The idea of digital gold is nothing new. Essentially it’s a development of representative money back in the days of the gold standard. Instead of handing over pieces of gold, which are cumbersome to transact and risky to transport and store, instead one would hand over a piece of paper signifying ownership of a quantity of gold and all safely held in a bank vault.
The gold standard, which most nations abandoned as the basis of their monetary systems at some point in the 20th century, was a monetary system in which the standard economic unit of account based on a fixed-quantity of gold. And, three types can be distinguished from the time, namely: (1) Specie; (2) Bullion; and, (3) Exchange. The US used just such a system as late as the 1930s.
But take the same principle and move it online and you have the advantages of gold’s universal reputation as a store of value along with the speed and convenience of transacting over the internet.
Now fintech platform OpenLedger is set to host trading for the DigixDAO asset – or DGD for short – leveraging the interest in smart contracts (i.e. applications or ‘apps’) via Ethereum, a decentralized platform with apps run on a custom-built blockchain, and the popularity of physical gold. All with the touted “power and network effect” of a decentralized asset exchange.
That said, there are problems with digital gold. Nowadays we rely on private companies rather than banks. And, you have to trust that they are holding 100% of the reserves of gold. Without regular audits by approved parties, you might as well be handing your money over to a complete stranger.
Then there are the costs involved. You will have to pay the spread – often quite substantial – and sometimes an additional fee. Buying small amounts of gold can therefore be uneconomical.
You are also of course trusting that the company you deal with or through to maintain its website and ensure you have access 24/7, especially if you’re a trader.
When Does Buying Gold Become Uneconomical?
But fundamentally you might ask: how does one determine what is ‘uneconomical’ or not when trading gold. Well, for this one has to basically compare the premium for different bullion bars.
The premium is essentially the percentage above the so-called ‘intrinsic value’ of gold. So, take a 10 gram bar – it has a 4.8% premium; a 5 gram bar 8.0% and a 1 gram bar 20.3% premium. Hence, if one considers everything above a 5% premium as being too much (or too uneconomic), then a 10 gram bar becomes the smallest amount that economical (i.e. $421 at recent prices).
Enter The Blockchain
Now this is where the blockchain, a distributed database that is regarded as the main technical innovation of bitcoin, excels. Whilst customers still have to rely on a centralized company to hold and audit their gold for them, distributed ledger technology (DLT) allows the ‘tokenization’ of gold – or just about any other commodity, tangible or otherwise.
Tokenization itself is the process of securely storing pertinent asset information onto an unalterable public ledger. This ‘token’ can then be traded in so-called trust-less peer-to-peer (P2P) markets.
Subsequently such tokens can then be sent to users around the world – at practically zero cost – which could be viewed as bold. And, because you are dealing with a digital world at this point, your gold is highly divisible: it’s as cheap and easy to send one thousandth of a gram of gold as it is to send a kilogram (kg).
This is the potential that DigixGlobal sought to tap into with their crowd-funded launch of their recent new initiative, DigixDAO (DGD). A Decentralised Autonomous Organization (DAO) could also be regarded a new kind of beast – and one that lives on the Internet. Users who pledged ‘ETH’ into the crowdsale for DGD tokens also own the crowdfunded ETH they have sent to DigixDAO simply by being a DGD token holder.
None of these ETH is controlled or owned by DigixGlobal, but by the pledgers themselves who are able to dissolve DigixDAO if they wanted to. This has never been done before in software or crowdsale history.
Highlighting the complex nature of these things, Digix has produced a 22-page whitepaper (‘The Gold Standard in CryptoAssets’) back in January 2016, which provides a technical overview, a use case for the tokenization and documentation of physical assets through its ‘Proof of Asset’ protocol.
DigixDAO’s crowdfund launch on Ethereum commenced March 31 2016 and was intended to last for a period of just thirty days. As it transpired they hit the cap and the sale ended in twelve hours – pulling in 1o times their original loose target of $500,000 – collecting $5.5m in the process.
But a few months ago in February, Kai Cheng Chng, DigixGlobal’s CEO and co-founder who worked on Wall Street as an FX trader at HSBC Securities, had expressed cautious hopes – at least in public anyway. Had the exercise not been so stellar and failed to hit target he had said: “…DigixDAO would return any virtual currencies that are sent to it autonomously.”
One of the advantages of using a smart contracts platform is that the process can be automated. Consequently, if the threshold of funds is not met then all the money is returned to investors.
Their vision was to create digital gold tokens (DGX) that would be created or ‘minted’ into existence by the corresponding purchase of a physical gold bar. This consists of 99.99% London Bullion Market Association (LBMA) approved gold, supplied, audited and stored by three separate companies.
Whenever DGX is sent to another blockchain user – in quantities as little as 0.001g – all transaction fee(s) involved will be available for DGD holders to claim as a reward from DigixDAO every quarter when the full suite of smart contract software goes live.
It’s a strange proposition in some ways, but shows how deep the appreciation for gold runs in the human psyche. And, with the cryptocurrency world having a reputation for being the Wild West, perhaps it’s no surprise that its denizens want to start transacting in gold once more. Bitcoin itself picked up a moniker as ‘digital gold’ back in its early days. Now do we have the real thing?
A Hedge Against Volatility?
The hedge, however, against volatility by backing tokens with gold has been met with a mixed response, with some saying that virtual currencies are supposed to be the Gold 2.0.
Shaun Djie, a DigixGlobal co-founder and Director of Business Development, commenting in this regard notes: “Gold has been one of the better performing commodities since the start of this year, albeit with a volatile range-bound trading range.”
The Singaporean, who worked formerly at Citi as a multi-asset group structured product specialist, adds: “Nevertheless, if one were to extrapolate this over a longer period of time, the stability of gold as a hedge against geo-political and economic risks is undisputed.” And, what Digix aims to execute is to “marry the transactional functionalities” of virtual currencies and the stability of a sentiment-driven commodity. It’s certainly a bold assertion, but one could prove to a blockbuster.
New Marketplace For A New Product
Ethereum, which was crowd funded back in August 2014 and developed by a Swiss not-for- profit foundation, is something the world has never seen before.
A vast, distributed computer, executing programmes on thousands of nodes located around the world. But it’s worth noting that it’s a smart contracts platform – not a marketplace. Digix DAO utilizes Ethereum as a decentralized world computer that is described as being capable of “executing trust-less smart contracts” on a P2P basis.
It’s possible to build an exchange on it. However, it wasn’t designed with that in mind. Take the issue of block times – essentially how fast transactions are processed.
Bitcoin, which some might say is the ‘granddaddy’ of cryptocurrency, has 10-minute blocks. And, it’s also argued that transactions are not generally considered truly secure until they have had three confirmations.
Newer systems are much faster – or at least have lower latency. Ethereum, for example, currently has block times of around 14 seconds. But even that’s nowhere near the super or ultra-low-latency systems required by professional traders and institutions that pack a punch to beat the competition.
Whilst the blockchain isn’t ever going to be suitable for the sub-microsecond rates required by high-frequency trading (HFT) algorithms, seconds do count in some quarters. And, if you can go faster well why not.
Amazing though Ethereum’s achievements are, this is not enough to create a viable and vibrant economy. It’s as if a goldsmith had developed the ability to mint an incredible form of new gold coin, but had no access to a market on which to sell it. Are you with me so far? Good.
This is one of the factors that is touted to making OpenLedger such a “natural complement” to Ethereum for the DGD project according to Ronny Boesing, CEO of crypto exchange CCEDK, which is OpenLedger’s Danish Registrar.
He asserts further: “A successful business is not just about great tech – even in crypto. It’s about relationships. OpenLedger, the exchange built on the Bitshares 2.0 platform, has been designed for the demands of the modern market.”
The Danish-based cryptocurrency exchange head in explaining that transactions are processed in seconds – not minutes – adds in what could be likened to a bit of a sales pitch: “It’s fast, secure, reliable and transparent. And, if Ethereum provides the means of minting digital gold, OpenLedger provides the perfect market on which to buy and sell it.”
Digix and OpenLedger
Digix and OpenLedger are “playing to each of their strengths” says Boesing. As from Thursday, April 28 2016, OpenLedger starts listing Ethereum assets, initially with the DigixDAO (DGD) token, which represents a share of the revenues from sending gold tokens. (Note: This token is an Ethereum-based asset that represents a portion of DGD).
Later on it is intended to add the DGX gold-backed tokens themselves to OpenLedger as well. It’s a long-term arrangement that is being held up as offering the “best of both worlds” according the parties.
Specifically, OpenLedger will serve as a venue for trading DGD and DGX – a means of bringing two different worlds closer together. This is namely that of blockchain-based representative tokens and of physical assets housed in the real world.
Digix provides a transparent, auditable and secure protocol that leverages Ethereum’s P2P consensus system and the Inter Planetary Files System (IPFS), a decentralized P2P permanent database and a new internet architecture, that it’s claimed will facilitate the creation of transferable ‘crypto assets’ that represent physical gold on the blockchain.
The IPFS itself replaces the centralized, server-based attributes of HTTP with a decentralized cache-based system. Meanwhile, OpenLedger offers a gateway and an exchange for a wide range of fiat and digital currencies.
The upshot of this partnership means that as an investor you can buy gold in any amount – right down to one thousandth of a gram (i.e. worth about $0.04).
People can send it anywhere in the world, or even pay another person in gold. Furthermore, you will be able to sell it via OpenLedger for USD, EUR, CNY (Chinese Yuan) or their ‘pegged’ digital equivalents on the platform (BIT.USD, etc.), as well as Bitcoin (BTC), BitShares (BTS), Ethereum (ETH) and other cryptocurrencies.
Democratization Of Investment Industry
“What you’re seeing here is what I would describe as a democratization of the investment industry,” explains Boesing.
“Previously, it would often be prohibitively expensive to buy small amounts of gold – certainly physical gold of which you actually took receipt in person. Even if ordinary investors were able to buy paper or digital gold without getting hit by fees, what could they do with it?”
Transferring it to another person is also fraught with difficulties and costs. And, using it as a currency? “Forget it,” the Dane says.“However, via OpenLedger it means investors can buy and send someone else a fraction of a gram of gold, without worrying about spreads or transaction fees or delays or ownership records. It’s all done automatically on the distributed ledger,” he adds.
To some it may seem incredible that almost a century after most of the world came off the gold standard, we now have the means to use gold as an effective payment mechanism once again. “Not as a new gold standard, but as one of many parallel currencies on the blockchain,” as Boesing adds.
Buyers can withdraw their newly acquired DGD from OpenLedger to their Ethereum wallets to enjoy both the “passive income from transaction fees and the ability to vote on key decisions as well as the deployment of funds within the company”, the US-educated Dane explains.
The bottom line is that holders of DGX have a secure store of value and a new form of payment on the blockchain – fungible, resistant to counterfeiting, scarce, durable, divisible and portable like never before.
They can even cash it in and take physical delivery of the gold should they wish to do so. But, unlike real gold in a safe behind a picture at home, the tokenized form of the precious metal is secured by a cryptographic lock and key that the backers purport “can never be cracked.” Let’s hope so, or there could be egg on faces.
DGX tokens, which represent 1 gram of gold with transaction fees at 0.13% capped at 1 DGX per transaction, can be used to redeem physical gold. Already available via a web-based app on Digix’s home website, next week’s scheduled release sees trading commencing on OpenLedger on the same day (28 April).
The times, they are certainly a-changin’, but some things will always be the same. Gold isn’t going anywhere, though gold-backed digital tokens will shortly be flying all over the world – if this latest trading venture lives up to the plan. Buying a 1 gram or 10 gram of gold will still be the price at Digix and they will basically make 100g and 1 kilo bars fungible through their technology. Bonam Fortunam!