Initial (very early) Discussion: Tokenised commodities as collateral on AAVE

AAVE currently supports a number of tokenised fiat currencies as collateral. In this same vein, would users benefit from being able to make use of their tokenised commodities (such as gold) as collateral?

I believe that currencies such as tokenised gold could be a useful form of collateral for AAVE users. Although tokenised gold can be controversial and at the very least a bit polarising, I believe that in the future, the addition of a gold-backed token as collateral on AAVE could be beneficial to users.

Tether Gold (XAUT) currently has a market cap just shy of $100 million, and PAX Gold just below $60 million. It is worth mentioning that the latter appears to have a much larger trading volume than the former. I believe these are the largest (by market cap) commodity-backed tokens on the market right now, and both are erc20 tokens.

The benefits of adding such a type of token as collateral I have thought of are:

  • Users may prefer to hold such an asset as opposed to a fiat-backed stablecoin, to reduce their exposure to inflation

  • While commodities such as gold can and are currently used as collateral for loans available through other companies and services, I believe the ability to do so through AAVE would be an improvement in efficiency and ease-of-use

  • Commodity price fluctuations are less likely to be correlated to that of the general cryptocurrency market, in the case of a market flash crash for example

The drawbacks I have so far considered are:

  • Borrowing rates may be lower than some of the other forms of collateral currently available on AAVE such as fiat-backed stablecoins

  • There may be legal limitations to working with commodity-backed tokens on AAVE

  • In my understanding, commodities investors at large may not yet be comfortable working with cryptocurrencies and tokenised representations of their assets

I concede that it is extremely early to be introducing this topic, but at the same time I am interested to find out what the members of this community think about this possibility for the future.

9 Likes

This is actually really great!

I think there’s definitely a shift happening towards asset-backed cryptocurrencies/tokens. Aave can definitely have a serious impact here. They’re already looking at implementing mortgages at some point (how cool is that?), so I’d love to see real asset-backed crypto assets as collateral too.

After all, one of the biggest downsides of the cryptocurrency space (I believe at least) is how self-contained it is, and this is now shifting! Aave has a bright future.

4 Likes

Great idea! We’re definitely gonna see commodities as collateral. Btw, what about oracles for these, do you know any good solutions already?

2 Likes

That’s a good question @VGataulin-Mithraeum! I’m no oracle expert, maybe someone with more knowledge could chime in on whether the current oracle provider would be suitable for this or if another solution is required.

1 Like

Hey Toad, i really like the idea of commodities on aave, escpecially gold, however, i dont think tether gold is a good option considering the tether reputation, but there is vera one, which is backed by gold stablecoin, we sould ask their CEO if this is a possibility.

If not, we will also get the option of synthetics assets, and this should not be an issue to add some as a collateral imo.

Looking forward to get your opinion on that :)

3 Likes

Thank you @Dydymoon, I think you are right that it is especially important to consider the reputation and standing of any company who is responsible for looking after the commodity behind the token.
I actually hadn’t even thought of synthetic assets such as sXAU and sXAG from Synthetix. This could be a good option given that they use the same reputable oracle provider as AAVE to track the commodity prices. I think this is a really great suggestion.

2 Likes

This is a good idea!

If AAVE is fine with USDT, I would not see an issue with XAUT, but to be fair Paxos Gold sees significantly more volume so I would add PAXG only.
For example today $30k volume on Tether gold, $1M on Paxos Gold.

Tokenised gold is a good suggestion to add on AAVE: not a volatile asset, a very liquid asset which will be easy to liquidate and hedge for professional liquidators.

3 Likes

I think commodities as collateral make sense. The key is to find right assets and structuring. Would there be completely commodities based money market or for example sXAU and sXAG would be in Synthetix money market along with their other assets. This is something that the Aave community should discuss.

5 Likes

The benefit of PAXG for professional market makers is that:

  1. this can always be redeemable as last resort,
  2. there are professional market makers on FTX to sell with tight spread (because gold is a deep market)
  3. PrimeXBT for example has Gold markets so you can easily hedge with crypto collateral too.

On the other hand, sXAU is $500,000 market cap so not quite the same yet.

I think objectively, tokenised Gold is the most stable digital asset after stablecoins. Not sure how easy it is to add an oracle feed for gold, and whether there is enough demand. Could be something that Paxos pushes somehow …

1 Like

It has been very interesting to read the replies in this thread!

In this initial discussion I think we have established that there is an interest in commodity assets being added to AAVE in the future.

As @stani said, the next step is for the community to discuss whether a purely commodities-based money market would be suitable for AAVE, or if it would be better to include commodities as assets which exist in the Synthetix money market.

My own considerations would be that while a money market solely for commodities would be useful, it might be more sensible to introduce these assets as part of the Synthetix money market to begin with.

1 Like

Shouldn’t be too hard, I’m assuming Synthetix gets price date from Chainlink?

2 Likes

Please consider CACHE Gold. We have submitted a proposal here which outlines all the reasons that CACHE Gold provides a superior gold-backed token.

Although PAXG is the current market leader in terms of listings, their aggregate volume is upwards of $1 million per day, most of their individual markets are fairly illiquid and/or with large imbalance between buys and sells. The price variance between exchanges is also huge - currently $1,830 to $2,070 (not including Uniswap). Redemption should provide an arbitrage opportunity but due to the high minimum redemption of 430 troy ounces but it doesn’t because it doesn’t seem possible to purchase 430 PAXG (~$832,000 USD at current gold spot) on any exchange at anywhere near the spot price.

PAXG and XAUT also have transparency issues.

Lastly, scalability and sustainability seems to be an issue with PAXG and XAUT. Neither has a mechanism to collect storage fees, while storing gold in audited, insured vaults always has a cost. The larger the token’s market cap, the larger this cost becomes. If token holders hoard tokens and do not transfer them, no revenue is earned on the tokens with which to pay the storage fees. CACHE Gold solves this problem (as well as others) by implementing a small 0.25% per annum storage fee.

Although nobody likes to pay fees, and fees can be a hassle for developers, we feel it is necessary to maintain scalability and sustainability of the token. As asset backed tokens gain adoption, platforms and token holders will need to come to terms with the fact that secure storage of real, physical assets has a cost that must be paid.

We agree that gold would be a great addition to lending platforms and it would provide small retail investors with the opportunity to earn interest on their gold holdings - something that has previously been difficult if not impossible to do for most retail investors.

1 Like

@cache.gold Thank you for your compelling post.

I appreciate your comparisons between cache.gold and some of the tokens previously mentioned in this thread. The fee model that you have described with cache.gold appears to be a more sustainable approach than competitors are taking. Considering the long-term like this is something which AAVE places a focus on as well.

If there is to be a commodities money market on AAVE then maybe cache will be a good fit. Looking forward to reading what the rest of the community thinks. :+1:

1 Like

Adding a gold-backed stablecoin is essential, especially since this is now an option on the leading centralized money market / lending protocols [e.g. BlockFi, Nexo and Celsius recently adding PAXG].

Among the leading gold stablecoins, I feel PAX Gold (PAXG) is the best fit for Aave. As opposed to smaller markets like DGX and CGT, PAXG has a $65M market cap, high trading volume, and over 4k addresses [source: etherscan].

While the other larger market cap player in this space – Tether Gold (XAUt) – may seem enticing, it lacks the transparency of PAXG [much like USDT does when pitted against PAX)]; and, therefore, poses more risk.

Most of the discussion here so far has been limited to fungible assets like PAXG and XAUt.

Have we considered NFT commodities? Two projects come to mind:

  1. Bullionix – NFTs backed by Digix Gold (DGX) tokens [1 DGX = 1 gram of gold].

  2. Icecap Diamonds – [summary taken from opensea.io] Icecap, LLC sells Non-Fungible Tokens each representing claim on a specific diamond, stored in an insured vault at 580 Fifth Avenue, NYC. The ERC721-based tokens may be bought, sold, or redeemed (exchanged for the actual diamond.)

Hi @joshman91!

I had not heard of either Bullionix or Icecap Diamonds before, but thank you for sharing as these are both interesting examples of NFT commodities. I can see that Bullionix has a DGX token like you pointed out which represents a gramme of gold. I believe that chainlink can be used alongside commodity NFTs to ensure that market rates are accurate.

Non-fungible tokens in general are possibly a hurdle for AAVE. The assets that can be deposited and borrowed on AAVE to this date are all fungible. We should perhaps discuss the implementation of NFTs into AAVE further.

My thoughts are that NFTs could possibly be used as collateral on AAVE. In order for this to be made possible however, we will need some sort of accurate valuation for these assets that is resistant to manipulation.

I would draw comparisons to physical works of art being used as collateral. This market has emerged somewhat recently just over the past two decades, from what I’ve read. I found this paper written in 2018 to be useful:

One of the complications that faces this market and which I believe would also face NFTs is valuation. Deloitte have reported extensively on the relationship between art and finance this past decade. It seems that although the industry is working to improve transparency and trust, there are still issues relating to standardisation when it comes to valuation. The consequence of this being that there are still concerns over price manipulation within the market. Deloitte’s 2019 report on art and finance can be found here:

Maybe we can overcome such challenges with cryptocurrency? Historic transactions for NFTs will be openly available on the blockchain and I am aware that chainlink is working with NFT valuation per this blogpost: https://blog.chain.link/create-dynamic-nfts-using-chainlink-oracles/

I’ve strayed far from commodities in this post and I apologise, but given the recent uptick in NFTs I believe that sooner or later we should have a broader discussion on this within the AAVE community.

2 Likes

Personally I like the idea. I have PMs and take physical possession but want to move to PAXG so that I can actually leverage the Gold on the blockchain. However, I am no whale so would not be offering much liquidity. I know Nexo just introduced PAXG as a commodity that you can use on their platform to take loans against.