The Importance of Asset-Backed Cryptocurrencies

Since the creation of Bitcoin in 2009, the burgeoning crypto space has been an unrelenting hotbed of experimentation and innovation. Of particular interest to many recently has been the phenomenon of ‘stablecoins’ – that is, digital money where each unit is backed by assets (on-chain or off-chain or a mix, with the most popular, at present, being USD). In this way, the value of the token issued is ‘pegged’ to the US dollar.

There are certainly a lot of merits to adopting this approach, which would iron out some inefficiencies with the existing cryptocurrency offerings. Firstly, it addresses the problem of volatility – as it stands, the use of digital moneys as a means of exchange or store of value is difficult to rationalise, with daily price swings making this sort of application unwise. Secondly, it ‘anchors’ the value of these tokens – some would put forth the criticism that the crypto market cap is hugely overvalued, given that the vast majority of tokens and cryptocurrencies are backed by nothing. Tethering their value to real-world assets instead makes them redeemable for said asset, and could be a much safer instrument to hold in the long run.

Consider the gold standard, where currency’s value stemmed from the fact that it could be redeemed for a set portion of gold. Many hold that this period was superior in many ways to the current fractional reserve system, and would like to see it return. This would be an excellent application of blockchain technology.

The steady appreciation of gold over the years can be attributed to a number of factors, one of which is undoubtedly the proliferation of marketplaces for trading the metal. It has become increasingly easy to buy and sell gold, whether investors purchase and hold the metal physically, opt to have it stored by a third party, or use ETFs to track it as an underlying asset. There are a few downsides to each of these, notably the associated costs (premiums being charged over spot and maintenance/brokerage/storage fees). Moreover, these solutions have varying degrees of transportability and liquidity, though none are perfect.

With a token backed by a certain portion of gold (with 1 token being backed by 1 gram of gold usually, for more granular control), holders would be in possession of a highly-liquid digital money that can be redeemed for the underlying metal at some tokenisation companies which allow for this option. They would be able to remain comfortable in the fact that, historically, gold has been one of the most stable assets (and will be considerably less volatile than current tokens).

Combining gold with blockchain-based tokens is the logical step forward in manifesting gold in the digital realm. By creating a new class of asset-backed cryptocurrency, inefficiencies from both components alone are erased, giving way to a liquid, portable and easily-used new money.

About the author

Shaun Djie is co-founder and COO of Digix. Digix is an asset tokenisation company incorporated in Singapore in 2016, with physical gold on the Ethereum blockchain, DGX, being its first product. It aims to democratise access to gold for the masses.