<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>

How to Spot Fake DeFi Projects

What is Overcollateralization in Finance?

The REAL Reason Big Banks Are Scared of Crypto

Token Gating Explained

<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.&nbsp;</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.&nbsp;</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's jurisdiction changes, or your jurisdictions conflict with one another, you could be left with no value and legal issues.&nbsp;</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.&nbsp;</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.&nbsp;</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.&nbsp;</p>



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



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

Why Precious Metals Don't Belong on the Blockchain (In Any Form)

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