Introduction
When it comes to cryptocurrencies they are mostly seen as a product that is an alternative to fiat currencies and their services. However, major financial institutions have been taking an interest in working with blockchain to offer innovative methods of investing.
One such cryptocurrency project is PAXG. This article is going to discuss what is PAXG, how it works, and how can investors use it to diversify their portfolios and generate profits.
What is PAX Gold (PAXG)?
It is important to mention that there are many types of cryptocurrencies out there. One type is called stablecoin. A stablecoin is a type of cryptocurrency that aims to keep a stable or specified price such as $1. Stablecoins usually require some type of asset or commodity to back them and ensure their total value.
PAXG is also a stablecoin and it is backed by gold rather than cryptocurrencies, algorithm, or fiat currency reserve. This project is based on the Ethereum blockchain and operates as a Dapp or decentralized application.
The stablecoin is denoted by PAXG and it is an ERC-20 token. The adherence to the Ethereum tokenization standard enables PAXG to be compatible with Ethereum-based wallets. This project can integrate with other decentralized applications in the DeFi sector and operate on the decentralized exchanges or DEX that are hosted on the Ethereum blockchain.
PAXG has been listed on major cryptocurrency exchanges such as Binance, BitZ, and Kraken. It is registered in New York and regulated under the New York Department of Financial Services.
How does PAXG Work?
PAXG is a stablecoin that is backed by real gold. When an investor purchases the PAXG token, it means that they are purchasing real gold without owning it directly. Each PAXG token is backed by 1:1 ratio of 1 troy ounce of gold or 400 ounces.
The gold reserve of PAXG is stored at Brinks Security Vaults in London. To ensure that the PAXG tokens are backed by real gold, the firm conducts a regular audit with the third-party auditing firm and shares the report with the investors. Furthermore, the PAXG is backed by the London Bullion Market Association or LMBA-approved gold bars.
The investors have the option to redeem their PAXG tokens in exchange for these bullions and they can also exchange it for fiat currency. In case, the customer wishes to view the gold under their ownership they are given the option to use the PAXG lookup tool.
The investors can access the locator tool on the official website of PAXG and enter their Ethereum address. They would be able to remotely view the unique gold bar in their possession using a unique serial number, value, and other characteristics.
The investors are not required to pay any type of custodial fee for the storage services provided by PAXG. For every PAXG transaction, the investors are asked to pay a small gas of 0.02% in addition to the Ethereum network transaction charges. Investors who wish to purchase gold without having to go through rigorous legal scrutiny can take advantage of PAXG.
They are also saved from having to worry about keeping the gold physically safe and do not have to arrange any type of special storage or make an effort to keep it away from the reach of thieves. This stablecoin project is supervised and run by Paxos Trust.
In the event of bankruptcy, the consumers are not going to lose their gold ownership on account of the Paxos Trust structure. In addition to financial audits, PAXG also undergoes regular smart contract audits to weed out any bugs or blind spots.
Origin of PAXG
As mentioned above, the PAXG project is operated and created by the Paxos Trust. It is a bonafide financial institution and tech organization that is operating out of New York. The company has extensive experience in working with blockchain technology for innovative and unique purposes. The Paxos Trust was co-founded by Richard Teo and Charles Cascarilla.
Both the co-founders were formerly working as financial analysts at Cedar Hill Capital and Goldman Sachs respectively.
Paxos Trust was first introduced in 2012. The firm also works with other cryptocurrency projects such as PAX Dollar or USDP. The USDP is a USD alternative and a type of stablecoin.
Paxos Trust has worked with some of the biggest financial enterprises and investment firms such as PayPal Ventures, OakHC/FT, and Mithril Partners. The firm has reportedly raised $500 million in funds after a series of funding events to support its blockchain-related fintech projects such as PAXG and USDP.
Does PAXG Backed by Real Gold?
The answer to this question is not very simple and straightforward. In a way, PAXG does contain real gold but it would be wrong to assume that each PAXG token is made of gold. The reality is that just like Bitcoin and other cryptocurrencies, PAXG is also based on a computer algorithms and signature blockchain technology such as smart contracts and cryptography, etc.
However, each PAXG token is backed by real gold bars. The entire gold reserve of PAXG is kept at a remote location in London under strict security.
To ensure that it is high-quality gold, all the bullions are certified by the LAMDA. The PAXG is a tokenized currency that is backed by real gold. Tokenization is a process to convert a physical or virtual asset value such as fiat currencies or any commodity into a cryptocurrency such as a stablecoin.
In this manner, every PAXG stablecoin represents the assigned amount of real gold that is maintained and stored by the Paxos Trust. Many people are divided between choosing gold or cryptocurrencies as the best way for investing. PAXG solves this problem by combining both options into a single entity.
For centuries, people have been using Gold as a reliable hedge against inflation. Whenever the local fiat currency losses its value many people turn to gold to avoid the devaluation of their savings. To ensure that every single PAXG investor can track and view the bar that they have purchased, the gold bullions are marked with a unique serial number.
The PAXG token holders have the option to exchange their PAXG reserves for fiat currencies, other cryptocurrencies, or even allocated/ unallocated gold bullion based on the current market value of physical gold in the international market.
How does PAXG Make Money?
Many cryptocurrency investors may worry that why PAXG does not ask for an additional fees such as custodial services. At the same time, the Paxos Trust also conducts regular financial and technical audits of the said project and publishes the reports on its official website.
However, there are two major ways that PAXG generates profits for operating their business legitimately and legally. There are two main sources of revenue related to PAXG that Paxos Trust can use. The first one is the mandatory 0.02% fee on every PAXG purchase that the investors are obligated to pay.
This small fee is registered as a marginal tokenization fee. Usually, the tokenization fee is based on the amount of the total purchase. For one ounce of gold, it can be set at 1% but for bigger gold purchases the fee becomes lesser. The other fee is a small premium on the gold that the users own as a way of purchasing the PAXG token.
The users are bound to pay the premium on gold on the occasion of the initial purchase or they are selling their token on any blockchain or DeFi platform. The minimum purchase limit for PAXG is 0.01 PAXG tokens or 1% of the total supply if the users are purchasing from the official website.
Can PAXG Token be Used for Staking?
One of the best ways to multiply income from cryptocurrencies is to stake them for earning yield revenue. Since PAXG is an ERC-20 token it is possible to use it for staking. The users have the option to lend it to a custodial services provider to earn interest income just like a savings account in a bank.
However, the income percentage generated by the stake depends on the APY ratio set by the individual lenders and can differ from custodian to custodian. It is important to keep in mind that staking offers a way for the users to earn extra income but they are also under an obligation to lock their PAXG token reserves for a specified amount of time.
Before the staking period is over the users may not be able to unlock their PAXG tokens which can expose them to impermanent loss. However, some custodians allow users to unlock their PAXG staking positions at will by opting out of earning their staking rewards.
How to Purchase PAXG Tokens?
There are many major cryptocurrency exchanges and decentralized exchanges that have listed PAXG tokens. The users can opt to create an account at exchanges such as Binance, KuCoin, Kraken, BitZ, and Coinbase among others. Users who are planning to invest in the PAXG token for the first time can use the following simple steps:
- Download a self-custody wallet that supports ERC-20 tokens like PAXG and choose your preferred exchange to purchase it.
- Secure the recovery phrase and private key for the custodial and crypto exchange accounts.
- Calculate the transaction fee for making transactions on the Ethereum network or crypto exchange.
- Purchase PAXG using fiat currency or your existing cryptocurrency reserves and transfer them to the self-custodial wallet.
- You may also purchase ETH from the Ethereum network and swap it for PAXG coins later.
Differences Between PAXG and Gold ETFs
An exchange-traded fund is like a mutual fund that may contain a variety of cryptocurrencies that the users can track and invest indirectly. There are several popular Gold ETFs that allow investors to indirectly invest in gold without having to own them directly and take the risk of theft or robbery.
However, when an investor purchases a Gold ETF they are only tracking the performance of its underlying reserve rather than owning it. The Gold ETF contract only accounts for the percentage share in the pooled gold reserve. The owners of a Gold ETF cannot redeem it for the gold reserve that is backing it.
They are not a substitute for the real ownership of physical gold. On the contrary, each PAXG stablecoin is a tokenization of the gold reserves under the possession of Paxos Trust. Each PAXG token represents one troy ounce or 400 ounces of real gold ownership for the buyers.
The users can identify the gold in their possession using their Ethereum address and the unique serial number assigned to the gold bullion. Furthermore, unlike Gold ETF the sales or purchase of PAXG tokens does not require extensive approval or considerable time to complete.
The users can exchange or trade their PAXG tokens instantly on account of their healthy liquidity. The PAXG token is capped at a maximum supply of 263.73K.
Comparison between PAXG and ComTech Gold
ComTech Gold is considered one of the biggest rivals of PAXG; it is another tokenized gold project that issues cryptocurrencies against the real gold reserves. However, some important distinctions between these projects are mentioned for the benefit of the investors:
Minimum Purchase Limit
The minimum purchase limit for PAXG is set at 0.01 troy ounce or $20 for a singular investor. On the other hand, the people who wish to purchase ComTech gold are required to purchase at least 0.001 grams.
Custodial Fees
There are no custodial fees charged by the Paxos Trust to the investors when they are purchasing or selling their PAXG tokens or when they are holding them. In the same manner, the users who have purchased ComTech Gold are also not under obligation to any type of custodial fees for the real gold reserves that the token is backing.
However, there are some other fees such as a small premium on the gold and a small tokenization fee for the PAXG traders.
Shariah Principals
Shariah principles are the financial tenets that are based on the Islamic laws. Many investors are Muslims and they may worry about finding the gold-backed currency that is backed by Shariah laws. For the followers of the Muslim faith, ComTech Gold is ideal. On the other hand, there is no such compliance claimed by the Paxos Trust for the PAXG currency.
Redemption for Other Assets
In both cases, the investors who have purchased the PAXG or the ComTech Gold tokens can redeem them for real gold. There is also the option for exchanging with other cryptocurrencies, fiat swaps, or for use in purchases such as NFTs or other DeFi products and services, etc.
Advantages of PAXG
Based on the advantages that the users can benefit from any Gold tokenized currency such as PAXG, here are some major advantages:
Cost-Effective
There are several gold-backed currencies and tokenized tokens available in the cryptocurrency market at present. However, Paxos Trust has worked on ensuring to offer the most economic purchase prices for their investors to remain ahead of the curve.
The users who are purchasing gold from PAXG in the form of a token can rest assured that they are getting their gold reserves at the best prices in the market and there are no hidden fees such as custodial charges involved to ensure that the prices remain low and friendly for the investors around the globe.
Secure and Regulated
Anyone who has ever purchased gold in real life understands the worry about the quality and purity of the gold they are getting. Many people may be thrown off guard if they end up purchasing low-quality and impure gold and sustain losses later.
However, the gold bullion under the custody of Paxos Trust are certified and screened by LAMDA to ensure its high quality.
The Paxos Trust adds another layer of security by performing regular financial audits using third-party auditing firms to avoid any bias. The report of the financial audits is published on the official website of Paxos for the benefit of the investors.
In the same manner, the development team of Paxos Trust also conducts technical audits consistently to avoid exploits and hack attempts.
No risk of Settlement
When it comes to PAXG, it is absolutely from the risk of credit risks and settlement. The users are bound to take advantage of the instant transactions plus T+2.
Redeeming Option
The owners of PAXG can redeem real gold in exchange for their reserves at any time. The users who opt for using the redemption option will be able to get the gold bullion that are certified by LAMDA. Institutional investors can also avail of this option using the unallocated Loco London Gold. Meanwhile, there is also an option for redeeming the PAXG reserves for USD based on the latest spot market prices for gold.
Limitations of PAXG
Negative Carry
When holding a massive amount of physical gold, the reserve can be subject to the forces of Negative Carry. It means that gold-backed tokens such as PAXG can suffer from depreciation per unit despite never using the token ever. On the other hand, the prices of the PAXG token can also differ on account of total supply and demand in the international markets.
Impermanent Losses
PAXG can be used for staking but its needs to remain locked if the custodial service does not offer the option to unlock it at will. In case the gold prices drop in the international markets, the users would not be able to access or sell their PAXG token to avoid sustaining losses because of the staking commitment. However, gold is a universal commodity and it is very unlikely to lose value and often recovers its value after some time.
Conclusion
Blockchain is not just useful for creating value on account of digital services. The products like PAXG are a testament to the utility and practical requirement of cryptocurrency technology. PAXG dissolves the issue of having to choose between gold and cryptocurrency. At the same time, it ensures instant transactions and warrants the users to invest in high-quality gold that has been accredited.