Digix: Towards a Future of Asset-Backed Cryptocurrency
Bitcoin’s success story in 2017 – a meteoric rise from less than $1000 to $20,000 in a year – had individuals pining to mimic the gains of those that invested early. It’s perhaps as a result of this that we’ve seen the rapid proliferation of thousands of alternative coins and tokens gunning for the market cap of the flagship cryptocurrency.
It’s unsurprising that concepts of decentralisation and permissionless finance are taking off, given a seemingly universal focus on financial inclusion. Changing regulation and technologies are rapidly ushering in an age where fintech developments are broadening access to better financial tools – one need only look to the open banking laws sweeping the globe, or the progression of developing nations towards a cashless society.
Stability: the Missing Element
On the surface, it seems strange that cryptocurrencies are often included in such discussions. While they promise greater transparency, self-sovereignty and decentralisation, wild price volatility makes them a poor choice as currency (let’s not forget, after all, that the majority are fundamentally backed by nothing). They’re chiefly used as speculative investments, used by traders to maximise profits.
Of course, there are exceptions to the rule. Alongside blockchain-native currencies conceived as payment mediums and application-specific utility tokens, are stablecoins – a phenomenon that has been around for a few years, but one that is only beginning to truly gain traction.
Due to the aforementioned volatility of most offerings (as well as a relative lack of understanding as to their nature, distribution and monetary policies), it’s unlikely that the regulatory environment will soften to accommodate cryptocurrencies like Bitcoin as legal tender anytime soon – experts predict that it will assume the role of digital gold, as opposed to digital cash, with holders either trading it, or adding it to their long-term portfolios.
The Rise of Stablecoins
Many are now looking to stablecoins, blockchain-issued tokens backed by an off-chain stable asset, as a much more viable successor to cash in cyberspace. The most popular example at present is undoubtedly dollar-backed cryptocurrency, wherein the issuer has in their custody a set amount of dollars and distributes a matching amount of digital dollars. The digital offering maintains a 1:1 peg with the dollar as it can always be redeemed for one.
The idea is by no means limited to fiat currency, as we’re seeing gold, silver and diamonds being used to back cryptocurrency, though the name ‘stablecoin’ may perhaps be an incorrect characterisation of non-fiat-backed cryptocurrencies – for instance, gold is not so much used for stability, but rather as an investment-class option with slow and steady appreciation. Asset backed cryptocurrency, or more specifically gold on the blockchain would allow for anyone to have access to a time tested store of value.
It stands to reason that such a coin would be perceived as a ‘Holy Grail’. Indeed, an asset-backed cryptocurrency takes the best of both an external asset and cryptocurrency and combines them to overcome their individual shortcomings, creating a stable, cheap to transact and peer-to-peer digital money.
One complication arising with asset-backed tokens is the off-chain element. With blockchain-native money, the network is able to validate and attest to the authenticity of any coin in circulation, but with tokens redeemable for off-chain assets, extra precautions must be taken. After all, how does an issuer prove that they have the reserves backing the currency being distributed?
The generally accepted method is via third-party auditing. An independent inspector will examine the funds to make sure they’re in the custody of the issuer, and publish their findings. Methods like Proof-of-Provenance can be leveraged to ensure that this process is conducted as transparently as possible, with routine audits, distributed file storage, and immutable evidence written to a public blockchain.
There’s a fitting adage in the cryptocurrency space – don’t trust, verify. It would be a step backwards to sacrifice one of the strongest features of blockchain (trustlessness) to rebuild what is essentially traditional banking with added buzzwords. Fortunately, this need not be the case with the tech stack available to us. Key to inspiring confidence in asset-backed cryptocurrency is transparency with protocols like Proof-of-Provenance and routine auditing on issuers’ reserves. With such standards adhered to, asset-backed tokens are may very well be poised to change payments and settlements in a way that other cryptocurrencies simply cannot.
Shaun Djie is co-founder and COO of Digix. Digix is an asset tokenisation company incorporated in Singapore in 2016, with physical gold on the Ethereum blockchain, DGX, being its first product. It aims to democratise access to gold for the masses.
