Is Gold the past and future of Stablecoins?

Categories: GeneralPublished On: January 18th, 20216 min read

When the 3 wisemen paid their respects to a newborn baby once upon a time in the sleepy town of Bethlehem, they did not come bearing Bitcoin or USDT — nor did they bring duffel bags stuffed with green paper, or whatever the inhabitants of Jerusalem used to buy and sell sheep next door.

No, they came bearing gold. 

If history is to be believed, it is hard to argue against the value that gold, as an asset has had in our lives. It has been endowed by Kings in England and it has been donned by Pharos in Egypt. Fast-forward a few thousands years to 2020, and this sentiment is as true as ever. 

In a pandemic stricken year clouded by uncertainty, a rise in demand for gold is about as predictable as anything else. This was first seen in January during the US vs. Iran conflict, and later again in July when pretty much everyone in the world realized that COVID-19 wasn’t ending anytime soon. Despite the stability and assurance that projects like Stably, Tether or MakerDao have brought to the market, there will never be a true substitute for gold as an asset due to its cultural significance in our lives. Gold doesn’t require language, translation, or hockey stick shaped graphs. It is as relatable to an old lady in Singapore as it is to a farmer in Argentina — which could make it the ultimate collateral for stablecoins in the future. 

This is only more evident when you take a step back and look at the geopolitics engulfing nations regardless of longitude or latitude. There is conflict or problems in almost every area of the world, whether that is domestic, racial, economic, or conflict between disputed borders. An argument can be made that the earth as we know it is as unstable as it has ever been. Humans naturally seek to strike a balance between stability and instability, too much stability makes life predictable and opens up systems for exploitation. Too much instability though, can cause fear mongering and a desperate grasp to escape the pits of chaos. Okay, maybe that’s a bit of an exaggeration — but it is very much in our nature to seek comfort and stability in times of uncertainty. 

Money, or more specifically — fiat currency, is the pinnacle example of this humanistic behavior. Global markets have, and will continue to fluctuate due to conflict. Even for historically stable economies like the United States, modern conflicts are leading to fiscal challenges. The further we slide down this slope, the faster the desire to seek stability in the form of money will accelerate. Fiat currencies simply just aren’t going to be reliable anymore if this trend continues, regardless if it takes 5 months, 5 years or 5 decades. Perhaps, then, we can make the argument that the gold standard should return as the single most stable asset around the world — regardless of whichever conflict or pandemic is causing unrest and uproar. Gold, after all is not just used widely by thousands of cultures and religions, but also stores value by itself simply through existing. It doesn’t matter if you are weaving it into a gown, melting it into a necklace, or simply staring at it in a glass case, gold will be worshiped and valued regardless of its use of function.  

But to simplify this idea, and lay out more tangible reasons, here are three main factors why gold will always have a place in our hearts, and therefore our (digital) wallets. 

1. Deflation

Unlike any fiat-backed currency, the chances are that gold will never inflate due to a country’s monetary policy because physically gold cannot be printed the way Euros or Pesos can. As a result, governments can’t simply jack up the supply of gold in circulation, ensuring it will never inflate the way Argentinian Pesos did in the early 2000’s. This makes gold more safe, and therefore more “stable” compared to even the most stable of stablecoins such as any form of USD held in vaults around the world. Re-imagine inflated economies like Venezuela if they had a gold backed stablecoin instead. As long as the gold remained safely stored in a vault somewhere and was legitimately accounted for, the farmers and workers of Venezuela wouldn’t have to hoard basic household goods in fear of government manipulation. There would be no snowball effect, and the lives of millions of people would be far more stable compared to how it is today. 

2. Price stability

Not only will gold likely never inflate, but the price has historically demonstrated a consistent stickiness to it. Sure, it will grow or shrink in value just like any global asset dug from a mine, but the supply of raw gold around the world has diminished, whereas demand is at least predictable based on historical transactions, if not stable. Price is a reflection of market economics, and there has always been a healthy balance between the supply and demand of gold because gold isn’t something that simply disappears — ensuring a relatively stable curve of supply. People don’t burn gold, they don’t flush it down the drain, nor do they eat it. By having a public and predictable supply, gold has historically been able to (relatively) maintain price stability. 

3. Liquidity

Liquidity is defined by your ability to sell or buy an asset (gold) without having it drastically affect market price. Gold is very liquid. So much so that in India, there used to be a practice where the bride’s family had to pay tribute to her equal weight in gold as a form of endowment when she got married. Derivative practices like this exist in dozens if not hundreds of cultures around the world. Gold is ingrained in cultures and religions, which means it is also engrained in the lives and minds of hundreds of millions of people. As a result, gold is and almost always will be highly in demand — making it liquefiable at almost any moment. 

In conclusion, while stablecoins are relatively new in the blockchain space, they are quickly taking form and allowing the creators of projects like Stably to assess and decide the next steps are, not just for individuals or organizations, but the industry as a whole. As we’ve carefully illustrated above, gold is primed to take the pole position in this race. The fact that our entire sector is still so young means that it is also incredibly exciting, maybe there are applications for gold backed stablecoins that no one has thought of yet. If gold can unlock this level of stablecoins, perhaps we will quickly find out that there are hidden features and applications not possible through traditionally backed stablecoins involving fiat or digital currencies. It’s like we just got on a ship which is sailing out to the large, vast ocean. To the starboard side are algorithmic backed stablecoins. To the North East are fiat backed stablecoins, but maybe we should turn the mast towards true North instead, gold?

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