Andreas Ruf, CEO of InfiniGold, examines why the rise of tokenized gold may be a significant development for the gold industry.
Value of Gold
Any portfolio must include gold as a fundamental asset. It has been used as a store of value for thousands of years, and societies all across the world acknowledge its enduring capacity to hold value. The ultimate relatively safe asset in times of economic turbulence, the precious metal has been widely recognised by central banks, Wall Street firms, and retail investors alike.
On a chemical level, gold differs from other elements for a variety of reasons. Its scarcity means that its value cannot be easily diminished. Additionally, it is expensive to mine and refine, and despite their best efforts, alchemists have yet to perfect the art of synthesising it in a lab.
Contrarily, fiat currencies can be produced at the central bank’s discretion, effectively depreciating those that are already in use.
This makes cash an illogical choice for long-term wealth storage, especially when combined with the deflationary principles of inflation, which show that the purchasing power of money is always falling.
Gold has also historically been prized for its fungibility—one ounce is functionally equivalent to another—and durability (it resists scratches and doesn’t tarnish).
But as we’ve transitioned into a digital world, our ideas of what constitutes a “portable” device have changed significantly. The expense and effort necessary to transfer real gold have a substantial impact on market liquidity when it comes to trading.
The price of gold has increased by 500% from the year 2000. The reserves held by sovereign nations, which have been gradually building up the asset over time, have increased in value along with the asset’s price.
A wide range of financial products have evolved over time to provide easier exposure to gold on the institutional and retail fronts. However, the issuing of gold-backed tokens through blockchain technology creates new channels for investors to enter government-guaranteed gold markets.
In its simplest form, a blockchain is basically a database. However, because it is shared throughout a network of users, rather than just a single user, and because each user has their own copy that is constantly updated, this technology is extremely potent.
Currently, the most popular application of blockchain technology is for conducting safe cryptocurrency transactions; users just need to pay a small charge to the network in order to have their transactions recorded there permanently and easily verifiable.
Anyone can access these data structures and use them in their own research or to create applications. Because there are no middlemen or governmental institutions involved, transaction fees are typically lower than at conventional financial institutions.
Where Does Gold Fit In?
Blockchains have so far been used most frequently in relation to cryptocurrencies. These digital currencies have typically been highly speculative, which has resulted in substantial price volatility.
The big markets, on the other hand, have grown more stable as the market has matured. Retail investors have found spot trading less fascinating as a result of the path to price stability, which has led to a need for futures markets where crypto assets may be leveraged many times over, such Bakkt, CME, and BitMEX.
Institutional investors are now more interested in the digital markets due to their growing stability, though they are still cautious due to past price fluctuations.
Stablecoins were developed as a means for dealers to safeguard their funds in light of this concern. Stablecoins are cryptocurrencies that are backed by a reserve asset, often the US dollar, though they can also be any other low-risk asset or group of assets.
They provide price stability in a market known for its volatility by tying each token in circulation to a specific amount of fiat currency (held in reserve by the issuer)
With precious metals, the same method can be used. An issuer with, let’s say, 100 ounces of gold on hand may keep this in reserve and issue 100 tokens, each redeemable for a single ounce.
These tokens could circulate freely, be saved in mobile wallets and eventually exchanged for actual gold by the owner for little costs when sent back and forth across the globe.
As a result, a user of such a system enjoys the majority of the advantages of owning physical gold without experiencing any of its disadvantages.
Why is Tokenised gold crucial?
It will appeal to all different types of buyers and, more importantly, open the doors to new types of investors. These include traders looking for an alternative to current gold products, long-term investors who do not want to take physical possession of their gold holdings, and individuals who simply want exposure to small amounts of the asset.
The accessibility and price stability of government-guaranteed gold will be advantageous to traders as the financial world continues to change and become more digitally focused in order to protect their financial interests.
Limitations of bitcoin
The best thing about the Bitcoin system is that it makes it safe to send money directly from one person to another. It’s open to anyone, anywhere in the world. The sender doesn’t have to believe that the recipient, the bank, or any other institution will record the transfer correctly. The “blockchain” of Bitcoin is an online public ledger with records that can’t be changed. Transfers are permanently recorded, like flies in amber, and can’t be changed because the ledger is copied and reconciled many times over thousands of nodes.
As a currency, Bitcoin is also limited in ways that are well known.
1- Scaling of bitcoin
First, it does not scale well. The Bitcoin blockchain can handle about four transactions per second, while Paypal, Visa, and Mastercard can handle hundreds or even thousands per second. As the number of transactions has grown, the blockchain has become congested. The idea behind the recent proposals to increase the block size, which caused a stir in the bitcoin world, was to reduce congestion.
Validation takes at least ten minutes. More secure validation takes longer, and when the system is busy, validation takes even longer.
Nick Szabo, who was one of the first people to work with cryptocurrencies, has made it clear that this tradeoff—high security at the cost of slow transaction speed and low capacity for transaction validations per second—is built into Bitcoin’s design.
So, a blockchain system like Bitcoin can’t handle a large number of retail payments quickly on its own.
2- Volatility of bitcoin
There is the network property of a monetary standard: each of us prefers to be paid in the currency that the most of our potential trading partners accept. This property favors the current standard, which is the fiat dollar in the US, over both bitcoin and gold. It makes the downside of volatility even worse. If your rent and utility bills are in dollars, it is risky to keep a bitcoin balance to pay them.
3- Supply and Demand
The value of a bitcoin is very unstable right now. Bitcoin would be less volatile if more people used it as a means of exchange, but all three problems make that hard to do.
Solution Gold on blockchain
Because of these problems, some people are trying to combine the benefits of blockchain technology with the use of tokens that are worth gold instead of bitcoin.
Gold advantages over bitcoin
Gold could be used as a medium of exchange, but it has fewer problems on all three counts than bitcoin.
First, its payment systems work well on a large scale.
Second, its value (in dollars or in buying power) changes less from day to day to month to month, and even less from month to year to year.
Third, it’s becoming more popular as a private asset. As of October 15, 2017, the total value of all bitcoin balances was $92 billion, while the value of all gold coins, bullion, and ETFs held by private investors around the world was estimated to be $1.7 trillion. Gold holdings are more than 18 times bigger than bitcoin holdings, which are less than 6% of the amount of gold held privately.
Several soon-to-be-launched projects, which are described below, want to make payment systems based on gold that use blockchain technology to make holdings and transfers safer. If gold-backed accounts or digital gold currency tokens with cryptographically secure transfers are successful, users will be able to switch to a modern gold standard as easily as they can now switch to the bitcoin standard.
Gold is already widely held as an investment (as a way to save money and tail‐risk‐hedging), but there haven’t been any easy ways to pay for gold. The business E-gold was a prototype. It was a service that let people buy, hold, and easily transfer gold account balances. In 2005, US authorities shut it down because it didn’t follow “anti-money-laundering” and “know your customer” rules set by the US Treasury. All of the new businesses that are opening soon say they will follow the AML and KYC rules for money service businesses.
FAQs Gold on blockchain
1- Is blockchain backed by gold?
Bitcoin is not backed by anything, so the answer is no. Its real value comes from demand, usability, acceptance, and technological value. The value of cryptocurrencies that are backed by gold, assets, or other things is based on the price or value of the assets that back them.
2- Who tokenized gold on the blockchain?
On December 26, Sberbank announced that it had put its first tokenized gold on the Sber blockchain.
3- Can I buy gold in blockchain?
Some websites makes it easy to buy gold bullion online with Bitcoin and other cryptocurrencies. They accept Bitcoin, Bitcoin Cash, and Ripple deposits from popular cryptocurrency wallets like Blockchain, BitPay, Ledger wallet, and Trezor wallet. They also accept deposits from cryptocurrency exchanges like Coinbase, Kraken, Coinfloor, and Bitstamp.
4- What crypto currency is tied to gold?
GoldCoin (GLC) (GLC)
Any Ethereum wallet can store and send ERC-20 coins. The backing is 1000 GoldCoins for every ounce of gold, which makes it much less volatile than many other cryptocurrencies that are not tied to any stable asset.
5- How do I know if blockchain is gold?
You can prove your identity in the Wallet by doing the following:
- Go to your Blockchain.com Wallet and sign in.
- Go to Settings by clicking on the “user” icon in the upper right corner of your screen.
- Under “Profile,” choose “Account Limits” on a mobile device or “Trading Limits” on a computer.
- Select “Upgrade and Unlock.”
- Follow the on-screen instructions to finish your verification.