Pax Gold: Better than Stablecoins?

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Written by

Crypto Enthusiast

3 years ago

In community: Crypto Mindset(9c1c)

Stablecoins have become quite popular these days as they serve many purposes. Some people use it when they are selling their crypto but don’t want to convert it to fiat. Some people use stablecoins on Crypto lending platforms and with the recent rise of DeFI projects the demand and use of DAI and Tether has jumped even higher.

Even I started using DAI on several DeFI platforms like AAVE and COMPOUND. I even used it on CeFI platforms like Nexo and Crypto.com.

Are Stablecoins really Stable?

All stablecoins are either backed directly by the USD or in cases they are built on crypto collateral like in the case of DAI they are programmed to remain close in value to $1. The reason why all popular stablecoins are linked to USD is driven by the sentiment that USD is the strongest and most stable currency in the world. People don’t seem at all surprised when they hear about currencies of Zimbabwe, Venezuela, Argentina and Lebanon getting worthless. Everyone thinks that can never happen to USD as it is the currency of the biggest economy of the world and used as a de facto global standard.

I would like to give you one example here from History. Before World War I, the Mark which was German Currency at that time was considered one of the most stable currencies in the world as it was backed by gold. Due to world war expenses the government removed the gold backing of their currency which led to such level of hyper-inflation that Mark become totally worthless within a span of few months. If you are interested to read the full story you can find it on wiki - https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic.

The situation had gone so bad that as you can see in the image below people started using the banknotes as wallpaper.

Is the USD Indestructible?

If I believed that the USD was totally resistant to any socio-political disasters I would not mind holding Stablecoins as a big share of my long term asset portfolio. After all parking a part of your holdings in CeFI or DeFI platforms and earning 8-10% interest is not a bad deal at all.

There are however several factors which make me uneasy considering USD backed stablecoins as a long term holding, and by long term here I mean 5 years or more.

i. USD is not backed by Gold

There was a time when each USD was backed by gold and if you wanted you could go to the bank and ask for physical gold in return of your banknote. On Aug 15, 1971 President Nixon decided to take USD off the gold standard. This was due to the economic mess created by Vietnam war. If you remember the example I gave earlier about what happened to German Mark after being taken off the gold standard you would see this as a red flag. In my view USD is a ticking time bomb since it went off the gold standard.

Another issue I have with US fiscal policy is the way they print crazy loads of USD to fix any problem. This has been their preferred approach to try and fix the COVID situation. They have already printed trillions and will not shy from printing trillions more of the imaginary fiat. I feel sooner or later this will hit the purchasing power.

ii. Global position of USD is weakening

Traditionally USD had been the preferred currency for global transactions. Even international criminals and terrorists demanded payment in USD as they knew this would be accepted in any country they ran off to. Another big example is Petroleum sales which were always done in USD and the Brent and Crude (oil varieties) were always priced in USD. Russia which is one of the biggest oil producers has started using Euro instead of USD for Oil transactions. You can read the details here - https://www.reuters.com/article/us-russia-rosneft-tenders-euro/exclusive-russias-rosneft-to-switch-to-euros-in-oil-products-tenders-traders-idUSKCN1VB15J

China which is the biggest global exporter of manufactured goods is also pushing to shift more and more to Euro than USD and it has got worse since the political issues with US increased.

If not USD then What?

Since ancient times people have always used Gold to hedge their riskier investments and balance their portfolio. It is true that gold also suffers from price fluctuations and during times of war or pandemics it’s price tends to shoot up and during economic boom it tends to correct. However we need to keep in mind that these fluctuations are minor compared to the wild crypto swings and most important feature is that it will never crash to zero. This is due to the demand of solid gold which people have been using for jewelry, ornaments, decoration etc.

One challenge remains regarding integration with crypto as moving from gold to crypto would mean first selling your gold for fiat, then buying crypto from the fiat which would mean several dependencies on banks and crypto exchanges.

To address this requirement I think Pax Gold is the perfect solution for people who want to balance their portfolios with Gold without leaving the crypto environment.

What Exactly is this Pax Gold?

Pax Gold was launched last year by Paxos which is the same company which previously created the Paxos stablecoin. It’s symbol is PAXG and is currently #156 in crypto rankings by market cap. Each token is backed by actual physical gold which is stored in a secured facility in London. Each PAXG token is linked to a gold bar which is stored in the secure vault.

PAXG tokens can be stored in any Ethereum supporting crypto wallet.

One difference to keep in mind is that the lowest amount of PAXG which can be traded is 0.01 so it can not be like the 0.0001 transactions we can do for bitcoin.

How Can I buy Pax Gold?

Currently the best option to buy PAXG is through their own site https://www.paxos.com/paxgold/.

One limitation which I see in buying PAXG is when you buy a small fractional amount of tokens. As each token is linked to a physical bar if you buy a fractional amount of PAXG token they charge you 0.02 PAXG as Creation/ Destruction fee. The lowest amount you can buy is 0.01 but it will not make sense as you would need to pay a fee of 0.02 PAXG for this. The table below shows fees charged for different quantities of PAXG and you can clearly see it does not make sense to buy less than 2 tokens in a transaction. Considering 2 tokens would cost about $4,000 I am not in a position to buy it now. Another challenge is that currently it is not supported by any of the popular crypto exchanges like Binance or Coinbase so it is not a easy token to get your hands on. Hopefully it will get more accessible in the coming months.