<figure class="wp-block-image size-large"><img width="325px" height="183px" srcSet="https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/07/19201911/Crypto-Silver-2-375x211.webp 375w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/07/19201911/Crypto-Silver-2-662x372.webp 662w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/07/19201911/Crypto-Silver-2-768x432.webp 768w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/07/19201911/Crypto-Silver-2.webp 688w" sizes="(max-width: 425px) 150px, 450px" src="https://ll-blog-dev.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2023/07/19201911/Crypto-Silver-2.webp" alt="Crypto Silver" class="wp-image-3440"/></figure>



<p>Precious metals don’t belong on the blockchain.</p>



<p>At first, it seems like a viable way to give crypto users exposure to gold and silver.</p>



<p>But when you look a little closer, you realize it’s an awful idea, and it’s the opposite of why crypto was invented.</p>



<h2 class="wp-block-heading tablecontent">What is the Value of Precious Metals?</h2>



<p>Precious metals, such as gold and silver, have many different properties which make it an attractive means of exchange. </p>



<p>Among those properties are:</p>



<ol>
<li><strong>Limited Supply</strong> - there is only so much gold/silver on Earth</li>



<li><strong>Self Custodial</strong> - people can hold their own gold/silver if they want to eliminates <strong><a href="https://www.thecoinzone.com/defi/counterparty-risk-crypto" target="_blank" rel="noreferrer noopener">counterparty risk</a></strong></li>



<li><strong>Adoption</strong> - most governments and institutions around the world view gold/silver as valuable</li>
</ol>



<p>However, these features are destroyed when gold/silver is put on the <a href="https://www.thecoinzone.com/blockchain/blockchain" target="_blank" rel="noreferrer noopener"><strong>blockchain</strong></a>. </p>



<h2 class="wp-block-heading tablecontent">Why Precious Metals Don’t Belong on Blockchains</h2>



<figure class="wp-block-image size-large"><img loading="lazy" width="325px" height="183px" srcSet="https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/07/19202125/Crypto-Silver-1-375x211.webp 375w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/07/19202125/Crypto-Silver-1-662x372.webp 662w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/07/19202125/Crypto-Silver-1-768x432.webp 768w, https://d2ly46a6b1u3g6.cloudfront.net/wp-content/uploads/2023/07/19202125/Crypto-Silver-1.webp 688w" sizes="(max-width: 425px) 150px, 450px" src="https://ll-blog-dev.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2023/07/19202125/Crypto-Silver-1.webp" alt="Blockchain Silver" class="wp-image-3443"/></figure>



<p>In order to put precious metals on a blockchain, a central entity will obtain gold/silver and put it in reserves.</p>



<p>They will then issue a token as a receipt for a certain amount of gold/silver.</p>



<p>For example, if a user holds 1 eGold they are entitled to 1 oz of gold from the central issuers reserves.</p>



<p>This model presents challenges to the fundamental value propositions of both precious metals and crypto.</p>



<h5 class="wp-block-heading">1. Added Counterparty Risk</h5>



<p>Precious metals value comes from holding them yourself in the event that fiat currencies collapse. If you have a tokenized receipt for gold/silver, you don’t actually own it and are at the mercy of the central issuer. The central issuer could fractionally reserve (less than 1.0 <a href="https://www.thecoinzone.com/tradfi/what-is-collateral-ratio" target="_blank" rel="noreferrer noopener"><strong>collateral ratio</strong></a>) their precious metals or there could be a bug in their code. There are many other scenarios like this which could result in you not being able to extract the real value that is there. </p>



<h5 class="wp-block-heading">2. Unnecessary Costs</h5>



<p>Blockchains are slow and extremely expensive databases. Putting gold/silver on the blockchain adds a layer of expense that is unnecessary. If you don’t want to hold real precious metals, just hold traditional paper gold/silver from a broker. The central issuer is likely to charge additional fees for the tokenized version as well. </p>



<h5 class="wp-block-heading">3. Added Jurisdictional Risk</h5>



<p>Each jurisdiction has its own laws surrounding blockchains and precious metals. If the central issuer&#x27;s jurisdiction changes, or your jurisdictions conflict with one another, you could be left with no value and legal issues. </p>



<h5 class="wp-block-heading">4. Centralized Issuer</h5>



<p>Crypto was invented to get rid of middlemen. If you are relying on a middleman to hold your collateral for you, you are missing the point of both crypto and gold/silver. </p>



<h2 class="wp-block-heading tablecontent">Why Stablecoins Pegged to Precious Metals Don’t Make Sense</h2>



<p>Some projects have tried to peg a <a rel="noreferrer noopener" href="https://www.thecoinzone.com/stablecoins/what-are-stablecoins" target="_blank"><strong>stablecoin</strong></a> to the price of silver, for example, while using cryptocurrencies as collateral.</p>



<p>The purpose of this is to bring precious metals exposure without having to leave the blockchain.</p>



<p>The problem with this is it adds to the collateral health of the ecosystem. </p>



<p>For example, if the value of collateral decreases at the same time that the price of gold/silver increases, the collateral ratios decrease faster than usual.</p>



<p>This results in much more <a rel="noreferrer noopener" href="https://www.thecoinzone.com/liquidloans/how-to-not-get-liquidated" target="_blank"><strong>liquidations</strong></a> than if the stablecoin was pegged to the dollar. </p>



<p>In addition, if the price of gold increases, there isn’t actually anymore value brought into the ecosystem that it operates in. </p>



<p>Rather, it just decreases the collateral ratios of the vaults and converts itself into the cryptocurrency collateral. </p>



<h2 class="wp-block-heading tablecontent">The Bottom Line</h2>



<p>Crypto was invented to get rid of middlemen and create a censorship resistant payment network.</p>



<p>Adding precious metals to the blockchain injects counterparty risks and adds to the possibility of censorship. </p>



<p>In addition, the model of adding precious metals ino crypto creates unnecessary costs and jurisdictional risks. </p>

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Many projects have tokenized precious metals. Read more to learn why gold and silver do not belong in crypto. 