[PAXG] - PAX Gold MIP6 collateral application

[PAXG] - PAX Gold MIP6 collateral application

This is a MIP6 Proposal for the addition of Paxos’ tokenized gold to MCD.
PAXG is a standard erc20 token with approximately $43 million market cap compared to dgx market cap of around $6.5 million.

there is a previous discussion thread here for context: [PAXG] - PAX Gold as MCD collateral

1. Who is the interested party for this collateral application?

A member of the makerdao community. Perhaps the makerdao community in general is interested as PAXG is a high market cap, low volatility token which represents a well established asset, namely gold, to help stabilize the dai peg and collateralization levels in the maker ecosystem.

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token.

PAX Gold (PAXG) is an erc20 token. Each token is backed by one fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar, stored in Brink’s vaults. If you own PAXG, you own the underlying physical gold, held in custody by Paxos Trust Company.

3. Provide a brief history of the project.

Since its founding in 2012, Paxos has always sought to enable the movement of assets, starting with the launch of the itBit exchange in Singapore. In 2015, the New York State Department of Financial Services granted Paxos a limited-purpose trust charter, thus establishing it as the first company approved and regulated to offer crypto products and services. By seeking the highest forms of regulation and compliance, Paxos has distinguished itself within the blockchain industry and earned the trust of discerning institutional and individual investors.

Paxos has since continued to operate within established regulatory frameworks while creating innovative new products. This includes workstreams in the tokenization of securities, precious metals and commodities, such as the Paxos Standard token, a digital dollar launched in 2018.

Along the way, Paxos has raised over $93M in venture funding, added distinguished luminaries including Sheila Bair and Senator Bill Bradley to the board, and grown to 110 employees in three global offices.

4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

white paper: https://www.paxos.com/wp-content/uploads/2019/09/PAX-Gold-Whitepaper.pdf

APIs: https://www.paxos.com/apis/

5. Link any available audits of the project. Both procedural and smart contract focused audits.

audit FAQ: https://www.paxos.com/is-paxos-audited/
attestation reports link: https://www.paxos.com/

6. Link to any active communities relating to your project.

paxos is not decentralized/community driven, but has a blog: https://www.paxos.com/blog/

7. How is the applying collateral type currently used?

collateral is used as a cryptocurrency representation of gold which is redeemable for 400 oz gold bars directly through PAX (in 400 token increments) or for smaller amounts through a network of physical gold retailers around the world

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

Yes, PAX has headquarters in New York City, Singapore, and London

9. Where does exchange for the asset occur?

Kraken is the largest exchange for PAXG at the moment, although there is also some volume on other exchanges as well as a uniswap pair (with minimal volume): https://www.coingecko.com/en/coins/pax-gold#markets

The rest of these questions should be answered by @ilan or someone else who is better positioned to answer them than me:

  1. (Optional) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.
  2. (Optional) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.
  3. (Optional) List any possible oracle data sources for the proposed Collateral type.
  4. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.
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Transaction volume is real low for paxg. Looking at coinmarketcap it looks like there are 2 USD denominated markets (recognized by them) that total up to about $330K in terms of 24 hour trade volume.

Worried that given the low volume we could be susceptible to market manipulation on the oracle front.

Curious what people would think about pricing this token based on some spot price of the troy ounce instead of actually relying on market prices for PAXG itself. Similar to how we price WBTC.

Could also be convinced that a combination of the two are the best thing to feed into the medianizer.

What do people think? Use actual gold price? Don’t use the actual gold price? Why? Why not?

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I like the idea of basing the oracle on the underlying. Since PAXG should always be redeemable for gold through paxos. That said, hopefully over time secondary markets will develop.

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The lack of liquidity will also require keepers to work differently. It’s unclear how quickly keepers would be able to recycle funds for further liquidations via Paxos’ redemption options. Lack of 24/7 coverage is also concerning:

“When purchasing or selling PAXG directly from Paxos through the Paxos Wallet, you are transacting at the spot price of the London gold market. The Paxos Wallet supports purchases and sales during London gold market hours, which are typically from Sunday, 6pm ET through Friday, 5pm ET. The gold market closes for one hour on weekdays between 5pm-6pm ET, to settle all of the trades that occurred within the prior 23-hour period.”

We may need to engage with gold dealers or others who have the capital and risk management capabilities necessary to hold a few million DAI worth of PAXG through market closures.

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Could probably just use the collateral you bought to open a Vault? Basically you would just be trying to get a bridge loan to hold you over until markets open back up on Sunday.

It’s possible, although even with a relatively low LR I’d assume keepers could only safely borrow ~2/3 of the collateral value. But they would be accumulating market risk of the price of gold declining, so auction performance may suffer from much wider spreads. I’m assuming most keepers try to remain market neutral as much as possible.

We should be looking to get a XAUUSD oracle and using that as the basis for all gold tokens we may end up adding in the future

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Hi everyone,

My name is Ilan and I’m a developer at Paxos. Really happy to see interest in PAXG as collateral. I’m going to circle back with the team to chat about some of the really good points y’all brought up here and provide responses on Tuesday or Wednesday. We will support this effort in any way we can if the community agrees that PAXG is worthwhile in pursuing. Also, I’m always available for anyone to reach out to to ask any questions. I’ve been lurking on some chats and threads and am really impressed with the community :rocket:

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PAXG implementation would be amazing. @ilan if paxg could waive or reduce the fee transfer on erc20 for PAXG that would be a great start (at least for Decentralized apps).

ftx.com contain very liquid markets for paxg, including futures and an index composed by PAXG

FTX PAXG/USD
Kraken PAXG/USD
Itbit PAXG/USD

Hey everyone,
It’s Ilan from Paxos. Our legal and compliance team has put together an official response to the MIP questions 10 & 11 which you’ll find attached.

As far as fees go, we unfortunately cannot reduce or waive them. Unlike stablecoins (PAX, BUSD, USDC, etc) that generate interest from the underlying USD, PAX Gold has an inherent cost (vault fees) from storing the underlying physical gold. Other gold tokens charge a demurrage fee to the token holders over time to offset these costs, but Paxos does not. Instead Paxos charges a creation fee, a redemption fee and a small on-chain transaction fee of .02% to generate revenue and offset the costs. You can read more on the PAX Gold fees here.

Please keep the conversation going and, as always, send over any questions you may have.

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