27.02.2018Read Time: 4 min

Can Metal-Backed Blockchain Technology Bring Gold into the Digital Age?

Gold has been associated with wealth, prestige, and power

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Gold has been associated with wealth, prestige, and power and has long been considered a prized asset for investors worldwide. The numbers don't lie — approximately $22 trillion of gold is traded annually, an amount that dwarves the value of the DOW Jones Industrial Complex and S&P 500 combined.

However, despite its size and volume, the coin gold trading industry is still hampered by the same trading methods used since the 16th century. A growing interest in cryptocurrencies and blockchain technology provides a unique opportunity for the gold market cap to undertake a full-scale digital transformation with the new phenomenon of gold-backed crypto. 

The Problems With Trading Physical Gold

Over the centuries, gold has been traded through exchanges. These exchanges inserted themselves between buyers and sellers to authenticate each transaction and ensure that the golden token was transferred and money was received. Consequently, a lot of time and resources were applied to ensure that each contract was appropriately executed.

On top of that, the total gold market has always faced challenges, as it's difficult to divide and transfer from one holding location to another, especially as they were stored in the most secure vaults in the world. In addition, settling each trade could take a few days to process, leaving a price differential between the time the trade was made and when the gold was delivered.

In 2015, the London gold market (the largest in the world) switched to an electronic price system to put an end to its reputation of inefficiency. However, because gold is primarily traded over-the-counter, the market still lacks the transparency needed to inspire confidence in traders and add the very liquidity it needs to the market.

Creating a Blockchain Opportunity for Crypto Backed by Gold

Fortunately, cryptocurrencies do not face the same logistical problems associated with gold trading and might very well have a role to play in digitalizing the gold standard token. Savvy blockchain entrepreneurs are well aware of this and have been carefully eyeing the space over the last couple of years.

Even though the gold standard ended decades ago, people understand that trading in gold is as relevant as ever and that the public is already predisposed to the idea of gold as wealth. Moreover, gold has an intrinsic scarcity that people understand and respect which means that the concept of creating gold-backed cryptocurrencies makes it only more attractive as an asset.

Instead of getting rid of gold, it's simply a case of updating the methods in which gold can be lawfully traded, not necessarily replacing the asset itself. If only gold could shake off its old-fashioned reputation and reinvent itself for the blockchain generation by being an easy, fast, and secure means of exchange, it might find itself on the precipice of a new investment era.

How Blockchain Technology Can Add Value to the Gold Trading Market

As with other industries, blockchain technology can benefit the idea of crypto backed by gold in a few ways. For starters, it can help to improve price discovery, smooth settlement, and lower counterparty risk. It can also make it simpler for traders to verify who owns the underlying gold reserves or to properly fractionate gold bullions, which will, in turn, create a more liquid market for buyers and sellers to operate in.

Once the gold cryptocurrency market is more liquid and easily verifiable, there will be a greater trust in the market which should counter any doubts about price fixing and the authenticity of the underlying asset. This would have the added benefit of attracting a new type of customer to the market, which had previously begun to sour at the idea of gold trading because of the barriers of entry created by its own inefficiencies.

Metal-backed blockchain technology would also allow the creation of new types of securities based on the actual possession of gold as opposed to the types of derivatives used today, which are based only on part possession. These new instruments would further boost liquidity and increase circulation, enhancing gold's reputation as a means of exchange. Blockchain would definitely bring gold's sexy back.

The Future of Cryptocurrency Backed by Gold

The emergence of blockchain technology startups in the gold trade would represent a fascinating and necessary departure from convention. Crypto backed by gold would improve transparency and the speed of settling transactions immeasurably, providing a platform where gold can be bought, held, and traded on the spot using tokens.

As would be expected, many interesting startups are emerging on the market. One such startup is Aurus which claims to represent the new standard in gold currency. Aurus is different from the other solutions on the market as its business model achieves scalability by partnering with established gold traders and enabling them to tokenize their own supply of gold. Moreover, unlike many other startups in the space, Aurus has introduced a fee model that sets a fair price for potential traders to create a viable and sustainable metal-backed blockchain platform

Aurus links: WebsiteTwitterTelegramNewsletterYoutubeEmail


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