by CryptosisTeam | Mar 14, 2019 | CryptoCurrencies
Unlike fiat currencies that have paper cash and coins as legal tender, typical cryptocurrencies are not backed by anything tangible. It’s not hard to see why most people struggle to understand how a currency backed by nothing can have real value.
Cryptocurrencies are known for their polarizing price fluctuations, and their volatility stems from the fact that they are not tied to any asset. Despite this shortcoming, cryptocurrencies have an edge over traditional currencies because they are divisible, fungible, transferable, decentralized and scarce.
So, what happens when we hitch cryptocurrencies to a tangible asset?
Welcome to the buzzing world of asset backed cryptocurrencies.
What are asset backed cryptocurrencies?
Asset backed cryptocurrencies are digital coins that are tied to an existing asset of real value. When the price of the token goes down, the investor can choose to either cash out or retain the underpinned asset.
This way, asset backed cryptocurrencies overcome one of the biggest flaws associated with first generation cryptocurrencies; price volatility.
Tying a digital coin to a tangible asset gives token holders the peace of mind as they are certain that the price of their token is as stable as the underlying asset, which they can cash out when the worst happens.
It’s a great way of safeguarding the coin from excessive speculation.
Hitching a digital coin to an asset seems rather straightforward, only that it’s not. Essentially, there are third party custodians who store and manage the underpinned asset. The introduction of a trusted, centralized third party seems to go against the true spirit of decentralization that’s associated with blockchain technology.
How do stable coins play a part?
Stablecoins are arguably the most popular asset backed cryptocurrencies.
These are digital currencies pegged to an asset. They have a collateralized store of value that backs its price. The result is a non-speculative currency that’s stable enough to be used as a means of exchange and store of value.
Stable coins bring to the table the best of both worlds; liquidity of fiat currencies and the transparency, fungibility and decentralization of digital currencies. Users of stablecoins have the advantage of getting their reserve of fiat currencies whenever the price of a stablecoin plummets.
Stablecoins like Tether have in the recent past stood strong against price fluctuations, and experts are hopeful of using this concept to put an end to price volatility that has dogged the cryptocurrency industry for years.
Gold backed cryptocurrency
Away from the stablecoins, a new generation of asset backed cryptocurrencies is gaining traction; gold backed digital currencies. As the name suggests, these are digital currencies whose price is tied to the value of physical gold.
The gold in this case is stored by a trusted third party and can be traded in a digital exchange.
The whole concept of hitching a digital currency to the value of a physical asset like gold is popularly known as tokenization.
The idea itself is compelling because of the traceability and transparency of the blockchain technology.
With tokenization, it’s easier to trace your gold than it is when you buy the physical gold.
Furthermore, you enjoy the liquidity that comes with tokenization as redeeming your token is easy and quick, given that the token is traded in a number of digital exchanges.
While gold backed currencies are all the rage, they have a flaw of their own; the cryptocurrency company issuing the token doesn’t have to account for all the underlying assets as they are managed by a third party.
However, it’s worth mentioning that gold backed cryptocurrencies present a good value proposition for investors as the minimum price of the token is designed to equal the prevailing rate of gold.
Because of these benefits, gold backed cryptocurrencies are becoming more popular than first generation cryptocurrencies.
Digix Gold token is among the most popular gold tokenization projects in the cryptocurrency industry. Trading as DGX, each token is backed by physical gold, with one token being equal to 99.99% LBMA gold.
The underlying gold is stored in a secure vault in Singapore. Token holders have the option of having their gold bars sent over mail, or making the trip to Singapore when they choose to redeem their tokens.
When it comes to investing in gold, you’re better off buying a gold backed cryptocurrency than buying physical gold.
Gold backed tokens like DGX are based on a transparent blockchain that makes it easier for you to trace your gold.
Additionally, DGX tokens are more liquid than physical gold because they are traded in cryptocurrency exchanges.
Onegram, a Dubai based company is also tokenizing gold. It’s the first Sharia compliant digital currency.
Sharia law prohibits Muslims from speculative investment like cryptocurrencies.
Before the inception of Onegram, cryptocurrency investing in Gulf nations was prohibited, but Onegram is changing all this. Each OGC token is tied to a gram of gold.
The company plans to reinvest 70% of transaction fees into gold. Their plan is to grow the amount of gold as the number of OGC tokens remains constant.
In the end, Onegram provides a private investment option for Muslims.
This is a Switzerland based stablecoin that’s backed by physical gold.
Each of the ERC20 standard Ekon token is equal to a gram of gold 999.
Ekon promises an audit every 90 days to verify the number of gold bars in its vaults.
With Ekon, you can only ‘withdraw’ your gold and not the corresponding monetary value.
The company claims that Ekon is not a security token and is only allowed by regulators to redeem tokens for gold.