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Blockchain, Stablecoins and Gold

Blockchain Technology in the last years aims, among others, to create a new and safe payments system for global transactions that will be fast, secure, cheap, transparent, and decentralized. For that, it’s going to use cryptocurrencies.

The value of most cryptocurrencies, like Litecoin and Bitcoin, fluctuates daily, and while the digital currencies aim to facilitate safer transactions, their values depends increasingly on speculation.

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The first wave of crypto assets has failed to provide a reliable and attractive medium of exchangeand/or store of value. Crypto coins suffer from high volatility, limits to scalability, complicated user interfaces and issues in accounting, governance and regulation. Crypto assets have served more as a speculative asset class for traders-speculators and those engaged in illegal activities rather than as a means to facilitate global transactions and payments. Today, new stablecoins have many of the features of more traditional cryptocurrencies but aim to stabilise the price of the crypto coin by linking its value to that of an underlying asset or a commodity.

Stablecoins are increasingly gaining traction as their values are pegged to other assets such as the USD, gold, oil or silver. Stablecoins aim to mimic the same functionality of fiat currencies. A stablecoin is a crypto currency that is pegged to and/or backed by an underlying asset.

Stablecoins enjoy the benefits of a cryptocurrency (security, transparency, privacy, etc.) without the extreme volatility that comes with most of them.

In the last months there has been a “stablecoin invasion.” Numerous stablecoins have been released or are in development all over the world.

Most of the stablecoins are pegged at a 1:1 ratio with fiat currencies, such as the USD or the Euro, which can be traded on forex. Other stablecoins can be backed to other kinds of assets, such as commodities like gold, or even by other cryptocurrencies like bitcoin.

Commodity-backed stablecoins are backed by other kinds of assets, among others gold, silver or other precious metals. Gold is the most common commodity to be collateralized.  Investors and users of precious metals-backed stablecoins essentially hold a tangible asset that has real tangible value. Precious metals have the potential to appreciate in value over time, which gives increased incentive for investors to hold and use these stablecoins.

Blockchain technology now has established itself as a secure accounting method, and with BTC becoming well known to global investors, a new era of gold-backed cryptocurrency is emerging, even countries are looking to issue their own gold-based cryptocurrency.

A coin is issued that represents a certain quantity of gold (e.g. 1 gram of gold equals 1 coin)so that at a minimum the price of the stablecoin will always equal the current gold price. The gold is stored in a safe location by a trusted custodian, and can be traded on exchanges with other cryptocurrencies.

An example of stablecoins backed by precious metals are KAU (Gold Currency) and KAG (Silver Currency) which are the primary currencies of Kinesis. On Kinesis Gold Stablecoins you can find a presentation of Kinesis, a list of articles and other materials about this project, which is evolving into a whole monetary system.

When evaluating gold-backed stablecoins look atthe legal framework concerning ownership and storage of the gold: it is important to make sure that you own the physical gold.

There are also stablecoins backed by other cryptocurrencies. This allows the stablecoins to be much more decentralized than their fiat-backed counterparts, since everything is conducted on the blockchain.

Finally, there are also non-collateralized stablecoins that are not backed by anything, which might seem contradictory given what stablecoins are. These types of coins use an algorithm to control the stablecoin supply.

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