What are gold-backed stablecoins, and how do they work? Gold-backed stablecoins are digital currenc
What are gold-backed stablecoins, and how do they work?
Gold-backed stablecoins are digital currencies pegged to physical gold reserves and designed to maintain a stable value. The concept of gold-backed digital currencies dates back to the early days of cryptocurrency, with developers aiming to create a reliable store of value.
Each gold-backed stablecoin represents a specific quantity of gold. For instance, one token might be linked to 1 troy ounce of gold. A troy ounce is a unit of weight used explicitly for weighing precious metals like gold, silver and platinum; it is equal to 31.1034768 grams.
A third party typically holds the gold reserves to ensure security and transparency. The issuing entity is responsible for maintaining an equivalent amount of physical gold for every token in circulation.
The token’s price remains closely aligned with the market value of gold. Buyers pay gold’s spot price for a token. Similarly, if the stablecoin fails, the tokenholders can redeem their tokens for the gold. Practically, the gold is liquidated for electronic fiat transfers.
Regulators classify gold-backed stablecoins as commodity-backed stablecoins or asset-referenced tokens (ARTs), depending on jurisdiction. Examples of gold-backed stablecoins include Tether Gold (XAUT), Paxos Gold (PAXG) and Alloy (aUSDT).
Did you know? On April 1, 2025, Tether Gold (XAUT) traded at $3,165. Its market capitalization was about $780.3 million, with a daily trading volume of $11.03 million.
Advantages of gold-backed stablecoins
Gold-backed stablecoins combine the stability of gold with the flexibility of digital assets. Their blockchain-based nature offers benefits beyond traditional paper gold.
Here are a few advantages of gold-backed stablecoins:
- Flexible alternative to physical gold: Gold-backed stablecoins function as blockchain-based representations of gold, offering a more efficient and flexible alternative to holding physical bullion.
- Instant global trading: Unlike traditional gold ownership, these tokens can be stored in cryptocurrency wallets from which you can transfer instantly and trade globally with a nominal transactional fee.
- Access to DeFi applications: They also enable decentralized finance (DeFi) applications, expanding their usability beyond traditional gold investments.
- Better security: Physical gold is vulnerable to theft, loss and damage. Gold-backed stablecoins, stored on blockchain networks, can be more secure.
- Programmability: Gold-backed stablecoins are programmable because they exist on blockchain networks such as Ethereum. This allows them to interact with smart contracts and work with decentralized apps (DApps).
- Divisibility: Splitting physical gold or even paper gold is challenging. However, you can split a single token into several decimal places, which can be recorded on the blockchain.
- Make gold more accessible: Gold-backed tokens enable you to easily access gold. An ounce of gold may be expensive, but you can easily buy 0.001 of a token.
- Interoperability: When you release a token on a widely used network like Ethereum, it is instantly operable with DApps, DeFi platforms and wallets supported by the network.
Diversification of funds: Investing in gold-backed stablecoins enables you to diversify your funds. It is a unique type of asset that protects you against currency value drops.
What are USD-backed stablecoins, and how do they work?
USD-backed stablecoins are cryptocurrencies designed to maintain a stable value by being pegged to the US dollar. Each token is typically backed by an equivalent amount of US dollars or cash-equivalent assets held in reserve by a financial institution or trust.
For every USD-backed stablecoin issued, the issuing entity must maintain a corresponding reserve amount to guarantee its value. This ensures that holders can always redeem their tokens for an equivalent dollar amount. Examples of USD-backed stablecoins are Tether (USDt), USDC (USDC) and Binance USD (BUSD), all of which are used in trading, payments and DeFi.
You can buy and sell stablecoins through crypto exchanges like Binance or Coinbase. To purchase, create an account, complete verification, deposit fiat or crypto and choose a stablecoin such as USDt or USDC. To sell, go to the trading section, select your stablecoin, and exchange it for fiat or another crypto. Some wallets and peer-to-peer (P2P) exchanges also support stablecoin trading.
Did you know? The EU’s Markets in Crypto-Assets Regulations (MiCA) have forced crypto exchanges to delist USDT and other non-compliant stablecoins, resulting in a growing market for Euro-backed stablecoins. USDC continues to be a prominent USD alternative in the region.
Advantages…
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