Why Precious Metals Don't Belong on the Blockchain (In Any Form)

Precious metals don’t belong on the blockchain.

At first, it seems like a viable way to give crypto users exposure to gold and silver.

But when you look a little closer, you realize it’s an awful idea, and it’s the opposite of why crypto was invented.

What is the Value of Precious Metals?

Precious metals, such as gold and silver, have many different properties which make it an attractive means of exchange. 

Among those properties are:

1. Limited Supply - there is only so much gold/silver on Earth
2. Self Custodial - people can hold their own gold/silver if they want to eliminates counterparty risk
3. Adoption - most governments and institutions around the world view gold/silver as valuable

However, these features are destroyed when gold/silver is put on the blockchain. 

Why Precious Metals Don’t Belong on Blockchains

In order to put precious metals on a blockchain, a central entity will obtain gold/silver and put it in reserves.

They will then issue a token as a receipt for a certain amount of gold/silver.

For example, if a user holds 1 eGold they are entitled to 1 oz of gold from the central issuers reserves.

This model presents challenges to the fundamental value propositions of both precious metals and crypto.

1. Added Counterparty Risk

Precious metals value comes from holding them yourself in the event that fiat currencies collapse. If you have a tokenized receipt for gold/silver, you don’t actually own it and are at the mercy of the central issuer. The central issuer could fractionally reserve (less than 1.0 collateral ratio) their precious metals or there could be a bug in their code. There are many other scenarios like this which could result in you not being able to extract the real value that is there. 

2. Unnecessary Costs

Blockchains are slow and extremely expensive databases. Putting gold/silver on the blockchain adds a layer of expense that is unnecessary. If you don’t want to hold real precious metals, just hold traditional paper gold/silver from a broker. The central issuer is likely to charge additional fees for the tokenized version as well. 

3. Added Jurisdictional Risk

Each jurisdiction has its own laws surrounding blockchains and precious metals. If the central issuer's jurisdiction changes, or your jurisdictions conflict with one another, you could be left with no value and legal issues. 

4. Centralized Issuer

Crypto was invented to get rid of middlemen. If you are relying on a middleman to hold your collateral for you, you are missing the point of both crypto and gold/silver. 

Why Stablecoins Pegged to Precious Metals Don’t Make Sense

Some projects have tried to peg a stablecoin to the price of silver, for example, while using cryptocurrencies as collateral.

The purpose of this is to bring precious metals exposure without having to leave the blockchain.

The problem with this is it adds to the collateral health of the ecosystem. 

For example, if the value of collateral decreases at the same time that the price of gold/silver increases, the collateral ratios decrease faster than usual.

This results in much more liquidations than if the stablecoin was pegged to the dollar. 

In addition, if the price of gold increases, there isn’t actually anymore value brought into the ecosystem that it operates in. 

Rather, it just decreases the collateral ratios of the vaults and converts itself into the cryptocurrency collateral. 

The Bottom Line

Crypto was invented to get rid of middlemen and create a censorship resistant payment network.

Adding precious metals to the blockchain injects counterparty risks and adds to the possibility of censorship. 

In addition, the model of adding precious metals ino crypto creates unnecessary costs and jurisdictional risks.