Blockchain, cryptocurrencies and gold: the future of money?

Money is one of the most important inventions of humanity. Since ancient times, humans have sought ways to exchange goods and services efficiently and fairly. Money fulfills three basic functions: it is a medium of exchange, a unit of account and a store of value.

However, the money we know today is far from perfect. Fiat money, that is, money issued by governments and central banks, is subject to inflation, devaluation, manipulation and loss of trust. Electronic money, that is, money transferred through cards, transfers or applications, depends on intermediaries who charge commissions, impose restrictions and are vulnerable to computer attacks.

Faced with these problems, many wonder if there is a better alternative to traditional money. Some believe the answer lies in gold, the precious metal that has been used as money for thousands of years. Gold has the advantage of being rare, durable, divisible and recognizable. Furthermore, gold is not dependent on any central authority and maintains its purchasing power over time.

Others believe that the answer lies in blockchain, the technology that underpins cryptocurrencies, such as bitcoin. The blockchain is a distributed, secure and transparent registry system that allows value to be created and transferred without intermediaries. Cryptocurrencies have the advantage of being fast, cheap, global and decentralized. Furthermore, cryptocurrencies are programmable and can be adapted to different needs and preferences.

But what would happen if the best of both worlds were combined? What would happen if cryptocurrencies backed by gold existed? This is the idea behind some projects that seek to create a new form of money, which combines the stability of gold with the innovation of blockchain.

What are gold-backed cryptocurrencies?

Gold-backed cryptocurrencies are a special form of cryptocurrency that has an underlying value backed by a certain amount of physical gold. In essence, these cryptocurrencies combine the blockchain technology of cryptocurrencies and the stability of gold as a store of value.

Unlike conventional cryptocurrencies, such as bitcoin or ether, whose value is based on supply and demand in the market, gold-backed cryptocurrencies have a tangible physical backing. This means that for every unit of this cryptocurrency in circulation, there is an equivalent amount of gold stored in a safe deposit box or some other secure location. This feature provides inherent stability to these cryptocurrencies, as the value of gold tends to be less volatile compared to other traditional currencies or purely digital cryptocurrencies.

How does gold backing a cryptocurrency work?

How a cryptocurrency's gold backing works is crucial to understanding why these coins are considered by many to be a safe investment. To simplify it, we can break the process down into several key steps.

First, the issuing entity of the gold-backed cryptocurrency must acquire a certain amount of gold. This gold acts as collateral for the value of the cryptocurrency and is obtained in the market, either through the purchase of gold bars or by acquiring gold-backed futures contracts. Once acquired, the gold is stored in a secure location, such as security vaults or safes. The issuing entity is responsible for ensuring that the gold is safely stored to maintain investor confidence in the existence and security of the physical backing.

With the gold in custody, the gold-backed cryptocurrency is created. To do this, a blockchain platform is used, which allows cryptocurrency units to be issued and transferred in a secure and transparent way. Each unit of the cryptocurrency represents a fraction of the gold stored, for example, a gram or an ounce. The issuing entity establishes a conversion mechanism between cryptocurrency and gold, which can be fixed or variable depending on the market price. Thus, investors can buy and sell the cryptocurrency with the guarantee that they can exchange it for gold at any time.

Finally, an audit and verification system is established, which ensures that the gold backing of the cryptocurrency is real and sufficient. To do this, independent and reliable entities are used, which carry out periodic inspections of the stored gold and issue certificates of authenticity. These certificates are published on the blockchain platform, so that anyone can access them and verify the solvency of the gold-backed cryptocurrency.

What advantages do gold-backed cryptocurrencies have?

Gold-backed cryptocurrencies offer a number of advantages that make them attractive to many investors and users. Some of these advantages are:

Stability: Being backed by gold, these cryptocurrencies have a more stable and predictable value than other cryptocurrencies that fluctuate depending on the market. This makes them ideal for those seeking to protect their assets from inflation, devaluation and volatility.

1. Liquidity: Being based on blockchain, these cryptocurrencies can be bought and sold quickly, easily and cheaply, without intermediaries or commissions. This makes them ideal for those seeking to carry out global transactions, without borders or barriers.
2. Security: Being backed by gold, these cryptocurrencies have a physical backing that guarantees their value and existence. This makes them ideal for those looking for a safe investment, without the risk of counterfeiting, theft or loss.
3. Innovation: Being based on blockchain, these cryptocurrencies can be programmed and customized according to the needs and preferences of users. This makes them ideal for those looking to explore new forms of money, with more features and possibilities.

What challenges do gold-backed cryptocurrencies have?

Despite their advantages, gold-backed cryptocurrencies also face some challenges that limit their adoption and potential. Some of these challenges are:

• Trust: Although gold-backed cryptocurrencies have auditing and verification systems, users must trust the issuing entity and the auditing entities, which can make errors or fraud. Additionally, users must rely on the custody and security of stored gold, which may be subject to attack or confiscation.
• Regulation: Although gold-backed cryptocurrencies have legal and tax support, users must comply with the regulations and taxes of each country, which can vary and change. Additionally, users must face uncertainty and hostility from some governments and regulators, who may ban or restrict the use of these cryptocurrencies.
• Competition: Although gold-backed cryptocurrencies have a differential and unique value, users must compete with other investment and payment options, which may offer better returns or conditions. Additionally, users must compete with other gold-backed cryptocurrencies, which may have better features or reputations.

What examples are there of cryptocurrencies backed by gold?

There are several projects that have launched or plan to launch cryptocurrencies backed by gold, each with its own particularities and proposals.

PAX Gold (PAXG):

It is a cryptocurrency issued by Paxos, a company regulated by the New York State Department of Financial Services. Each unit of PAXG represents one troy ounce of LBMA grade gold stored in Brink's vaults. Users can buy and sell PAXG on various exchanges, or redeem it for physical gold through the Paxos platform. PAXG has a fixed conversion mechanism, that is, one unit of PAXG is always equivalent to one ounce of gold. PAXG is audited monthly by Withum, an independent accounting firm.

Tether Gold (XAUT):

It is a cryptocurrency issued by Tether, the company behind the popular USDT stablecoin. Each unit of XAUT represents one gram of LBMA grade gold stored in a Swiss vault. Users can buy and sell XAUT on various exchanges, or redeem it for physical gold through the Tether platform. XAUT has a fixed conversion mechanism, that is, one unit of XAUT is always equivalent to one gram of gold. XAUT is audited quarterly by Moore Cayman, an independent audit firm.

Digix Gold Token (DGX):

It is a cryptocurrency issued by Digix, a company based in Singapore. Each unit of DGX represents one gram of LBMA grade gold stored in secure vaults in Singapore and Canada. Users can buy and sell DGX on various exchanges, or redeem it for physical gold through the Digix platform. DGX has a fixed conversion mechanism, that is, one unit of DGX is always equal to one gram of gold. DGX is audited quarterly by Bureau Veritas, an independent inspection firm.

What future awaits gold-backed cryptocurrencies?

Cryptocurrencies backed by gold are an innovative and attractive proposition for many investors and users looking for a more stable, secure and global form of money. However, they also face a number of challenges and obstacles that must be overcome to achieve greater adoption and recognition.

On the one hand, gold-backed cryptocurrencies must demonstrate that they are trustworthy and transparent, and that they have real and sufficient physical backing. To do this, they must turn to independent and respected entities that carry out periodic audits and verifications of the stored gold and the issuance of the cryptocurrency. Likewise, they must guarantee the security and custody of the gold, and prevent it from being attacked, robbed or confiscated.

On the other hand, gold-backed cryptocurrencies must adapt to the rules and regulations of each country, which can be different and changing. To do this, they must obtain the necessary licenses and permits to operate legally, and comply with the tax and legal obligations that apply to them. Additionally, they must face competition and hostility from some governments and regulators, who may see these cryptocurrencies as a threat to their monetary sovereignty.

Finally, cryptocurrencies backed by gold must offer added and differential value to users, which motivates them to use them and prefer them over other options. To do this, they must take advantage of the advantages of blockchain, such as the speed, ease and comprehensiveness of transactions, and the possibility of programming and customizing cryptocurrencies according to the needs and preferences of users. Additionally, they must compete with other gold-backed cryptocurrencies, which may have better features or reputations.

In conclusion, gold-backed cryptocurrencies are a form of money that combines the best of both worlds: the stability of gold and the innovation of blockchain. However, they also have to overcome a series of challenges and obstacles that limit their potential and adoption. Only time will tell if these cryptocurrencies will manage to establish themselves as a viable and attractive alternative to traditional money.