If cryptocurrency is going to be used as money, we’re going to need to see some hurdles overcome. The “easy” ones are secure mobile wallets and user adoption.

The hard one is stability. People want a stable unit of currency. There has to be an expectation that the price of it doesn’t change from day to day (or minute to minute in crypto world).

This is why I don’t see $BTC ever becoming a useful currency. It may remain useful for other reasons, but it has no chance of working as a widely adopted currency.

You can view the DGX contract address by clicking the picture above. There are currently 10,000 DGX tokens minted.

$DGX, one the other hand, is an Ethereum blockchain token that I do think has a chance at building an alternative currency system. One DGX token represents one gram of gold (approximately $43 USD), which is held in 100 and 1000 gram bars in a vault in Singapore. The DGX token is divisible, so one could pay for a cup of coffee or a candy bar and pay 0.05 DGX (or less!). 

There are two ways in which I foresee early implementations of an alternative monetary system arising: DGX by itself as money, and DGX collateralized to create $DAI stablecoins. Let’s take a look at both of these options.

Two Early Implementations

The first option, with DGX being used as for payments, is a 21st century twist on a centuries old monetary system. In this system, the only money that is minted is that which is fully backed by gold. In 1901, you could walk into a bank with a couple $20 bills and trade them for gold.

When the government wanted to wage war, it had to borrow money from its citizens to do it. This is why you’ll see World War II reels with “War Bonds” as a major initiative.

The US no longer uses fractional reserve, as we stopped trading gold for dollars in 1972. Since that time, our dollar is now based on faith; it is a belief that $1 today will be $1 tomorrow. We all trust that the Federal Reserve buildings that print dollars will restrain themselves from corruption, overprinting, etc. Cash in the form of USD is artificially limited. We trust that the Chairs of the Federal Reserve are a) competent and b) not corrupt in their management of the economy.

This is pretty scary. Centralizing power in one person like this is extremely dangerous. How do we know none of them have helped themselves in the process? Humans, in the best of times, find ways to rationalize our wrong actions.

This is where the blockchain is quite helpful. With DGX, we can look at the contract address and know how many DGX tokens exist at any given time. Furthermore, we can look deeper and ensure that each gold bar represented by an equivalent amount of tokens actually exists, through an audited, open record trail (Digix Global’s Proof of Provenance). This adds to the trustworthiness of DGX tokens.

Overall, the US monetary system has maintained itself, but people in countries like Venezuela, Zimbabwe, and others have seen their currency wrecked overnight. Even Argentina had a 4:1 Peso:USD implemented overnight. People in these countries might feel more comfortable using a token like DGX instead of their currency. I fully expect a great deal of early adopters in Venezuela.

I’m also excited about DGX being used as part of a basket of commodities in a CDP.

DAI: Borrow Against Your DGX Tokens

CDPs, or Collateralized Debt Positions, can be opened using Maker’s OasisDEX. They work a little like a computerized, self serve pawn shop: you can deposit your Ether tokens, and take out a loan against them. In some ways, it is like taking out a Home Equity Line of Credit (HELOC) to buy a boat or something. You can take out a variable amount of DAI per ETH, with higher amounts exposing you to greater risk. If the price of ETH goes too low, you’ll need to either replace the DAI you took, or add more ETH… or somebody else can close your CDP for a profit (and a 13% loss to you).

If that sounds complicated, you shouldn’t do it. But the result of this operation is the generation of DAI, which is a stablecoin that maintains a peg to the USD. DAI become useful to companies operating on the blockchain who want to avoid rapid price fluctuations.

What does DAI have to do with DGX? Currently, DAI is backed only by ETH, which makes it sensitive to ETH price movements. Those who wish to take a loan out against their ETH need to keep an eye on the price of ETH. The more you borrow, the easier it is for a price drop in ETH to bring your borrowing ratio to the point where somebody can close out your CDP, costing you an instant 13% loss. When DAI 2.0 gets released, it will have multiple non correlated assets in it. This way, when one of the assets in your CDP drops in price, it won’t automatically put you at risk. (Astute readers will have noticed how nearly the entire cryptocurrency market dropped along with Bitcoin this winter; there is very high correlation in crypto at this time).

DGX will be one of these assets. The price of gold does not correlate with ETH (and while gold is somewhat volatile against the USD, it is nowhere near as volatile as ETH or BTC).

In conclusion, you will be able to spend DAI which are backed by a basket of currencies, including DGX gold. To put it another way, you can borrow against gold that you own, without an intermediary. Or, you can use DAI knowing with confidence that it is backed by DGX gold (this will happen in summer 2018; it isn’t the case yet!)

DGX: gold is money again.


Disclaimer: DGX transactions go to a rewards pool that is paid out to holders of DGD (a separate token), who vote for and manage the deployment of Ether collected in the Digix crowdsale 2 years ago. I hold DGD, and will benefit from the increased use of DGX.