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What are Stablecoins?

The term stablecoin is frequently thrown around by those initiated in the crypto-space, but what is it? It is a digital currency value tied to an asset or supply controlled by an algorithm (known as an algorithmic cryptocurrency). This category of digital assets created a cryptocurrency with a stable value. Cryptocurrencies have become popular alternatives to traditional inflation hedges as such money assets are highly volatile, meaning that Bitcoin may not be the best store of value if compared to other monetary assets. In 2014, the first stablecoin, Tether, was established and was backed by the US Dollar and related assets  (US bonds). But wasn’t the creation of cryptocurrency an attempt to veer away from the authority and meddling of central banks? There must be a better asset to collateralize private digital money than monetized debate.

Fortunately, there is gold, precious metal that has demonstrated its value retention and salability over the course of human history. In an age of digital transactions, even using gold-pressed coins or promissory notes to redeem specie may be cumbersome in an era of debit cards. The idea of a gold-pegged stablecoin seems like a natural fit, combining the benefits of gold’s superior value proposition with the perks of blockchain technology. The market for the digital token has answered with popular stablecoin such as Pax GoldTether Gold, and Perth Mint Gold Token.

Gold stablecoins are valued at a specific amount of gold per token, stored in a secure vault. Per the Pax Gold white paper, each coin is collateralized by one troy ounce of gold. In the example of Pax Gold, any owner of Pax tokens can redeem them for physical gold “… at partner organizations..”. While the reserve ratios for gold to token parity and specifics of redemption requirements may vary by currency, most gold-backed stable coins utilized Ethereum-based smart contracts (ERC-20 protocols).

3 thoughts on “Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 2)

    1. I will get into the benefits of it in my next post.

      It is more portable and divisible in a digital format. Then again there is the issue of institutional trust (will they make good on redemption) and liquidity ( it is easier to go to your local gold storage facility for conversion to specie).

      This trust should be conditional , if a coin offering is boasting a reserve ratio , less than 1:1, the risk of bank runs lingers; unless the institution suspends redemption with an “option clause”.

      I would say never trust any asset-backed coin with less than 1:1 backing.

      However, this maybe our last shot at having a “gold standard”. For the US/world. After Nixon closed the gold window and with the advent of unconventional monetary policy(QE), the genie is out of the bottle , no one outside of Libertarians are going to want to go back. Making it a political impossibility.

      Being a fan of Free Banking (think the work of George Selgin and Larry H. White) ; if we return to a gold standard let it being a private money.

      Liked by 1 person

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