If gold is so strong, why have most gold-backed stablecoins failed?

Stablecoins have often been presented as a better alternative to other cryptocurrencies because they are backed by some type of tangible good, such as fiat or gold. While the concept itself has merit, what has been seen in practice doesn’t reflect the same characteristics. There has been plenty of talk that Tether, for example, is seeing financial difficulties and doesn’t have all the fiat backing that it claims to hold, and other stablecoin projects haven’t produced the strength they anticipated. In fact, the majority of the stablecoin projects that were backed by gold have already closed up shop.

According to Blockdata, 119 stablecoin projects have been announced since 2017, but still haven’t been launched. There are now 66 active projects and 24 dead ones. Of those that have shut down, 16, or two-thirds, were reportedly backed by gold reserves.

Blockdata points out that fiat-backed stablecoins need to have some type of centralized entity controlling the security and that gold-backed assets have to be able to prove that the gold reserves exist and are stored someplace safe. If a stablecoin is backed by gold reserves, it should be solid enough to not suffer from extreme changes in the market like what other digital currencies witness.

However, gold itself is not stable; the price can and does fluctuate. Even Investopedia acknowledges that gold has no real value. It asserts, “[Gold] is seemingly uninteresting, with no intrinsic value other than the value humans have attached it.” Arguments that gold is more valuable than crypto become null and void by this definition.

Maintaining huge stores of gold can cause the price of gold to increase, which completely nullifies the definition of a stablecoin. Perhaps a new crypto category is needed – an almost-virtually-quasi-stablecoin.

Blockdata also points out that Tether no longer meets the requirements to be considered a true stablecoin. Its analysis asserts, “Formally known as “Realcoin”, Tether is a stablecoin backed by a combination of cash, cash equivalents, cryptocurrency assets, and loans (emphasis added)… In April 2019, the New York Attorney General’s Office issued an injunction against Tether and Bitfinex, companies which share a parent company, iFinex. This resulted in Tether announcing that 74% of its tokens are backed by cash, not the 100% that was previously claimed.”

If there have been so many stablecoin projects waiting in the wings since 2017, and stablecoins aren’t subject to crypto market volatility, what are they waiting for? While companies jumped on the crypto bandwagon in droves following Bitcoin Core’s (BTC) meteoric price increase in 2017, the logical choice would have been for those projects to follow suit. Perhaps they realize that being a stablecoin isn’t as much of a certainty as some would portray them to be.

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