans at a staggering 89% rate.
If you’re struggling to access financial capital in this country, you likely have a temporary or systemic issue with asset collateral. As a corollary, if you can provide asset collateral related to specific priorities and projects, capital’s perception of certainty goes up and their demands go down.
We have seen two systemic challenges facing collateral value in places that have a high concentration of community-led investment behavior.
- The market’s estimation of value doesn’t support the cost to underwrite and service collateral. If it costs $5,000 to originate and service a mortgage, banks cannot write a profitable loan on a $75,000 home. This becomes a vicious cycle as asset values plummet when they can only be bought and sold for cash. Capital regards the economy as low-value and pulls back on high-value service offerings such as relationship-based lending. The most pernicious instance of this problem occurs in communities whose market value has been undercut by a racially or politically motivated refusal to underwrite and service.
- Large lenders are pro-cyclical participants. When large lenders have exhausted their core market capacity in good economic times, they go searching for interesting projects in less familiar places. When the economy turns, they pull back. They often regard the lending relationships in these geographies as less critical to ongoing success. That means any defaults end up with the workout desk, and collateral is sold at market bottom for pennies on the dollar. Wary of this cycle, many large businesses in non-core geographies are dramatically under-levered or debt-free.
Absent widely appreciated collateral, most communities and their community-led investment opportunities have been asked to pledge all their assets, present and future. Specific collateral with a liquid market value which can be easily serviced would seem to cut through many of these systemic issues, limiting capital’s claims to specific investments while enabling it to achieve a balance of risk and return which it finds tolerable.
If such financial agreements can be facilitated by an intermediary that has a long-term interest in the communities it serves, some of the cruelest aspects of capital might be mitigated, its demands might be more specific and understandable, and it might be able to participate profitably in partnership with community rather than in opposition.
IV.
“Commoditization” can be something of a dirty word. Wendell Berry viewed it as the hollowing of America, a step away from the land and toward the unsustainable machine. There is no question the market can be unrelenting and singular in its focus, but it’s also true that when put in its proper place, the market can be useful.
The agricultural economy changed for North American farms in the 1850’s as grain elevators began to dot the landscape. In the post-Civil War era, the expansion of rail lines supercharged the growth of the construct. Without this innovation, corn could not be a commodity. Elevators needed railroads to access the prices quoted in Buffalo, Chicago, or Saskatchewan. Railroads needed elevators to aggregate enough grain, becoming sizable customers whom might be profitably serviced.
The railroad alone took that profitability urge too far and sought to own the first elevators. They were uncomplaining tools of the system. When rail barons hiked shipping costs, the elevators passed these directly on to farmers, as opposed to negotiating on their behalf. More devious sins were committed, and eventually, communities began to organize elevators on their own, essentially providing unpaid labor and capital contributions in the hope of fair market access.
They had no other choice. Where farms near larger cities might have more customers to choose from, the elevator was a small city’s sole link to the market. If it functioned properly, it could turn corn into collateral, striking forward agreements with small farmers and guaranteeing a purchase price for their grain. The certainty allowed them to access credit. This motion of capital formation is a critical one. Community coalesces resources independently, it creates markets in those resources, it connects those markets to larger markets, and the capital compounds.
Eventually small elevators were subsumed by larger ones, as economies of scale were not in their favor. They claimed to be acting in communities’ best interest, but here we are again, with massive gaps in credit. Herein lies the cost of commoditization. When small entities can only remain economic for short windows in history, the community quickly loses any buffer it has against large market forces.
V.
Naming things is hard. Cryptocurrencies were named as such when a bunch of cypherpunks thought that they could build an independent currency at far lower cost than a national government. They succeeded, to the point that bitcoin will likely soon achieve full integration with financial system in the form of an ETF.
Not everything in crypto land is a currency though. This presents an ongoing struggle to share how and why the technology might be useful. Chris Burniske coined the term cryptoassets, which began to explore a diversity of use cases. Utility tokens and work tokens have had their moments and may again. Cryptocommodities is a term that’s also had muddled meaning.
I won’t fight the naming battle. I will say, however, that crypto allows for digital assets which are interchangeable and substantially similar to be originated, serviced, and managed at far lower cost than their centralized peers.
This is not limited to JPEGS on the internet. It can be expanded to all digitally verified goods and services. How much bandwidth are you providing to the people around you? How much power has your battery delivered to other users? How much information have you provided about flood heights in a neighborhood? How often are you maintaining green infrastructure? Cryptocommodities are digitally verifiable promises to produce something of tangible value, just like the farmer’s promise to produce grain and the elevators’ promise to buy it.
If these commodities align with community priorities, they might prove valuable digital collateral.
VI.
The problems plaguing collateral-compromised places impair not only their ability to interact with banks, but also any company that “lends”. Many companies in the energy, communications, and other critical service industries “lend” to communities in the form of infrastructure, and then recoup that loan by selling products over time. If the minimum cost of a cell tower between materials and admin is $250,000, that affects which communities are served.
Were bandwidth to be commoditized by crypto, however, communities could find new ways of deploying cell coverage. They could choose appropriately sized equipment that would be economically deployed on the rooftops of local businesses. Those businesses might choose to take a revenue share in the tower instead of a static rent for their roof space. Community organizations might pull together buying groups for cell service. Lenders might be willing to lend against that future bandwidth value to finance this deployment.
Many communities are doing this work through wireless co-ops or buying collectives. It’s slow progress as these efforts are trapped in the informal economy. If it weren’t their efforts might scale to the size of the challenges they face and might create new opportunities.
Governments also rely on collateral of a different kind. Let’s call it “information collateral” – data that shows their funds have been deployed in accordance with policy. This is a generous interpretation of government policy, but whether the intention is aligned with the outcome, the process requires a significant surveillance apparatus not unlike banks underwriting and servicing requirements. Without the metrics as collateral, government will only advance so much capital. Were some of these outcomes to be commoditized, community coordination networks might also become assets.
Most importantly, these would become community-owned assets that could be used in line with community-led investment priorities. A wheel emerges.
VII.
History never repeats. The elevator model may not apply perfectly to the value chain of digital assets, but the story rhymes quite strongly. Community-led investment structures can originate commodities on the low end of the cost-curve due to non-cash contributions. This commodity will be usable as collateral in accessing capital markets.
Private companies are rising to help communities build on top of new or existing cryptoasset protocols, but communities might be comfortable interfacing directly with the market. Where early elevators fell, we expect community-led intermediaries to have enduring value, as access to technology enables access to economies of scale on par with large entities. Much will be different. Some simple things will stay the same.
If nothing else, history tells us that buffers against the market have value. Present experience does as well. None of these processes are simple. Formalization to the market’s satisfaction is not easy. Carbon credit commodities, for example, which might in the future deliver great value to communities seeking climate resilience, show the fraught, at times unfair, nature of the process. The work continues and things are produced. There is price risk to manage. There is monitoring and maintenance to perform.
These are familiar motions if unfamiliar tools. Many places had been doing this work before digital assets and would continue to do it without them. This is not a change, so much as a recognition. When you belong to a place, you tend it. Things grow. Some of them, you can sell. And there’s a financial asset where none had been recognized before. That’s good value for a dollar.
Special thanks to Dustin Mix and Samuel Piccolo for their editorial perspective.