This article explores the concept of blockspace as a commodity, drawing parallels with traditional commodities and discussing its implications. An alternative framework to the existing ‘cryptocurrency as a security’ and ‘cryptocurrency as a commodity’, this piece proposes ‘blockspace as a commodity, cryptocurrencies as a derivative’ framework. More broadly, this piece questions whether we should update our definition of commodity to include digital resources.

About Blockspace

Blockchains, often portrayed as abstract and speculative financial products, are, in reality, tangible technological systems with precise product and business models. Serving as distributed global computers, blockchains produce blockspace—the opportunity for anyone to include transactions in a block and inscribe state changes on a distributed ledger.

The cost for users to access blockspace is expressed in gas fees, with each operation requiring a fixed gas amount and the gas price fluctuating based on demand. The cost for the blockchain and blockspace producers is intricately tied to its security since gas fees, alongside block rewards, are used to pay validators or miners in transaction validation and network security. The more nodes participate in approving transactions, the more secure the network is. Each blockchain (layer 1) uses its native token to reward validators and miners.

Like companies, blockchains exhibit varying spending patterns and levels of efficiency on security and fee earnings. For instance, Bitcoin, with an issuance rate of around 1.8%, invests heavily in security but also earns substantial fees. In contrast, Avalanche, with an issuance rate exceeding 3.5%, spends significantly on security but may not earn as much in fees. Finally, Ethereum, the first blockchain with a deflationary token supply, typically shows a negative issuance rate, meaning it collects more fees than it spends on operating and securing the network.

Categorizing Blockspace

If blockspace is the product, blockchains themselves function as market infrastructure, facilitating the production of blockspace and the coordination of supply and demand, a balance that is ideally reflected in the blockchain’s token price. Talking about Proof of Work blockchains, Leo Zhang and Georgios Konstantopoulos write:

The ultimate purpose of the entire mining industry is serving as a decentralized transparent clearinghouse for a single commodity: the blockspace.

Blockchains produce a resource consumed by end users and establish a market infrastructure, leading to a growing belief that blockspace should be considered a commodity. As further articulated by Leo Zhang and Georgios Konstantopoulos, blockspace fuels the essence of all cryptocurrency networks, with miners as producers, mining pools as auctioneers, and users as bidders in the blockspace market.

Interestingly, the current debate between the SEC and the CTFC has neglected the concept of blockspace and solely focused on cryptocurrencies and tokens. By doing so, it ignores any distinction between blockchain protocols (Layer 1 and 2, responsible for producing blockspace) and other dApps that offer a diverse range of services. This article seeks to redirect attention to the concept of blockspace, analyzing it within the framework of commodities. This discussion not only holds intriguing intellectual considerations but also carries significant practical implications.

The Properties of Commodities

The 1936 Commodity Exchange Act (CEA) defines commodities in the following way:

The term “commodity” means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as provided by section 13–1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.

According to this arguably dated definition, commodities are physical goods with contracts for future delivery that are presently or in the future dealt in. On top of these two official criteria, commodities typically show a few properties: fungibility, consumability, scarcity, volatility and tradability.

Fungibility

Commodities are economic goods with full or substantial fungibility, meaning there is no product differentiation, and they are interchangeable with other goods of the same type. Unlike finished products, commodities of the same type are all fundamentally the same, and it doesn’t matter to the consumer who produces them.

Those who oppose the idea of blockspace as a commodity would argue that different chains have different trade-offs between security, decentralization and performance, with users generally exhibiting strong preferences for one or a pair of these properties. Different communities and ecosystems form around specific design choices, and the term ‘maxi’ applied to Bitcoin or Ethereum supporters represents an intensification of this trend. Chris Dixon says:

Most blockspace will not be fungible, in my view, which will limit the financialization. While blockspace may be fungible within a single chain, between blockchains, there will be technical trade-offs in areas such as security and performance. More importantly, different blockchains have different communities around them.

Nonetheless, if multichain interoperability becomes a reality as prominent projects like LayerZero seem to believe, then blockspace will increasingly become homogeneous and interchangeable like a commodity. Users won’t need to know which chain they are on. Perhaps they won’t even know they are using a blockchain at all. As Karl Marx put it: "From the taste of wheat, it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist.”

Looking at the present situation, it’s also important to highlight a distinction whereby differentiation and network effects may be crucial for certain use cases but less important for others. For instance, DeFi generally requires deep liquidity, so LPs and users wishing to swap tokens may prefer to trade on blockchains with higher TVLs. On the other hand, transferring stablecoins as payments, say sending native USDC, may be less sensitive to the specific ecosystems and rather look at the cost. If the prices continued to converge as they have, users' utility wouldn't vary by choosing one blockchain or another.

Finally, even if blockspace retained slight differences in underlying security, decentralization, and performance, this wouldn’t preclude it from being considered a commodity. In fact, commodities are often categorized into different grades, reflecting their quality. For instance, in the case of oil, different grades depict specific properties, such as density, sulfur content, and geographic origin, but they can all be grouped under the umbrella of 'crude oil’ or ‘petroleum' as a commodity.

Consumability and Scarcity

One of the most notable differences with securities is that commodities are physical goods that can be consumed directly by end users or used as raw materials to manufacture finished products. At the same time, both hard commodities (oil, minerals, etc) and soft resources (agricultural products) are finite or somewhat scarce.

This is the ‘use-value’ (or utility) concept Karl Marx refers to in his Critique of Political Economy:

To begin with, a commodity, in the language of the English economists, is “any thing necessary, useful or pleasant in life,” an object of human wants, a means of existence in the widest sense of the term. Use-value as an aspect of the commodity coincides with the physical palpable existence of the commodity. […] A use-value has value only in use, and is realized only in the process of consumption.

In other words, a commodity needs to have a practical purpose or be valuable in some way to people. Similar to commodities, blockspace is valuable and useful to users who want to get their transactions into the new state of a blockchain. Like commodities, blockspace is consumed, and this process is irreversible. As noted by Will Nuelle, consumers essentially purchase the right to utilize computing and bandwidth resources for a fixed period and storage over an indefinite duration. Computation and bandwidth are immediately consumed, and storage is indefinitely consumed since nothing can be removed from the blockchain to ‘free up space’. In other words, blockspace cannot be reused. Because blockspace needs intensive (and physical) resources like electricity, computation and hardware to be produced, and because they cannot be reused, it’s a scarce and limited resource. In fact, it’s even more limited than traditional commodities, since even increasing input (hashrate) won’t lead to increased production of blockspace, but only stronger security. Leo Zhang and Georgios Konstantopoulos write:

[…] unlike most commodity markets, more producers doesn’t mean an increase in the supply of blockspace. The supply of blockspace is determined by block size and the average block time.

Volatility and Tradability

Because commodities are either extracted from or grown on physical land, their production is often subject to various external factors like weather conditions and geopolitical events, alongside supply and demand fluctuations. These factors can lead to unpredictable availability and significant price volatility. Tradability in commodity markets was initially designed to help producers manage risks associated with external factors and hedge against price volatility. It’s important to note that the value of commodities comes from being tradable and exchangeable with others, what Marx called ‘exchange-value’.

Like commodities, blockspace is a resource that needs to be extracted (‘mined’ in Proof of Work blockchains) by a decentralized network of node operators, who face an upfront investment in hardware or staked tokens. At the same time, demand for blockspace quantified through fees that users attach to their transactions varies over time, making the blockspace business highly volatile. Blockchains serve as markets for the production, sale and usage of blockspace, striving to optimize demand and offer and assign the most accurate price to users’ utility (timely inclusion in a block).

This is an important endeavour because, as mentioned, the level of uncertainty in this business is quite high. On the production side,

The rewards node operators receive are liable to volatility: the spot price, transaction fees, and the probability of finding that block all factor into the uncertainty of rewards.

An efficient market, aka the blockchains, would ideally offset and hedge validators/miners’ capital and operational risks with things like staking derivatives, re-staking, or other more sophisticated solutions like Alkimiya:

Until now, none of these strategies or structured products have enabled users to gain exposure to the value of blockspace directly. As a specific example, the value of blockspace often gets bid up heavily during token airdrops, NFT mints, or days where the market is volatile and on-chain activity is high in general. Investing in blockspace via swap-integrated products allows buyers to take a directional bet on event-driven network congestion and profit off these expected events.

On the consumption side, blockchain users purchase and consume blockspace, similar to how they purchase and consume oil or wheat. When the blockspace demand increases, users can either pay higher fees or get included in later blocks. In both these scenarios, users incur a loss.

Leo Zhang and Georgios Konstantopoulos summarize this double-sided uncertainty well:

For miners, blockspace in the future has lower time value due to uncertainties in price, network difficulty, and fees. For users, blockspace in the future has lower time value because of the uncertainty in the profitability and the utility of their transaction.

In this scenario, the blockchains’ native tokens can serve as a first instrument to mitigate the risks of price volatility, both for producers and consumers. When blockspace demand and usage increase, the token will likely appreciate. Ethereum has an additional catalyser for this reaction: EIP-1559. Burning ETH used to pay base fees ensures that the rise in blockspace demand reflects in the ETH price, as heightened demand for blockspace leads to increased base fee burning, which in turn contributes to the deflationary supply of ETH. In essence, surges in blockspace demand directly benefit ETH holders.

By selling the tokens earned through fees and block rewards, blockspace producers can mitigate losses during periods of low activity and reduced income. Conversely, users can partially hedge against increased network costs during peak activity by purchasing tokens when prices are low.

In this context, tokens serve as derivatives representing the value of the underlying resource—blockspace—much like traditional commodities in derivative markets.

Blockspace Between Fungibility and Consumability

Among the properties analyzed so far, tradability, volatility, and scarcity may apply to other categories of products, such as securities, albeit with some differences. If we really wanted to simplify this analysis and see where blockspace resembles commodities, we could narrow it down to a two-dimensional analysis and focus on two properties: fungibility and consumability.

While commodities’s value is linked to their usability in various industries or for end consumers, securities are not consumable in themselves as they represent financial instruments and ownership in an entity. Moreover, their value is derived from factors such as the financial performance of the issuing entity, which makes each unique and different from others, or ‘non-fungible’. On the contrary, commodities are completely fungible and interchangeable.

Blockspace could be placed somewhere in between, with high levels of consumability and mid-levels of fungibility. If interoperability and modularity approaches prevail, blockchains will likely converge toward similar prices and performance, making blockspace effectively fungible (Blockspace*).

Another noteworthy property often associated with commodities, setting them apart from securities, is physicality: traditionally, commodities have been tangible goods or raw materials. However, it must be recognized that the current legislation pertaining to commodities is somewhat outdated, exemplified by peculiar exclusions such as onions. The evolving landscape of digital resources introduces a new dimension to this consideration, as items like bandwidth could potentially be regarded as commodities. As regulatory frameworks adapt to the digital era, there's a possibility that the definition of commodities may expand to encompass non-physical assets.

Why Does it Matter?

Discussing whether blockspace can be deemed a commodity is not merely an intellectual exercise but also carries practical implications.

If blockspace is recognized as a commodity, tokens of these blockchains could be viewed as derivatives, providing a means for participants to hedge against the volatility and risks inherent in the production and consumption of blockspace. This novel framework of blockspace as a commodity and token as a derivative tries to surpass the ongoing debate among regulatory bodies, particularly the SEC, CFTC, and the broader crypto community, regarding whether tokens should be categorized as securities. In this context, the argument is made that the CFTC, with its regulatory oversight of commodity futures, holds greater authority in shaping this discourse.

It's essential to note that this analysis and conclusion specifically pertain to layer 1s—full-fledged blockchain protocols whose primary product is blockspace. This framework may not necessarily apply to other protocols or applications with diverse offerings such as DeFi, games, social platforms, and more.

On a broader scale, this conceptual shift calls for reevaluating and updating the definition of commodities. Applying Marxist criteria, which insist on commodities displaying both use-value and exchange-value, demonstrates the seamless applicability of these principles to blockspace despite its digital nature. The outdated assumption that consumable items must be physical is rendered obsolete in the Internet era, where virtual resources like blockspace, bandwidth, and cloud storage have become indispensable products in the daily lives of billions. As technologies and markets progress, the regulatory landscape surrounding asset classification must remain flexible, subject to interpretation, and adaptive to change.