PAX Gold

What is Pax Gold (PAXG)?

Pax Gold is an asset-backed token, or stablecoin, pegged to the price of one fine troy ounce of a London Good Delivery gold bar. PAXG is a crypto derivative of gold but is backed by physical units of gold held in reserve by the Paxos Trust company.

For millennia, gold has been tied to the concept of currency and value. The first gold-containing coins date back to the kingdom of Lydia (modern-day Turkey) in the 6th century BC.

Given its history and deep entrenchment in the human psyche, gold has become a premier investment during times of fear and uncertainty in financial markets.

More rationally, gold does possess certain attractive fundamental characteristics, such as resistance to corrosion and decay of any kind. It is abundant enough to create coins and other products out of it but not ubiquitous enough for everyone to own and refine.

However, investing in gold directly can be difficult. As a physical commodity, buying gold also means having to transport and store it. This isn’t very practical for most investors. For this reason, derivatives like Pax Gold allow investors to enjoy the characteristics of gold as an asset while a third party takes care of actual storage.

Pax Gold is also a cryptocurrency. This makes it possible to trade in extremely small units since cryptocurrencies are highly divisible. Blockchain settlement is infinitely transparent, far faster, and more efficient than traditional derivatives, let alone the settlement of physical gold trades.

When Was Pax Gold Launched?

Pax Gold was launched as an ERC-20 standard token on the Ethereum blockchain in September 2019.

The decision to use Ethereum makes PAXG available on a wide variety of networks, given the number of other blockchains that are EVM-compatible. Also, Ethereum itself hosts the widest variety of decentralized finance (DeFi) applications.

Trading PAXG in a decentralized, permissionless manner can also be accomplished very easily on Ethereum. This is done by engaging with many decentralized exchanges, including Uniswap.

Who are the Founders of Pax Gold?

Pax Gold was created by blockchain company Paxos. They are also well known for issuing the Pax Dollar, a cryptocurrency token that works like Pax Gold but tracks and is backed by the U.S. dollar instead.

Paxos was founded by Charles Cascarilla and Rich Teo in 2012. The company’s first major project was the first regulated cryptocurrency exchange, itBit.

Alongside his co-founding of Paxos, Cascarilla is a partner at Cedar Hill Capital Partners. He has extensive fund management experience, having been a portfolio manager at Claiborne Capital Management. Cascarilla was also a financial analyst at Goldman Sachs and an analyst at Bank of America.

Teo also worked at Cedar Hill as a principal/senior analyst. Before that, he was a financial analyst at Citi.

How Does Pax Gold Work?

Pax Gold is a digital entitlement to a London Bullion Market Association (LBMA) certified gold bar in the custody of Paxos Trust Company. These bullion bars are stored in Brink’s vaults.

PAXG tokens are backed 1:1 by ounces of London Good Delivery gold bars stored in vaults. PAXG token holders can redeem these bullion bars with Pax Gold tokens.

Users of the Paxos platform can create PAXG tokens with a minimum purchase representing 0.01 t oz of gold or 0.01 PAXG. Tokens will be minted via Ethereum smart contracts and delivered to users on the same day. Larger transactions, however, may settle on the next business day.

PAXG token holders can now take advantage of Ethereum’s near-instant settlement to trade with or use it however they wish. This could simply be holding for the long term or generating yield via DeFi.

Paxos does not charge a custody fee for the gold held in reserve. However, the company does charge a fee when PAXG is minted or redeemed on the Pax Gold platform or Paxos wallet.

This fee is a flat 0.02 PAXG for mint/redemption of 2 PAXG or lower and 1% from 2 to 25 PAXG. The percentage fee reduces as more PAXG is minted or redeemed to a minimum tier of 0.15% for over 200 PAXG.

Paxos also levies a small on-chain fee for PAXG transfers between ERC-20 wallet addresses. This 0.02% transaction fee is added to any gas fees required to process the transaction on the blockchain.

What are Smart Contracts?

Smart contracts are pieces of code that execute predetermined actions when a set of specific conditions are met. Deployed on programmable blockchains like Ethereum, these smart contracts are immutable and fully open-source. This allows users to audit them with the knowledge that they can’t be changed once live.

These smart contracts are facilitated by Ethereum, on which PAXG exists as an ERC-20 standard fungible token. Ethereum is a highly secure and extremely decentralized blockchain that can execute smart contracts thanks to the Ethereum Virtual Machine.

What Makes Pax Gold Unique?

One of Paxos’ selling points with its stable asset products is that the company is chartered by the New York State Department of Financial Services. As a result, Paxos is allowed to offer regulated cryptocurrency services.

This charter means that Paxos is subject to a high level of regulatory oversight. Many customers value this aspect and the security and peace of mind it provides.

Just like with its Pax Dollar, Paxos makes monthly disclosures of its Pax Gold issuance and gold reserves held in vaults. These attestation reports are independently verified by Withum, a top U.S. auditing firm.

Customers can also choose to trade for allocated gold bars or unallocated gold. Allocated gold is identified with a unique serial number, purity, and weight for each bar. This means that a PAXG token owner can track exactly which bar their token is tied to by visiting the Paxos website and entering their ERC-20 wallet address.

Pax Gold versus ETFs and Futures

Aside from retail gold purchases or actual bullion, the most common way to invest in gold is via gold ETFs and Futures. Along with being instantly redeemable for bullion, PAXG stands out from gold ETFs and Futures in several ways:

• Minimum Purchase. The 0.01 PAXG minimum purchase is one of the main advantages Paxos grants customers. This level of divisibility allows retail investors to allocate PAXG to a portfolio however they like. ETFs are also affordable, but with one share often costing around a tenth of a troy ounce, they aren’t as cheap as PAXG minimums. Futures, meanwhile, can cost hundreds of thousands of dollars since a single contract equals 100 troy ounces of gold.
• Settlement. Pax Gold purchases settle on the blockchain, which is practically instant. ETFs have a T+2 settlement schedule but often suffer from Failure To Deliver (FTD). FTDs occur when a seller of a stock, or ETF share, does not deliver the share to the buyer within the settlement period. The U.S. Securities & Exchange Commission publishes biweekly FTD data. As per SEC data, the top gold ETF SPDR Gold Trust ($GLD) suffered from FTDs on most of the trading days in the second half of August 2022. This included the 23rd when over 412,000 shares (price $161.64 on the day) weren’t received by their buyers. This pervasive problem is eradicated by Pax Gold’s blockchain settlement.
• Regulation. The SEC regulates ETFs, and the Commodity Futures Trading Commission regulates futures trading. However, the SEC is often embroiled in controversy, from its revolving door to Wall Street to allegations of figuratively sleeping (or worse) on the job. Paxos, meanwhile, is regulated by the NYDFS.

How is the Pax Gold Network Secured?

Paxos does not run a blockchain of its own, and Pax Gold is an ERC-20 token deployed on the Ethereum blockchain. As such, PAXG relies on Ethereum to secure account balances and transactions.

As of September 2022, Ethereum is a proof-of-stake (PoS) blockchain. The PoS consensus relies on economic incentives and disincentives to ensure validating nodes behave according to the network protocol.

Ethereum requires node operators to stake a minimum of 32 ETH to become validators. The amount staked is directly proportional to how much of a reward validators can receive for doing their job, and validators who misbehave risk losing their stake.

Meanwhile, the LBMA-certified gold bars backing PAXG are secured in Brink’s professional-grade vaults. Paxos’ attestations of reserves are signed off every month by Withum, an auditing company.

What is the Use of PAXG?

PAXG is meant to give customers the benefits of gold ownership along with the divisibility, flexibility, speed, and mobility of a digital asset.

Gold is a very popular investment asset. That being said, PAXG allows traders to take advantage of gold’s price movement (or lack thereof) using an instant-settlement blockchain derivative. Despite being a derivative, it entitles the token holder to the underlying bullion.

PAXG can be used to stake on some platforms to earn a yield, which is akin to lending gold to the platform and charging them interest. It is also possible to deposit PAXG into some DeFi decentralized applications (dApps) on Ethereum and borrow stablecoins against it.

Who Controls Pax Gold?

Pax Gold is controlled by Paxos, a privately held company founded in 2012 that attempts to decentralize financial infrastructure. One of Paxos’ stated goals is to make it possible to move any assets anywhere instantly and democratize access to a global, frictionless economy.

How Much Is PAXG In Circulation?

Pax Gold is backed 1:1 by gold bars held in reserve. As mentioned, Paxos produces a monthly attestation as to the state of these reserves, backed by an independent auditor.

As such, the circulating supply of PAXG is not dependent on any defined tokenomic structure. It actually depends on how many investors are minting and redeeming PAXG on the Paxos platform at any given time.

Currently, the circulating supply of Pax Gold is over 325,000 PAXG.

How Do You Buy PAXG?

Pax Gold is available on multiple leading exchange platforms, including decentralized exchanges, since it is an ERC-20 token on Ethereum. You can buy PAX using a variety of cryptocurrencies, stablecoins, and fiat currencies. You can also buy PAXG directly from Paxos.

Is It Possible to Buy Pax Gold Instantly?

Buying Pax Gold from Paxos is generally quite fast, although the company does stipulate that larger orders may be completed on the following business day.

However, purchasing on a centralized or decentralized exchange tends to be quite quick. The speed of a decentralized exchange depends on the blockchain’s congestion at the time. But if you’re using base layer Ethereum, make sure to check what gas fees are like, too.

Buying PAXG on a centralized platform is usually instant, although the process of withdrawing from said platform to your own wallet can be slower. This happens because the exchange may need to complete KYC (Know Your Customer) or AML (Anti-Money Laundering) procedures first.

How Do You Store PAXG?

It is possible to store PAXG on a centralized exchange or cryptocurrency lending platform. Moreover, some—if not most—centralized platforms may even pay you a small measure of interest to do so.

If you’d rather keep full custody of your tokens, you can also store PAXG in your own wallet. It may be possible to earn yields on PAXG this way by engaging with one of Ethereum’s DeFi protocols.

One clear advantage of keeping PAXG in your own wallet is the ability to redeem it for real, allocated gold. You can’t request your gold from Paxos by providing an exchange account, but you can certainly do so if your PAXG is in your own wallet.

Pax Gold Energy Consumption

PAXG is an ERC-20 token, meaning that most transactions using the token are on Ethereum or one of its layer 2 scaling networks. Ethereum, as well as these layer 2s, is proof-of-stake (PoS) rather than proof-of-work (PoW).

PoS networks rely on a game-theoretic system of incentives and disincentives to ensure nodes behave according to the network protocol. This process is far less energy-intensive than PoW, which relies on raw computing power provided by as many nodes as possible.

In fact, after its merge from PoW to PoS, it is estimated that the Ethereum network has cut its energy usage by as much as 99.95%.

Is PAXG a Good Investment?

Fundamentally, PAXG is meant to give investors exposure to gold without storage and transport hassles. At the same time, it takes advantage of cryptocurrency’s divisibility and near-instant settlement.

Pax Gold accomplishes that mission remarkably well. It takes advantage of Ethereum for security and easy movement across the globe. The fact that it is regulated and audited with proven 1:1 backing also inspires trust.

PAXG also allows retail investors fantastic flexibility in terms of portfolio allocation and owning smaller amounts, and it allows the earning of yields as well.

As such, PAXG is an excellent way for a retail investor to invest in gold. As an investment asset in its own right, though, it has to fall back on the fundamentals of gold itself to either retain its value or appreciate it in the long run.

While gold has been a highly regarded investment asset and store of value for centuries, the emergence of comparative assets such as Bitcoin could be a threat to the precious metal. So, too, is its own supply, for while gold cannot decay and never loses its properties, it continues to be mined, thus being diluted.

Ultimately, every investor has their own strategy when it comes to portfolio management, hedging, and risk. For those excited by gold, PAXG will surely be an option worth considering.