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PAX Gold (PAXG) Explained: a Regulated Gold-Backed Token on Ethereum

PAX Gold (PAXG) Explained: a Regulated Gold-Backed Token on Ethereum

Explainers Cryptocurrencies

30 Jul 2021

Throughout the history of humanity, gold has been serving as an excellent store of value. It's not just durable and impossible to destroy or synthesize from other components, but it also offers a way for investors to combat inflation.

However, gold has some drawbacks that have driven many away from holding the asset. Due to the difficulties of transferring and dividing it into smaller units, it's hard to invest in the precious metal with actual ownership over the commodity.

Gold-backed cryptocurrencies provide an effective solution to the above problems by tokenizing the precious metal to offer fractional ownership over real-world bullions that buyers and sellers can easily exchange on digital asset trading platforms.

And today, we will explore PAX Gold (PAXG), a regulated gold-backed token that charges zero fees for custody and offers the option for holders to redeem the cryptocurrency for physical bars.

What Is PAX Gold (PAXG) and How Does it Work?

Launched in September 2019, PAX Gold (PAXG) is a gold-backed cryptocurrency issued on Ethereum's ERC-20 protocol.

The precious metal-backed digital asset is the project of the New York-based blockchain infrastructure company Paxos that manages the cryptocurrency.

With a background of issuing and/or providing custody services for multiple asset-backed tokens – such as the stablecoins Paxos Standard (PAX) and HUSD –, Paxos is responsible for the safekeeping, issuance, and other related matters concerning PAXG.

Liquidity and Counterparty Risks

The management of the asset by a single company definitely comes with increased centralization, especially when compared to other crypto projects.

However, PAX Gold offers holders more benefits with much less counterparty risk than, for example, purchasing gold-based exchange-traded funds (ETFs) or futures contracts.

The reason for the above is quite straightforward. Gold-backed tokens like PAXG are highly liquid, allowing users to trade them at any cryptocurrency exchange (including AAX) that supports the coins. At the same time, unlike futures contracts or ETFs based on the commodity, PAX Gold can be easily moved to external wallets for secure storage.

In contrast, ETF investors must trust the stock exchange or the broker along with the company managing the fund to keep their assets safe. And, in most cases, these investments lack the option to redeem the shares for physical bars.

Alternatively, individuals can avoid counterparty risks by purchasing physical gold. However, the market around real-world bars is rather illiquid, leaving users subject to the rather hefty markups of bullion dealers.

Furthermore, if they choose this option, customers are responsible for storing their precious metal holdings, which comes with either increased costs or risks.

Regulation and Physical Gold Backing

Instead of using algorithms to establish the peg, PAXG is backed by physical bullions – one token represents one fine troy ounce of a London Good Delivery gold bar – and follows the precious metal's price in real-time.

As one of the greatest benefits of the digital asset, Paxos offers users the ability to instantly redeem their tokens for physical gold. For that reason, holders have ownership rights to their precious metal holdings, which they can exercise at any time.

Interestingly, PAX Gold is a regulated gold-backed token supervised by the New York State Department of Financial Services (NYSDFS). This is the same government body that regulates Paxos as well.

The regulated nature of Paxos and its assets offers some additional protection for investors. Since the issuer is a state-chartered trust company, it keeps customers' holdings separate from business assets. This means that Paxos can't use clients' funds to generate extra profits by trading or (re)investing them in other instruments (like most banks do).

Furthermore, according to Paxos, the precious metal holdings used to back PAXG do not become the company's estate, even in the case of insolvency. As a result, in the event of a bankruptcy, token holders will (very likely) be able to claim the physical gold bars they are entitled to.

Fractional Ownership and Fees

Like most cryptocurrencies, PAX Gold is fractionable, which means that it can be divided into smaller units. In the current case, the smallest unit is 0.01 PAXG, which is worth $18.36 at the current price of $1,836. This fractional ownership allows investors with a lower budget to gain exposure to gold without having to purchase an entire gold bar or stock-traded assets tracking the precious metal's price.

As PAXG resides on the Ethereum blockchain, holders have access to a continuously operating market where they can trade the asset 24 hours a day and on weekends as well (just like other cryptocurrencies).

However, this also means that PAXG transfers are subject to the gas fees of Ethereum. In addition to that, Paxos takes a 0.02% fee on all transactions along with a tiered, volume-based token minting and burning fee.

On the other hand, unlike most service providers, the company doesn't charge customers for the custody of the physical bars.

Due to the benefits it offers, PAXG has gained quite some traction since its launch, claiming the top spot among all gold-backed tokens with an over $300 million market cap and a $12 million trading volume in the last 24 hours as of July 30.

What Is the Dynamic Between Gold and Bitcoin?

Bitcoin and gold are often mentioned together. And for a valid reason. Both assets are scarce, featuring a limited supply that is either non-extendable or complicated to do so.

While creating new coins will become impossible after all 21 million BTC is mined, gold mining is a costly and complex process. And this is why its new annual supply is minimal compared to the current stock of the precious metal.

As fiat currencies are inflationary – that lose their purchasing power in the long term due to the continuous printing of new supply –, the scarcity-driven long-term price appreciation of gold and Bitcoin has become attractive for many investors.

At the same time, gold and Bitcoin are also known for their qualities that make them decent safe-haven assets, instruments that offer a way for investors to hedge against the risks of the general market by featuring minimal or negative correlation with traditional investment vehicles like stocks and bonds.

And, since sometimes correlation is negative between Bitcoin and gold as well, investments in the precious metal can be a good option to hedge against the crypto market's risks or continue earning funds when digital asset prices are down.

Fortunately, due to the power of cryptocurrency and blockchain technology, you don't have to rely on brokers, physical gold dealers, or the stock market to get exposure to the commodity.

Instead, you can buy and hold gold-backed tokens like PAXG that can be easily traded on crypto exchanges and other markets while still offering the same exposure and very similar ownership over the precious metal.

One additional advantage of gold-based cryptocurrencies over other ways to invest in the precious metal is that they are compatible with decentralized finance (DeFi) products. This means that, for example, PAXG holders can lend their tokenized gold bars to borrowers or use other ways (e.g., staking or yield farming) to generate extra revenue on their assets.

If you want to learn more about this exciting topic, we recommend taking a look at our articles about gold-backed cryptocurrencies, the difference between Bitcoin and gold investments, as well as how scarcity impacts our lives.

Trade PAXG on AAX

Backed by real-world precious metal reserves as part of a regulated offering, PAX Gold is a good choice for those looking to diversify their investments and hedge against the risks of both the crypto and traditional markets.

While PAXG leverages Ethereum's network and the crypto market's liquidity to offer seamless tokenized gold trading for buyers and sellers, the ability to redeem the coins at the service provider allows for real ownership over bullions.

If you are looking to gain easy exposure to gold without the counterparty risks of stock brokers, then we have some good news for you.

PAX Gold is listed on the next-generation, LSEG-powered cryptocurrency exchange AAX, which you can trade by heading to the following page.

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