Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 3)

Bitcoin.me Educational Video by Three Piece Suit Productions LLC, Michael Adamo, Dan Donaldson is licensed under CC-BY-NC 4.0

The Benefits of Gold-Pegged Stablecoins?

Most of the white papers of the existing gold-tied stablecoins exalt the perks of digital currency backed by the world’s most enduring monetary commodity. Many claim the benefits of  1:1 token to gold-backinglow transaction feesa safe-haven hedge against instability and inflationlow buy-in requirementslow transactional costs for people living in remote areas, and the positive aspects of combing blockchain technology (convenience, decentralization, and honest record keeping) with the enduring value proposition of gold. While all these qualities are maybe enticing, the best way to demonstrate the superiority of golden stablecoins would be to compare them to other similar alternatives. 

Standard Cryptocurrency vs. The Midas of Digital Money

The most notable difference between Bitcoin and a stablecoin like Tether Gold would be the value proposition. Jeffery Tucker was bold enough to claim that the use-value of Bitcoin was a combination of trust (immutable transaction and a public ledger )and a universally applicable payment system structure. Tucker’s interpretation of the Austrian Regression Theorem (p. 407) is audacious, but can a concurrent use-value be equated to a past use value? Such an inquiry may be obtusely pedantic. However, what if a form of money could not only have the trust of a blockchain and internationally fluid payment system conjoined with the storied prior use history of gold? This may very well prove to be a superior form of money.

Beyond the intrinsic value of a gold collateralized cryptocurrency, the price stability of gold is far superior to that of Bitcoin, the highest valued digital coin on the market. As previously mentioned uncollateralized cryptocurrencies are highly volatile( 81 percent annualized for Bitcoin), with wildly fluctuating values. Some commentators have claimed that established gold-backed stablecoins such as Pax Gold have a lower degree of volatility when compared to unbacked cryptocurrencies. However, the degree of price fluctuation can also be attributed to how the currency is managed by the firm holding the gold. It would be shrewd of consumers to look for purveyors of stablecoins offering full reserve (1:1) redemption policies or limits on the capacity (to avoid depreciation). Even if an institution has lower reserve requirements, judicially implementing option clauses to prevent bank runs can help maintain customer confidence. 

Gold-Backed Stablecoins and Gold ETF Funds

Gold Stablecoins are frequently compared to Gold ETF Funds which are the darling of derivatives markets. Despite the criticisms of experts, there are some advantages that gilded Stablecoins hold over ETFs. Gold ETFs are essentially investment funds possessing gold-related assets. One key attribute distinguishing ETFs from their blockchain-based cousins is the fact that “..most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent..”. In terms of liquidity, this may be a bit more simplified than cashing out a share of a gold-backed stablecoin token, as most stablecoins redeem in gold specie. However, if the point is to obtain money of “high intrinsic” value, the ETFs have to trade easy liquid for lesser money (fiat currency), in return. It would be dishonest not to bring up that gold-tied stablecoins do have counterparty risks, but that is a chance anyone takes with any third party holding precious commodities in their care. 

ETFs are purely intended to function as a speculative asset, while in contrast, the smooth settlement and distributed ledger and nationally agnostic nature of blockchain structure make tokens like Pax Gold or Tether Gold better suited for use as a medium of exchange. In all honesty, this will probably best bet for re-establishing a gold standard in the post-Bretton Woods era. The political interests of Federal Reserve officials, banks, and politicians are too embedded in the empty promises of easy money policies of the post-2008 U.S. Monetary regime. The temptation lurks for utilizing Quantitative Easing, bent beyond purely macroeconomic objectives (full employment, price stability), to fund the ends of fiscal policy. (Fiscal QE). The temptation of gesturing such a powerful bargaining chip such as open purse strings would make the idea of a fixed money supply more of an obstacle than a virtue. The number of people who stand to benefit from the current monetary policy of using collateralized debt as money makes a gold standard wide-eyed opium dream. Any transition to gold-backed currency; must come from a private currency; no government would ever revert to such a barbarous relic. It doesn’t matter even if the “End the Fed” crowd gets Ron Paul or Dave Smith in the Whitehouse, a meat grinder of the political process will drown out any monetary reforms. 

The Benefits Over Physical Gold

Beyond the benefits of tokenized gold lending itself as a medium of exchange from blockchain technology, it is worth noting that most transactions are now digital. The ease, portability, and divisibility of a digital version of gold are hard to beat; versus lugging around cumbersome bars or pressed coins or employing costly storage solutions. Like ETF exchanges, gold exchanges or reputable storage facilities may not be accessible in rural areas. There is an affordability factor; instead of buying by the gram, ounce, bar, or coin, investors can purchase a fraction of a coin for as little as $1. They are reducing the logistical and monetary costs of investing in gold. 

Gold-Backed Stablecoins: Bridging the Gap Between Crypto- Gold (Part 2)

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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).