Digital gold on blockchain: What is Pax Gold (PAXG)?

One such digital asset is Pax Gold, an alternative to traditional financial instruments on the blockchain.

What is Pax Gold?

Pax Gold, or PAXG, is one of the leading stablecoins in the crypto market. It is pegged to the gold rate at a 1:1 ratio and backed by a portfolio of real assets. The Pax Gold token can also be called "tokenized gold." PAXG is also one of the few liquid stablecoins in this category on the market, with a capitalization of over $437 million, according to CoinMarketCap as of July 2024. Pax Gold ranks second behind Tether Gold (XAUT) in this metric.

Pax Gold is issued by New York-based Paxos, a well-known company in the crypto industry. Paxos also issued the 2024-closed Binance USD (BUSD) stablecoin, which has long been the second largest in terms of capitalization behind the market's largest stablecoin, Tether (USDT). Paxos has also become the issuer of a new stablecoin that Binance uses instead of BUSD: First Digital USD (FDUSD).

The gold rate-linked Pax Gold stablecoin was released by Paxos in September 2019 on the Ethereum blockchain as an ERC-20 token. As of July 2024, the PAXG token exists on two other networks: the BNB Smart Chain as a BEP-20 token and Solana in SPL format. However, the combined number of existing Pax Gold tokens in the BNB Smart Chain and Solana networks is just over 53 PAXG, meaning there is little to no liquidity there.

Advantages of Pax Gold

Like any other stablecoin, PAXG's main advantage is the ability to quickly and without leaving the decentralized environment (blockchain) convert cryptocurrencies into tokenized analogs of tangible assets, such as gold, dollar, euro, etc.

For example, suppose an investor needed to convert his bitcoins or ethers into real gold. In that case, there is no way he could do it directly: he would first have to convert the cryptocurrency into fiat, make a deposit on a stock exchange through a broker, and only then would he be able to buy gold on the market. All these operations have associated costs because the investor would have to pay a considerable commission at each stage (deposit and withdrawal, buy/sell). In the aggregate, he would lose up to 10% or more of the converted amount.

In addition, the process is quite complex and can take several hours or more. If an investor simply directly exchanged Bitcoin or Ethereum for Pax Gold, for example, through the decentralized exchange (DEX) Uniswap, it would be enough for him to pay the exchange fee and the cost of gas. Still, the latter is relatively high in the Ethereum network. At the same time, if desired, the owner of Pax Gold can exchange the stablecoin for real physical bullion - the Paxos issuer guarantees this possibility.

Another plus for tokenized gold is that there is no need to pay for storage services. In the case of buying physical gold or its digital equivalent on a traditional stock exchange, the investor will incur costs for depository services, i.e., storage of gold. Owners of the Pax Gold token do not need to pay for any services, so this storage option will be the most profitable of all.

Another advantage of Pax Gold over physical gold is the ability to divide to 18 decimal places, so an investor does not need to buy the equivalent of an ounce of gold or a whole bar. Like most assets on the Ethereum blockchain, the PAXG unit is divisible into 18 parts. In other words, an investor does not have to buy 1 PAXG: they can buy 0.1, 0.01, 0.001, or even 0.00000001 PAXG, just like in the case of ETH or USDT. Similarly, an investor can sell Pax Gold stablecoin not in its entirety but in any installments at his discretion.

Weaknesses of Pax Gold

The liquidity of the PAXG stablecoin will seem ridiculous compared to the gold market: the capitalization of Pax Gold is only 0.0027% of that of natural gold. In the global financial market, gold is the most capitalized asset, except for the most significant international currencies, which exceeds $16 trillion.

Due to its relatively small liquidity, a gold-linked stablecoin is much more prone to volatility than real gold. In addition, all stablecoins carry the risk of decoupling the exchange rate from the underlying asset (in this case, loss of parity to the price of gold). Therefore, securing the stablecoin with appropriate reserves plays a huge role.

Paxos ensures transparency of reserves and provides monthly reports, but as of July 2024, the most recent one was only published in May. The May report, confirmed by auditing firm Withum, stated that Pax Gold tokens circulating on the crypto market are 100% backed by gold reserves.

Another significant disadvantage of Pax Gold is that not all investors can convert PAXG stablecoin into physical gold. To do so, they would need to be present in New York, and the remote process of exchanging tokens for gold would be problematic and costly. This makes the risks of losing Pax Gold's parity with gold seem more significant.