The narrative of Bitcoin as 'digital gold' has been widely embraced, but that hasn't stopped the creation of blockchain tokens physically backed by the precious metal. According to data from early 2020, more than 30 gold-backed cryptocurrency projects have failed, while approximately 77 projects currently claim to be backed by physical gold — a testament to both the enduring appeal and the high failure rate of this niche.
The Gold-Backed Token Landscape: Failures and New Entrants
In October 2019, Coinshares and Blockchain.com launched the digital gold token DGLD, each representing 1/10th of a fine troy ounce of gold, secured by the Bitcoin network via Commerceblock's sidechain. In January 2020, Tether announced XAUT (Tether Gold), backed by one fine troy ounce of London Good Delivery gold bars, listed on Bitfinex. These join a crowded field including Digixglobal's DGX, Pax Gold (PAXG), Karatgold (KBC), and many others. However, historical attempts like E-Gold and Liberty Reserve failed due to centralized custody and regulatory non-compliance. Among the current 77 projects, many have minuscule market capitalizations and are not even tracked by major coin listing sites.
DGLD and XAUT: The Latest Contenders
Coinshares claims to have deposited $20 million worth of gold into DGLD, which can be traded on Blockchain.com's 'The Pit' platform but is unavailable to U.S. and Canadian residents. Tether emphasizes that XAUT combines the benefits of physical and digital assets, eliminating storage costs and charging only redemption/transaction fees. However, crypto commentator John Paul Koning questioned the sustainability of zero custody fees. Brandon Arvanaghi, Chief Security Officer at Layer1, responded that transaction fees are fickle: off-chain trading on centralized exchanges avoids them, while on-chain wrapper contracts can create synthetic trading, further undermining revenue.
Centralization Concerns: Déjà Vu from E-Gold
Despite blockchain technology providing distributed ledger records, most gold-backed tokens rely on centralized custodians for storage, issuance, and redemption. This closely mirrors the failure of E-Gold (1996), which attempted a gold-backed digital currency but collapsed due to non-compliance with KYC/AML and the Patriot Act. Today's gold tokens are not significantly more decentralized than E-Gold — they merely add a public ledger while the underlying gold remains with a single custodian.
Market Reality: Far Behind Stablecoins
Market data reveals extremely low liquidity for gold-backed tokens. Karatgold (KBC) has a market cap of ~$65 million but daily volume of only $200,000; Digix Gold (DGX) is at ~$6 million market cap with ~$193,000 volume. Combined, these pale next to Tether (USDT) at $602 million daily volume, Bitcoin ($529 million), or Bitcoin Cash ($30 million). Gold-backed tokens face a massive gap in achieving stablecoin-level network effects. While gold bug Peter Schiff argues that physical-gold tokens will surpass Bitcoin, market reality shows investor indifference.
In summary, the gold-backed token sector is riddled with contradictions: constant new projects, high failure rates, and negligible liquidity. The key to survival will be finding a sustainable balance among decentralization, regulatory compliance, and a viable business model.