Exclusive: 2 Key Challenges to Peg Gold Stablecoins5 min read
by Matthew Lam | May 16, 2019
In storage of value, financial professionals will think of physical gold whereas crypto community will think of stablecoins. How about a combination of gold and stablecoins? Geoffrey Cher, Business Development Lead of Digix, revealed the 2 key challenges to maintain the peg with gold using stablecoins! He also shared with us the enormous potential of digital gold given 2 pain points in physical gold purchase!
What are the current pain points in gold purchase? Why people would choose to purchase gold in stablecoins?
I believe there are two current pain points of gold purchase: 1) inconvenience due to limited number of physical gold stores; 2) customers can be ripped off by gold dealers due to information asymmetry.
Personally, I feel that one of the best benefits for digital gold is the idea of convenience, when we talk about tokenizing or digitizing physical gold. Breaking down the process of physical gold purchase, firstly you go to the actual shop to meet the gold dealers. Once you're there, you'll be presented with different kinds of gold, different brands, different gold bar sizes etc. Customers may not know the value for each gold brand, what is the premium for the current gold sizes. They can get ripped off by gold dealers easily. For example, if you buy one gram of a physical gold bar, the premiums paid over the base price of gold is about 40 or 50%. For digital gold like Digix, one DGX equals to one gram of gold. Each token has a premium of less than 1%.
There are 3 advantages of digital gold. Firstly, you can buy gold digitally online 24/7, which is very convenient. Secondly, digital gold provides you some form of price affordability because you can make fractional purchase. Thirdly, consumers can look at the base price of DGX directly regardless of the quantity they are buying for. They will not get confused by different gold brands thus minimizing the possibility of being ripped off. There's certain levels of convenience and accessibility for general public to buy digital gold.
What are the costs and challenges in maintaining the peg with gold using stablecoins?
That's a great question. It's something that is an ongoing effort that we're trying to improve over time. There are price differences between the price of digital gold and physical gold. The differences could be attributed to management costs, because there are charges related to the custody of physical gold that is being handled by the vaults.
Currently the price spread between physical gold and digital gold is wide. As Digix scales and improves the physical operations in the future, ultimately we hope to get the price of digital gold as close as possible to the price of baseline costs of gold. That's one thing that we want to achieve in the future moving forward.
While the price of gold is mostly independent from crypto markets, yet digital gold is available on the secondary markets, ultimately the price of digital gold could be influenced based on the market supply and demand. That's where we are now based on our current scale of operation. The spread of physical and digital gold is a bit wider than what we wanted to be. But as we scale over time and more traders participated in gold trading, this will be improved. At this point in time, I guess one of the pain points is that the spread is a little bit wide. Over time, as we get more users, more traders and more awareness in digital gold trading, the spread will definitely be tighter and much more affordable for everyone to use.
Apart from storage of value, what are the real use cases of gold stablecoin?
The way that we are looking at the gold token is not so much as a stablecoin. The way that I would define stable coin currently is something that is dollar stable overtime as it is always packed to $1. It could be one US dollar, one Swiss dollar or one SGD for example. This is a definition that it takes. However, gold is an investable asset class over the last 10 to 20 years. You will see a huge appreciation in gold value, especially during the time of the last financial crisis. Our DGX token is more of an asset backed token and it can be hedged against the price of crypto, or the price of stocks in the financial markets as well. It is a hedge against inflation and fiat currency. With the DGX token, you're buying gold stored in Singapore and Canada, for example. With a convenience of buying one token, you have the access of geographical diversification as well, depending on the storage location of gold. Moving forward, we do want to have vault locations or physical gold headquarters in places like UK, Germany, Switzerland, Australia and Africa as well. We do want to have the physical gold to be spread out across different geographies. That's one uses case for the end users, which is that not only do you get access to hedge against currencies in gold, but also with the purchase of one digital gold token, you get access to a diversification of geographies with the physical storage.