GoKawiilEvery few months, and especially this week, the AI space gets criticized for circular financing and customer relationships. OpenAI raises money from Microsoft, spending it on Microsoft servers; Nvidia backstops CoreWeave debt, and CoreWeave buys Nvidia GPUs. “The bubble is about to burst!” analysts scream.
Analysts point to dot-com deals with circular investments in 1999, arguing that this is all bound to happen again . They are wrong.
Circular deals are more interesting than “good” or “bad.” They show the AI industry isn't just maturing, but modifying the idea of “AI” to something that is less a technology product, and more a commodity. Imagine that—intelligence available like electricity, and the underlying financial system structured accordingly.
The evolution of circular deals points to the commodification of AI, where compute capacity is moving from a business model where you buy a product (e.g., the hardware, or space in a data center) to something so fungible that you buy it the way you buy electricity, copper, natural gas, or other commodities.
We'll explore why circular deals are particularly important in commodity industries and what this implies for understanding the trajectory of AI. First we'll cover how major investments in traditional commodities markets work to ground our analogy more clearly. Next, we'll cover the investments that mimic this process in AI, showing how such investments can be healthy. Finally, we'll explore a few examples where circular deals do not abide by this analogy and how these deals are introducing risks that could one day turn into awful surprises for the companies themselves, their investors, or the entire sector.
Buying and Selling Commodities: A Circularity Primer
Complex commodity infrastructure like mines, refineries, and ports comes with such large development costs that a bank lending a development company money can potentially risk its own solvency in doing so. Circular deals with multiple customers or beneficiaries, and potentially even governments, are often the only solution that gets shovels in dirt or ships in the water.
Let's look at a simplified example of such a deal. Imagine you want to develop your region's economy with several wells and a pipeline, and you can't afford it. You partner with a commodity trading firm who agrees to make your company attractive to banks or bond buyers by guaranteeing they will buy all your oil at a certain price. This means you are guaranteed revenue for the foreseeable future, and the banks know they can trust you'll repay their loans. The trading firm might even take an equity stake in your company for good measure—potentially to encourage better governance or oversight.
With such a relationship between you and the oil trader, you've got oil, a large bank loan, and a guaranteed customer… you've got yourself a circular commodities deal!
This is not a contrived example; it's a common strategy developed and evolved since the 1960s. Japanese commodities traders and development banks financed infrastructure to enable commodity development, committing to future purchases and equity deals . Jamaica did so in the 1980s .
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