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Gold-Backed Stablecoins: The Potential For An Inflation-Resistant Global Currency

December 02, 2023 - 12 min read

Gold-Backed Stablecoins Have The Potential To Resist Inflation, Creating Massive Economic Opportunities   

There is currently no readily available gold-backed stablecoin on the market today. However, the creation of a gold-backed stablecoin could have a significant impact on the global economy and monetary system– and could even pose a threat to the dominance of the U.S. dollar as a global reserve currency. 

Unlike fiat currencies, a gold-backed stablecoin could be an inflation-resistant or deflationary currency. This means that the coin could increase in price relative to the U.S. dollar and other fiat currencies, provided these currencies continue to experience inflation. This would preserve the purchasing power of anyone who held the currency, making it a superior option to the U.S. dollar, Euro, Swiss Franc, Yen, and other popular fiat currencies. 

A fully redeemable gold-backed stablecoin would allow anyone holding the coin to trade it for physical gold or a gold-backed token at any time. This would make it similar to how the U.S. dollar operated before 1971– when President Richard Nixon announced that the U.S. dollar would permanently sever its relationship with gold and that dollar holders would no longer be able to trade in their dollar for gold.  

Inflation And The Gold Standard 

Many economists, particularly those who consider themselves part of the semi-controversial Austrian School of Economics, believe that the switch to fiat currencies not backed by real-world assets has been the primary reason inflation has skyrocketed over the last five decades. 

Increases in inflation have led to significant increases in economic inequality, as average salaries have grown incredibly slowly compared to inflation, leaving regular workers with significantly less purchasing power each year. 

Since U.S. dollars no longer need to be backed by gold, the Federal Reserve and other central banks can print an unlimited amount of currency to fund government programs, increasing inflation and potentially skyrocketing prices for consumer goods. Of course, they do not actually “print money,” but instead issue and sell government bonds (such as U.S. Treasuries), in order to raise money. 

In addition to this, by setting extremely low interest rates, central banks make it easy for entities like large corporations and real estate investors to expand their business at a very low cost. 

Therefore, during periods of high inflation, assets like stocks, bonds, and real estate can rapidly increase in value (even when considering inflation). This allows wealthier individuals who hold significant assets to accumulate significant wealth during these periods. 

However, as we just mentioned, average salaries generally do not significantly increase during periods of high inflation, so overall, this trend significantly increases the gap between rich and poor. In fact, excessive government “money printing” between 2020 to mid-2022 led to the largest wealth transfer in recorded history, a highly concerning trend for those seeking to narrow the gap between the rich and poor. 

The Current Status Of Gold-Backed Cryptocurrencies 

As we discussed in the beginning of this article, there are currently no widely available gold-backed stablecoins on the market today. However, there are several gold-backed cryptocurrencies, including: 

  • PAX Gold (PAXG): PAX Gold is a gold-backed ERC-20 token on the Ethereum blockchain. Each token is backed by one fine troy ounce of a London Good Delivery gold bar, and can be redeemed as such. PAX Gold is issued by Paxos Trust Company, a trust company and LLC with an active charter under the New York State Department of Financial Services (DFS or NYSDFS).
  • Tether Gold (XAUT): Tether Gold is another Ethereum ERC-20 token backed by  physical gold bars stored in multiple secure vault facilities. Tether Gold is issued by Tether Limited, which is not as highly regulated as the Paxos Trust Company. One potential benefit of Tether Gold is that it can be used for yield farming on protocols like Curve Finance, Convex Finance, Aura Finance. 
  • DGX Gold Token (DGX): DGX Gold Token, which was launched in 2018, is a fully redeemable gold token, with each token representing one gram of gold. DGX is far more decentralized than most other gold-backed tokens, as it uses a consensus protocol called Proof of Asset, or PoA, which certifies records of DGX’s gold holdings on the Ethereum blockchain. The DXG network has a number of validators which consist of gold providers/vendors, vault managers, and, perhaps most importantly, third-party auditors which review the quality and quantity of the gold stored in vaults. 
  • Perth Mint Gold Token (PMGT): Perth Mint Gold Token is yet another ERC-20 token, representing ownership in gold bars securely held by the Perth Mint, a government-owned entity in Australia. Compared to other tokens, like PAX Gold, PMGT generally has faster transaction times. Perth Mint Gold Token is issued by a company called InfiniGold, and tokens can be redeemed for physical gold bars if requested.   physically delivered to users if requested. 
  • Gold Coin (GLC): Gold Coin is another decentralized gold-backed cryptocurrency. Unlike DGX, GLC is mined via a proof of work (PoW) algorithm, much like Bitcoin. Like the other coins on this list, it is also an ERC-20 token. GLC is pegged at a ratio of 1,000 GLC per ounce of gold, which is also stored in secure, physical vaults. 

Gold-Backed Stablecoin Challenges: Scalability And Volatility 

Chart comparing the 10-year global market caps of gold and Bitcoin. Source: In Gold We Trust. 

While inflation-resistant, gold-backed stablecoins could have a massive impact on the global economy and monetary system, there are still a few major issues to address. The first major problem is scalability. Current estimates suggest that the total value of all gold in the world currently sits around $12-13 trillion dollars. While this may sound like a lot, it’s far less than the annual GDP of the U.S., which was more than $25 trillion in 2022. 

U.S. GDP data, 1955-2023. Source: Federal Reserve Bank of St. Louis (FRED)

Therefore, if an entity, whether centralized or decentralized, was to purchase a significant amount of gold in order to back a gold-backed stablecoin, this would likely skyrocket the price of gold, potentially making the coin deflationary, rather than inflation-resistant. Unfortunately, a highly deflationary coin would be unaffordable to average users, making it relatively useless as a dollar alternative (and, as a way for ordinary people to maintain their purchasing power by combating inflation). 

Gold futures prices, mid-2019 to mid-2023. Source: Google. 

In addition, it should be mentioned that, while gold has historically been a relatively stable store of value, gold is volatile in its own right– far more volatile than the U.S. dollar. Therefore, rapid changes in the price of gold could make a gold-backed stablecoin relatively unstable, either making it inflationary when the price of gold drops, or deflationary when the price of gold increases. Though gold prices are generally stable long-term, according to some estimates, gold has shown a volatility level of more than 20% in the last few years, with a maximum loss (i.e. maximum drawdown) of approximately 37%. 

This certainly calls into question its viability as the backing for a currency, but despite volatility issues, a gold-backed stablecoin would still likely be able to resist inflation far better than fiat currencies which aren’t backed by any real-world assets. 

Centralized Vs. Decentralized Gold-Backed Stablecoins 

When it comes to gold-backed stablecoins (and cryptocurrencies in general), these assets can either be centralized, decentralized, or somewhere in-between. In the eyes of some, a fully decentralized gold-backed stablecoin would be able to resist inflation better than a centralized one. This is because a decentralized consensus model would be able to resist tampering and theft far better than a centralized one. 

We’ve seen many rug pulls and scams in the crypto industry– including the fall of major entities like FTX, which resulted from a highly-centralized governance structure in which executives, including FTX founder Sam Bankman-Fried, had easily accessible access to customers’ assets, which he was able to transfer to his hedge fund, Alameda Research, and freely trade, leading to massive customer losses. A highly-decentralized model, with 100% of assets represented on-chain, would be able to make this type of theft nearly impossible, provided there were enough distributed node operators with relatively distributed mining/staking power. 

MakerDAO total value locked (TVL), 2019-2023. Source: Defi Llama. 

One example of potentially effective decentralized stablecoin governance is MakerDAO, the entity that issues the popular DAI stablecoin, which is backed (and generally over-collateralized) by cryptocurrencies including ETH, Bitcoin, and USDC. MakerDAO allows anyone to mint its DAI stablecoin, provided that they put up various cryptocurrencies as collateral, with collateral requirements varying for different cryptocurrencies. 

For example, individuals who want to mint DAI and use ETH as collateral, they will generally have to lock-up/stake 150% of the value of the stablecoins they want to mint in a Maker smart contract. MakerDAO is highly transparent, and anyone can easily check the total value locked (TVL) of funds in Maker smart contracts at any time. 

To facilitate both on-chain and real-world transactions, MakerDAO uses a complex, yet effective network of companies and trusts in order to store its assets securely and create a legally viable structure that allows for a high level of decentralization, without compromising scalability. 

The MakerDAO ecosystem is governed by MakerDAO, which uses the Maker (MKR) token for governance, so it’s possible that a gold-backed stablecoin could use a secondary token for decentralized DAO governance while operating under a proof of stake or proof of work model, or some variant thereof. 

Using Gold As A Base For A Diversified, Asset-Based Stablecoin 

While gold has historically been a great store of value, the aforementioned scalability and volatility issues it presents means that an ideal inflation-resistant stablecoin might actually be backed by a variety of real-world assets, including gold, silver, oil, stocks, bonds, and real estate. 

By diversifying in this way, the underlying assets backing the stablecoin might have much less volatility, and, since the governing entity (whether a corporation or DAO) purchasing these assets would not significantly impact their price levels by rapidly increasing the demand for a single asset (like gold). 

While no fiat currencies are directly backed or redeemable for real-world assets, the Swiss National Bank does hold a wide variety of real-world assets, including commodities, stocks, and bonds, which it can use to repurchase Swiss Franc-denominated government bonds, reducing the money supply in an effort to combat inflation. 

Switzerland inflation rate chart, 2019-2023. Source: Trading Economics

As a result, in recent years, the Swiss Franc has experienced noticeably less inflation than the U.S. dollar and most other fiat currencies, meaning that a stablecoin backed by a diversified pool of assets may have a better chance of maintaining price stability when compared to a stablecoin backed by just one asset. Specifically, Switzerland experienced an estimated 3.5% inflation in 2022, significantly less than similar Western economies, such as the U.S. (9.1%), the  Euro Zone (10.6%), and the U.K. (11.1%). 

However, in terms of U.S. inflation rates, it should be noted these are based on the U.S. Bureau of Labor Statistics (BLS)-issued Consumer Price Index (CPI), which many analysts believe seriously underreports inflation levels. This is particularly because the basket of consumer goods that the BLS uses to measure inflation is rather limited. This means that, theoretically, U.S. inflation rates in 2022 may have been as high as 12-15%+, making Switzerland’s relatively low inflation even more impressive. 

In another example that demonstrates the power of reserves and government bond repurchase programs, Russia has utilized its significant gold reserves to stabilize its currency, which is one reason (in addition to rapid interest rate increases) why the Russian government has been able to keep the price of the Ruble relatively stable over the last year. This is despite the massive sanctions levied on the country as a result of its invasion of Ukraine and the seizure of around $300 billion of the government’s foreign reserves held in foreign banks. 

BRICS Joint Currency Efforts And Gold-Backed Stablecoins 

One potential issuer of a gold-backed (or real-world asset-backed) stablecoin is a proposed currency that may be issued by the BRICS economic union, consisting of the countries Brazil, Russia, India, China, and South Africa. However, while BRICS countries have talked repeatedly about creating a currency that could rival (or even unseat) the U.S. dollar as the world’s primary reserve currency, these countries’ unstable economic situations, high debt levels, as well as their high levels of geopolitical instability (including tensions between countries like India and China) certainly throw some cold water on the idea that a government-issued BRICS currency could really rival the dollar. In reality, a BRICS currency, at least at first, would likely only be used for certain large interbank or intergovernmental transactions, and is less likely to be utilized by average consumers. 

This holds true whether this currency is a traditional fiat currency or a government-issued stablecoin (i.e. a central bank digital currency, or CBDC), which some commentators have discussed. However, there may be some progress when it comes to a private sector asset-backed BRICS stablecoin. For example, BricsTether, a private, blockchained-based, decentralized, asset-based stablecoin issuance platform recently announced that they would be issuing a stablecoin backed by a basket of diversified assets, with a specific focus on the BRICS market. However, there is relatively little information on this project, so it’s yet to be seen if this is a viable and scalable initiative. 

Direct Financial Incentives For Gold-Backed Stablecoins 

One issue that consistently pops up is the potential lack of financial incentives to create a gold-backed, or real-world asset-backed stablecoin. For better or worse, governments, banks, and large corporations often benefit from high inflation levels, even at the expense of ordinary people, so it may not be in their best interest to offer people an inflation-resistant alternative. 

In addition, raising the initial funds needed to create a capital reserve for a gold-backed stablecoin could pose a serious challenge. However, this type of highly-valuable, inflation-resistant, and unique currency product could become incredibly popular, provided someone raises enough capital to make it sufficiently scalable. 

One the initial funds and governance structure (including the potential creation of a DAO), as well as the recruitment of a large number of diversified node operators, the financial incentive problem is partially fixed. This is because, much like Bitcoin or Ethereum, node operators could receive significant rewards for validating transactions, making staking or mining a gold-backed stablecoin a potentially profitable venture. 

In Conclusion: Gold-Backed Stablecoins Could Revolutionize Our Economy

Right now, gold-backed stablecoins may still be something of a pipe dream for libertarian thinkers and Austrian economists. However, it’s undeniable that the creation of such a currency could present the first true rival to the U.S. dollar since the dollar overtook the British Pound as the world’s global reserve currency in the aftermath of WWII. 

With DAO decentralization, fully transparent on-chain reserve measurements, and a sufficiently profitable proof of work or proof of stake consensus mechanism, a gold-backed stablecoin could be an incredibly valuable product– and a fantastic way to preserve the purchasing power of billions of people. In the long term, this could significantly decrease worldwide economic inequality and usher in a new era of global economic opportunity. 

However, there are still a variety of hurdles to creating this type of stablecoin, including a lack of institutional economic incentives, scalability issues, and the inherent volatility of gold– meaning that a currency backed by a wider pool of assets could be a more viable option. That said, the world still has to wait until this type of product is widely available. However, when it is, it could become a major cryptocurrency, and even a major world currency– within just a few years. 

References: 

  1. Forsyth, R. (Aug. 2021) 50 Years After Nixon Ended the Gold Standard, Dollar’s Dominance Faces Threat. Barrons
  2. Clifford, T. (Jun. 2020) Jim Cramer: The pandemic led to ‘one of the greatest wealth transfers in history.’ CNBC. 
  3. Bianco, A. (Apr. 2023) Best Gold Backed Cryptocurrency. Datawallet
  4. Digix (DGX). CryptoMarketsWiki. 
  5. Securely buy, sell, trade, and store gold that only you control. Gold Coin
  6. Gold’s Market Cap. CompaniesMarketCap
  7. United States GDP. Trading Economics. 
  8. Hinkel, A. (Aug. 2020) How volatile is gold compared to other asset classes? Xetra-Gold. 
  9. A better, smarter currency. MakerDAO. 
  10. Swiss National Bank. Wikipedia. 
  11. Gilchrist, K. (Feb. 2023) The small European nation of Switzerland beat sky-high inflation. Here’s how. CNBC. 
  12. Aris, B. (Feb. 2023) The EU can’t find most of Russia’s $300bn of frozen reserves. bneIntellinews. 

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