Feature: The Digital Gold StandardBy Kai C. Chng, CEO, Digix
Published on January 17, 2019
The introduction of blockchain technology gave new meaning to the term “financial inclusion”. The concept of non-fiat digital currencies that could be transparently traded and transferred around the globe at the click of a button have set the tech field ablaze with innovation on such protocols around them.
It has to be said, however, that much of the potential for the adoption of something like Bitcoin, Ethereum or any number of coins is largely driven by hype. At the time of writing, Bitcoin’s value plunged by 24% in seven days.
The financial market is heavily driven by speculation, and the fact that tokens or coins are fundamentally backed by nothing means that price movements are erratic and unpredictable. As a result of this, we are beginning to see more attention placed on projects with a real-world use case.
Historically, gold has been a safe haven asset that underpinned a paper-based system under the gold standard, where notes issued by central banks could be redeemed at any time for a pegged amount of gold.
The peg was broken decades ago in favour of the fractional reserve system we have today (currency underpinned by trust in governments), and the growing mistrust in the current monetary system is bringing many sceptics back to the gold standard.
Digix, as a pioneer blockchain company, has utilised the best characteristics of the blockchain to create a gold-backed token to always ensure that 1 DGX token is backed by 1 gram of investment-grade gold.
With advances in blockchain technology, we now have the ability to issue and trade in cryptocurrencies tethered to off-chain assets. This harkens back to the gold standard with greater optimisation – gold-backed cryptocurrency allowing affordable, divisible and near-instant transfers to anyone with an internet connection.
The biggest barrier to overcome for crypto gold is establishing trust with the issuer of the gold tokens. If there is any doubt over the legitimacy of the reserves held by the issuer, the peg is at risk of rupture, and the tokens may turn out to be worthless. In order to function, the tokens should always be redeemable for their physical equivalent.
Digix uses the transparent and public nature of blockchain architecture and IPFS (a distributed database) to track the provenance of gold, so as to be able to issue gold backed tokens. Every DGX token is equivalent to 1 gram of gold divisible to four decimal places. Digix spent two years developing this technology, called the Proof of Provenance protocol. By design, no DGX gold tokens can be issued until the Proof of Provenance is fulfilled on the smart contract layer.
This protocol creates a blockchain time-stamped event requirement for every supply chain action. When Digix procures gold from a supplier, all related documentation is captured, uploaded, and kept as a permanent, unalterable record on a distributed database (IPFS) and public blockchain (Ethereum). When Digix moves the gold to the custodian, the same process of documentation attestation happens on the blockchain to create an immutable record. Every quarter, an independent auditor would verify the reserves, logging additional information as necessary (i.e. weight/amount of gold bullion) and via the Proof of Provenance protocol, have the documentation uploaded onto IPFS and recorded on Ethereum. It is only when these steps are fulfilled that DGX tokens can be created on the blockchain.
By doing this, we remove the opaqueness of the gold holdings by having real-time immutable public records of our reserves. Everyone, not only our customers, can verify this documentation, and that all DGX tokens issued are equally backed by its weight in physical gold.
We have, at our disposal, a revolutionary technology that records the transfer of assets in a public and transparent manner. Proof of Provenance, as a “bridge”, enables gold to have a place in the digital realm, harnessing the traits that make cryptocurrencies so interesting – round-the-clock operations, easy transferability and a global audience. In a space known for its extreme volatility, crypto-gold tokens are the natural progression in the migration of hard assets into cyberspace.
* This article was published in partnership with Digix
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