LlamaRisk supports onboarding PAXG to Aave v3 on Ethereum mainnet. Our recent review of Paxos’ issued PYUSD stablecoin, along with their track record, supports Paxos as a credible issuer. Operating under NYDFS oversight, Paxos Trust Company issues PAXG with physical gold backing in LBMA-accredited vaults, verified through Withum Smith+Brown’s monthly attestations, the last being September 2024. While this regulatory framework provides a foundation for asset segregation and user protection, it still requires trust in Paxos and vault providers as custodians. The vault provider also maintains insurance coverage against the loss of the gold.
The 3/20 multisig configuration for upgradeability control remains a concern, similar to PYUSD, and we are in ongoing discussions with Paxos about this setup as it combines an unusually high signer count with a low threshold. The lack of a bug bounty is also a concern; although PAXG’s contract is simple, we strongly encourage all protocols to implement a bug bounty program.
Market liquidity is primarily concentrated in the Uniswap V2 ETH-PAXG pool ($20M TVL), with additional depth from major CEX integrations via USDT pairs. The settlement follows standard market convention with T+1 for purchases and up to T+2 for sales, aligned with London gold market hours. The tokenization process ties each PAXG token to specific gold bars through a mint-and-redeem model, with real-time pricing from StoneX feeds.
Despite moderate DEX liquidity concentration and relatively flat market performance since early 2022 (declining from peak TVL of $600M to current ~$500M), PAXG can be safely integrated as a collateral asset on Aave. This addition would enhance PAXG’s utility while leveraging Paxos’ proven regulatory compliance and operational history.
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Collateral Risk Assessment
1. Asset Fundamental Characteristics
1.1 Asset
Pax Gold (PAXG) is an ERC20 token representing physical gold tokenized on Ethereum. Each PAXG token corresponds to one troy ounce of a 400-ounce London Good Delivery gold bar, securely stored in LBMA-accredited physical vaults.
PAXG enables accessible and fractional ownership, eliminating many traditional barriers to gold investment, like high entry costs, storage complexity, and transportation challenges. Physical gold backing ensures token holders directly claim real gold, allocated to each gold bar’s serial number and other unique specifications.
The asset was launched in September 2019 and issued by Paxos Trust Company, a regulated financial institution under the New York State Department of Financial Services (NYDFS).
1.2 Architecture
Users can mint PAXG using USD or unallocated gold. Paxos acquires London Good Delivery bars through LBMA-accredited clearers, with a minimum purchase of 0.03 PAXG (including 0.02 PAXG conversion fee).
Each PAXG token represents ownership of specifically allocated gold through Paxos’ off-chain registry. Token holders can verify their gold allocation details via Paxos’ lookup tool, which displays serial numbers and specifications of their underlying gold bars.
Redemption through paxos.com can be processed for USD, unallocated gold, or physical gold. Institutional clients can redeem for LBMA Good Delivery bars, while retail clients can access smaller quantities through partner retailers. The physical gold backing PAXG is stored in LBMA-accredited vaults (Brink’s, HSBC, ICBC Standard Bank) under Paxos Trust Company custody, maintaining a bankruptcy-remote structure.
Buy orders typically settle T+1, while sale orders settle T+1 or T+2 based on market conditions. Trading operates Sunday 6 pm ET through Friday 5 pm ET, with a daily closure from 5-6 pm ET. No settlements occur on US/UK holidays or weekends. itBit Exchange orders follow exchange-specific settlement rules.
StoneX direct price feed provides real-time London gold market pricing. While the gold market may be closed, PAXG/USD order book trading remains available. Monthly attestations by Withum Smith+Brown verify the 1:1 backing of PAXG tokens with physical gold, following AICPA standards.
Source: Pax Gold (PAXG) Transparency Reports - Paxos, November 13th, 2024
1.3 Tokenomics
Paxos generates revenue from PAXG through several fee structures:
- Upon minting/burning PAXG - the fee is tiered based on the transaction amount, ranging from 0.02 PAXG for transactions under 2 PAXG to 0.125% for transactions over 800 PAXG.
- On-chain transfers of PAXG - a transaction fee of 0.02% of the transferred amount applied before; it is now lifted. Paxos does not cover standard Ethereum network gas fees.
- Custody fees - Paxos does not charge storage fees for PAXG tokens. However, they reserve the right to introduce storage fees in the future, which would be applied pro-rata to all customers.
2. Market Risk
2.1 Liquidity
Uniswap V2 accounts for most of DEX liquidity, holding 92% of the total on November 18 ($10.34M of $11.20M).
Source: DEX Guru, November 19th, 2024
About $1M PAXG can be swapped to USDC within a 7% slippage impact.
Source: DeFiLlama, November 19th, 2024
2.2 Volatility
PAXG’s price directly reflects the spot price of gold in USD. Several spikes and dips can be observed caused by gold price fluctuations or changes in PAXG/USDC liquidity.
Source: DEX Screener, November 19th, 2024
Over 1 year, PAXG has maintained a near 1:1 peg to XAU (gold spot price), with only two observed outlier deviations. These deviations were not reflected in other venues (e.g., DEXs).
Source: Coinbase, November 20th, 2024
2.3 Exchanges
PAXG is paired with USDT on many leading centralized exchanges.
Source: Coinmarketcap, November 19th, 2024
Uniswap V2 PAXG/ETH pool is currently go-to DEX venue with a TVL of $20M.
Source: Uniswap, November 19th, 2024
Uniswap V3 has not managed to attract significant liquidity:
2.4 Growth
PAXG has seen little fluctuation in its TVL since its initial growth phase from launch, reaching a high of $600M in Q1 2022. The TVL currently stands at approximately $500M, with over 34,000 holders.
Source: DefiLlama, November 19th, 2024
3. Technological Risk
3.1 Smart Contract Risk
In 2018, before its launch, Paxos standard smart contracts underwent comprehensive security audits conducted by Nomic Labs, ChainSecurity, and Trail of Bits. Further scrutiny was applied specifically to PAXG, with ChainSecurity and CertiK conducting detailed examinations in 2019.
The audits found no severe security issues; all identified issues were addressed and resolved by Paxos.
The token contract is upgradable, but implementation hasn’t been changed since the original deployment.
Source: Etherscan, November 19th, 2024
3.2 Bug bounty program
There is no bug bounty program for PAXG contract(s).
3.3 Price Feed Risk
Besides the StoneX feed, several options are available to price PAXG:
3.4 Dependency Risk
PAXG incorporates a proxy-based upgradeable model where the logic resides in this PAXGImplementation contract, while the data storage lives in a separate proxy contract. Users interact with the proxy, which delegates function calls to the implementation contract.
Standards applied:
- ERC-20, implementing core functions such as
totalSupply, balanceOf, transfer, approve, and transferFrom for basic fungibility and compatibility with wallets/protocols;
- OpenZeppelin’s SafeMath library for arithmetic operations to prevent overflows and underflows;
- EIP-712 implementation for “beta delegated transfers,” which enables off-chain signature verification for transferring tokens on behalf of another address (e.g., customers’ gas fee coverage by a certain platform/exchange).
- Ownership model where certain functions are only executable by an
owner, supplyController, assetProtectionRole, feeController, and betaDelegateWhitelister.
4. Counterparty Risk
4.1 Governance and Regulatory Risk
NYDFS Paxos’ authorization status ensures a high level of customer protection. Paxos is mandated to segregate customer assets from corporate assets, thus protecting customer funds or holdings even during Paxos’s insolvency. NYDFS requires Paxos to maintain separate accounting for customer assets on-chain and within internal ledger systems. The company must undergo regular audits to verify the alignment of on-chain records with physical and digital asset reserves. Paxos’s operations are also subject to routine NYDFS examinations, compliance monitoring, and policy assessments.
Source: DFS, November 13th, 2024
Paxos employs third-party analytical tools provided by ComplyAdvantage and Chainalysis to safeguard its operations against fraud and money laundering. This includes ongoing platform and on-chain monitoring to identify suspicious activities and take appropriate restrictive measures.
Paxos acquires gold from INTL FCStone, Ltd., a company registered in England and Wales. The gold comprises London Good Delivery bars, which are regulated by the London Bullion Market Association (LBMA), the precious metals bullion trade association.
For a refiner to be accredited on the Good Delivery List, they must meet stringent criteria, including a minimum of five years in operation and at least three years in refining the specific metal for which they seek accreditation. Additionally, they must have an established annual refining production of at least 10 tonnes for gold or 50 tonnes for silver, a tangible net worth of no less than £15 million, and ownership and financial standing that pass the Due Diligence tests of the Loco London Market. Moreover, applicants must implement LBMA’s Responsible Sourcing Programme and undergo an independent audit before submitting their application for Good Delivery Listing.
The London Good Delivery gold bars purchased by Paxos are securely stored with Brink’s Global Services Ltd., Hongkong and Shanghai Banking Corporation (HSBC), and Industrial and Commercial Bank of China Ltd (ICBC) Standard Bank, all of which are LBMA-approved vaults.
The seller, INTL FCStone, Ltd., claims to be a registered broker-dealer under the regulatory oversight of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Conduct Authority (FCA). Following the name change to StoneX (announced in 2020), we have confirmed the authorization status of the entity.
Source: BrokerCheck FINRA, November 19th, 2024
Source: CFTC, November 19th, 2024
Source: FCA, November 19th, 2024
StoneX ensures that the gold backing, PAXG, is insured against potential loss. The insurance covers the gold while secured in vaults and during transportation. The protection aligns with industry standards for gold vaulting, ensuring that custodians hold an appropriate level of insurance to safeguard the metals they have.
Evidence on the independent auditor’s registration status with the Public Company Accounting Oversight Board:
Source: PCAOB, November 15th, 2024
4.2 Access Control Risk
Roles and Permissions:
Owner: Allows an assigned role (setAssetProtectionRole) to freeze/unfreeze accounts or wipe balances of frozen accounts, can pause/unpause contract functions to halt operations during emergencies and transfer ownership (proposeOwner).SupplyController: Mints or burns tokens, adjusting total supply.AssetProtectionRole: Can freeze, unfreeze, or wipe balances of accounts; the role is created for regulatory or law enforcement compliance.FeeController: Manages fee-related settings (setFeeRate), including setting the transfer fee rate and changing the fee recipient.BetaDelegateWhitelister: Manages the whitelist for delegated transfers, authorizing addresses to use betaDelegatedTransfer.
Owner, AssetProtectionRole, and FeeController roles are concentrated within 3/20 multisig. This presents an elevated operational risk, as the attack surface for social engineering and other threats is considerably larger than typical implementations. We recommend Paxos consider segregating day-to-day operational controls from critical actions, such as token contract upgrades, by implementing separate multisig wallets and timelock where applicable.
Note: This assessment follows the LLR-Aave Framework, a comprehensive methodology for asset onboarding and parameterization in Aave V3. This framework is continuously updated and available here.
We believe PAXG can be safely integrated as a collateral asset. We will present join parameters with @ChaosLabs shortly.
We recommend using Chainlink’s PAXG/USD feed (yet to be deployed), which is based on both CEX and DEX volume, including Binance, Kraken, Bybit and Uniswap V2 and V3.
This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.
totally in favor of this proposal.
