Is the Glittering of Gold Tokenization Worth the Hype?
The blockchain technology is evolving rapidly and changing financial assets and economic models on the go. Its support for cryptocurrency development can no longer be ignored. Very soon it may revamp the way we look at money and its ever-changing nature.
Tokenization is one of the main changes that blockchain has brought so far. This process converts real, palpable goods into digital tokens to enable easy transfer and virtual manipulation.
Gold is just one of the latest tangible assets to go through tokenization. Gold-backed cryptocurrencies capture the interest and imagination of investors, banking institutions and even governments. Some companies like Digix already allow users to buy, sell and trade tokenized gold.
Today, we try to find out if investments in gold-backed tokens are feasible by answering a question that is on many investors’ lips: Is the glittering of gold tokenization worth the hype?
What is Tokenization?
Tokenization is the process through which the value of a product is transferred to a blockchain system. Almost everything from fiat money to copyrights and precious metals can become virtual tokens on a decentralized ledger.
Through tokenization, people can manipulate their assets in a virtual space free of physical constraints. One can buy, sell and trade the tokens that represent the real-life assets that he or she possesses.
Bitcoin is one of the first examples of tokenization. People would trade fiat money for Bitcoin tokens (BTC) and become owners of digital assets on the Bitcoin blockchain. In recent years, this process has expanded its use to include a broad range of goods that the industry divides into three categories:
These goods are non-physical assets like patents, copyrights or carbon credits. They can easily go through the tokenization process since they do not imply any physical manipulation, storage or shipping.
These assets are physical goods that possess two fundamental properties. First off, they can be divided into smaller units down to an infinitesimal proportion. Secondly, they can be exchanged for identical assets.
Gold is a fungible asset that has recently become the subject of intense tokenization. Other examples of similar goods include oil, wheat, sugar, flour among many others.
These goods are unique, real-life assets that are not divisible or interchangeable. Notable examples include art, real estate and even parking spaces among many others.
How Gold Tokenization Works
Gold has been a referential point of value for the Western civilization for millennia. Its conventional and fluctuating price has had an impact on the entire world. In a seemingly eternal bid to scavenge it, humanity has gone to extreme lengths that often led to dire consequences.
For centuries, governments had a steady reserve of gold to back their fiat currencies. The United States had this practice until the 1970s when President Nixon decided it was no longer necessary. Other countries followed suit.
Since fiat money is not a fixed resource like gold, banking institutions can have better control over its liquidity, velocity and credit supply. Nevertheless, a gold-backed currency is much more reliable than one that lacks the real-life support of a precious metal.
Now, as blockchain is steadily replacing the traditional financial order, an interest for a gold-backed cryptocurrency becomes a natural step in this evolutionary process of asset trade and ownership.
Gold tokenization works quite simply. A blockchain company can intermediate the transfer of fungible goods (gold) into digital assets on the ledger.
An investor that owns gold transforms its real-life value into tokenized gold, usually in the form of an ERC-20 asset on Ethereum.
The resulting tokens get their value from something called Proof of Asset (PoA), which confirms the existence of its real-life, palpable equivalent.
Tokenized gold is redeemable for the physical gold that the investor keeps in a certified vault. That gold must be minted by an official issuer. As a result, the traders must trust each other, the issuers and the eventual vault holders.
The Benefits of Tokenized Gold
Conservative investors may look at gold tokenization as a risky path to take. Their fears spur from a general fear of blockchaintechnology. They dread a future where palpable trading of real-life assets becomes obsolete. In their defense, most of them are veteran financiers who have seen one too many financial crises to now tread lightly on any innovation that comes their way.
All blockchain-phobia aside, there are several benefits to gold tokenization, such as:
No Need for Storage or Transportation
Trading gold physically requires plenty of logistics. You need to have a secure place to store it. You also need to ensure maximum safety during the transportation process. These conditions imply high costs and lengthy transfer times.
Through tokenization, trading gold-backed digital assets can take place almost instantly or at least in a few hours. There is no need for storage, transportation and paying all the costs that come with them.
Changing the ownership of physical gold bullions requires plenty of paperwork filling. It also involves the presence of an intermediary that validates the transaction. These middlemen will take their share of commission from the trade, which increases its overall costs.
Through gold tokenization, trading this precious metal can take place globally, without intermediaries and with almost no paperwork. As a result, the entire process costs less, is more investor-friendly and eco-positive since it does not involve the use of real paper.
Blockchain technology establishes a highly-secure accounting environment where investors can trade gold safely and quickly. Every transaction of tokenized gold is stored on a decentralized ledger in an indivisible and unalterable block of information. The data that confirms the transfer is permanent and easy to verify.
Investing in Gold-Backed Cryptocurrency with DGX
There have been several attempts to create a gold-backed cryptocurrency. A pioneer in this space is Digix, a Singapore-based company that empowers online users to buy gold without the need to hold it physically. Digix carefully manages the issuance of DGX Gold Tokens (DGX) through a process known as minting, and ensures each token is backed by 100% gold securely accounted for in vaults. It must be emphasized that this is a full reserve system where 1 DGX always equals 1 Gram of gold.
Digix uses Proof of Asset (PoA) protocol that keeps a consistent record of the proof that the gold involved in a transaction exists. At the time of writing, there is 122,700 DGX in circulation matched to 122.7 kgs of gold in vaults valued at roughly $6 million USD.
One of the main benefits of using DGX is that users can redeem their tokens for actual gold. This process involves a trip to Singapore, if you are not already there, and paying a 1% fee from the transaction.
Users can buy DGX for BTC and Ethereum on exchanges like BitFinex and Kyber. Every transaction comes with a 0.13% fee. Also, users should pay a 0.60% annual fee on the DGX tokens that they hold, although this feature is not enabled at the moment.
DGX owners can keep their tokenized gold in any wallet that supports Ethereum tokens. One can choose between a software wallet and a cold storage one to store their “gold bullions.” A secret key and a highly-secure, blockchain-enabled USB stick are cheaper, safer and more convenient alternatives to traditional, real-life vaults.
At the time of this writing, the DGX value was $45.90 according to coinmarketcap.com. The gold-backed token has had a slow growth since its release in May 2018, and it has consistently hovered above the $45 mark.
Gold tokenization is an exciting step in the evolution of blockchain technology and financial development. It offers investors a safe and easy way to buy, own and trade one of the most expensive assets in human history at the click of a button.
If you think that tokenized gold fits your portfolio, you can jump on the bandwagon and add it to your list of investments. The prospect of a quick and substantial ROI is not excellent at the moment. However, if gold prices rise, or with a fair bit of trading, you may soon find yourself sitting on a gold mine, albeit a virtual, blockchain-based one.