Last updated on June 15th, 2020
Digital asset backed tokens solve the problem of purchase, storage, and exchange of commodities that exist in the real world. Gold for example is expensive to store, to move, and to transfer from one owner to another.
Tokenization aims to put the ownership of these assets on the blockchain. This allows these real world assets to be used as an efficient medium of exchange allowing value and ownership of these assets to be transferred from one to another.
PAX Coin (PAXG)
Launched by PAXOS, PAX Gold is a cryptocurrency that attempts to solve the twin problems of gold storage and the use of gold as a medium of exchange. The company pledges that every PAX Gold token is fully backed by vaulted physical gold in London. One digital token represent one troy ounce of LMBA good delivery gold. They also affirm to investors that the gold is audited on a monthly basis.
As PAXG tokens represent a claim on one troy ounce of physical metal, it reliably tracks the LMBA gold spot price.
An owner of a PAX token can enter their token’s Ethereum address into the PAX website and find the serial number of the physical gold bar that it is backed by. A token can also be redeemed for physical gold. However to take deliver you need to own at least one London Good Delivery Bar (LGDB), which is in the order of 400 troy ounces. PAX tokens can however be redeemed in smaller amounts through participating gold retailers.
PAX gold is one of the largest crypto commodity projects with a current market capitalization of $47 million US dollars. PAXG is an ERC-20 token which means it can be stored in any Ethereum wallet.
The company states that the gold is held in separate custody from its own assets, which means if the company were to go under, the gold would not be seized to pay creditors.
Tether Gold (XAUT)
Tether Gold is similar to PAX gold, though it currently has a smaller market cap of around 6 million US dollars. TG commodities, the company that launched Tether Gold affirms that each coin is fully backed and represents one troy ounce of fine gold for good delivery. The gold is vaulted in Switzerland. Like PAX gold, to take delivery of the physical metal, you’ll need to own at least one good delivery bar at around 400 ounces.
Tether Gold is an ERC-20 token, and like PAX gold, you can enter an Ethereum address to match an XAUT token to its physical gold bar.
While the company will only deal in large volume orders, several exchanges offer a secondary market for XAUT tokens. On exchanges, coins can be traded in fractional quantities like other crypto assets.
Certified Diamond Coin
The Estonian company behind Certified Diamond coin is aiming to create an asset that solves the volatility problem of traditional cryptocurrencies.
Unlike precious metals, diamonds are not commoditized or fungible. Each diamond is unique. To solve this problem, the company issues three coins. This first, CDC coin, they describe as being backed by an unallocated diamond equivalent to 0.05 carat. This, they propose is the coin which acts as a fungible medium of exchange.
The second token, DPASS represents individual diamonds. This token uses the ERC-721 standard. In contrast to ERC-20 tokens, which are fully fungible, ERC-721 tokens are more like title deeds. They represent a unique claim on one specific asset.
The third token the company issues, DPT is a utility token that gives access to various services within the platform including sending and receiving payments in fiat currency.
The company declares that 95% of their assets are stored in investment grade diamonds. However, unlike other asset backed projects, they do not currently offer a way of redeeming coins for diamonds.
As the name implies this is a cryptocurrency that will be backed by oil and natural gas. The company behind the launch, PDX AG, of Zug, Switzerland, states that coins will be supported by certified oil and gas reserves and production facilities. They go on to state that the aim is for the coin to become a reliable store of value as well as a medium of exchange.
The premise of project is that all existing fiat currencies are unbacked by tangible assets. PDX’s whitepaper declares that each of their coins will be backed by at least one barrel of oil, for the first 10 years. This ratio, they propose, will be rebalanced over time as the world moves to different forms of energy such as renewables.
PDX coin will use Ethereum’s ERC-20 standard, so that it can be easily stored or exchanged peer-to-peer with other holders.
LODE is a Liechtenstein asset management company which aims to tokenize silver bullion on the blockchain. It is important to recognize that LODE encompasses not just a coin backed by a commodity, but a leasing and dividend model as well. This means it is not as straightforward as PAX or Tether GOLD.
LODE has two tokens. The AGX coin, they propose, functions as digital silver bullion. This token is the medium of exchange. Each AGX coin represents one gram of silver which is a claim on vaulted and reserved silver that’s held within the LODE ecosystem.
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The second token, LODE is for investors. Owners of investment grade silver bullion can stake their holdings and receive a LODE token, which works essentially like a dividend paying bond. In tokenized form, the owners of LODE will receive profits from the issuance and fees derived from the AGX tokens.
In effect, LODE is a form of silver leasing where the token is a receipt for the owner’s deposited silver. This model gives investors a chance to earn a return on silver bullion which would otherwise be sitting idle in a vault.
The AGX tokens are fully backed by the silver that’s held in custody, and for which owners are given LODE tokens. Likewise, AGX coins are tradeable on secondary markets.
Risks of owning commodity backed coins
Asset backed cryptos are supported by something tangible, which investors can relate to in the physical world. While these coins may be tied to physical assets, it is worth considering that commodities such as gold, silver and energy are volatile and can be adversely affected by many factors including interest rates and economic environment.
Before investing in any crypto asset project, it’s essential to do your own research to understand the risks. The space is still evolving, and it’s likely that many projects won’t survive.
Moreover, this space is largely unregulated, which means the laws surrounding ownership of remotely stored digital assets are not as clear cut as they are in the physical world.