Tokenized gold is basically physical gold that’s been turned into digital tokens on a blockchain. Each token is supported by a matching amount of actual gold stored safely by the organization that issues it.
Gold has always been a go-to for storing value, boasting a market cap exceeding $20 trillion. But it hasn’t been the easiest to trade or access since it’s a physical asset. Sure, there are gold ETFs, but they work within regulated systems and don’t always give retail investors direct ownership or the ability to redeem physical gold. Enter gold tokenization, which uses blockchain tech to create a more transparent and efficient global gold market. This sector has gained traction over the last five years.
Learn more about Tokenized Gold
Tokenized gold lets you own a piece of real gold in your crypto wallet, while the actual gold is stored safely by the company that issued it. These tokens are usually linked to specific gold weights, like the troy ounce, which is 31.1 grams.
For example, Tether Gold’s XAUT and Paxos Gold’s PAXG are based on the troy ounce. Then there’s the gram, a more common weight unit, with Kinesis Gold’s KAU and VeraOne’s VRO pegged to it.
Thanks to blockchain technology, you can buy and sell fractions of these tokens, making it easier for anyone to invest in gold without needing to meet high minimum purchase requirements. You can even buy just a fraction of a gram!
How Gold Tokenization Works
Gold tokenization means having real gold stored in a vault to back it up, using smart contracts to manage how tokens are created and redeemed, and having independent auditors to ensure that the amount of gold matches the number of tokens out there.
This is how gold tokenization goes down:
- A bank buys physical gold and keeps it safe in secure vaults.
- Minting tokens: The issuer creates digital tokens on a selected blockchain that match the amount of gold they have, typically using fungible token standards like ERC-20.
- Each token is backed by a specific amount of physical gold, meaning 1 XAUT equals 1 troy ounce.
- Issuers regularly publish audits to confirm that the amount of gold they have matches the number of tokens in circulation, and you can usually find this info on their website.
- Tokens can be bought directly or found on both centralized (CEX) and decentralized (DEX) exchanges, allowing for round-the-clock trading with fiat, stablecoins, or other cryptos.
- Getting your gold: If you have tokens, you can swap them for physical gold bars at a rate of 430 troy ounces per token with Paxos and Tether Gold. Just keep in mind that there might be extra fees and some logistics involved, and it’s only available in certain areas. For cash or unallocated gold, companies like Paxos let you convert smaller amounts into USD or shared gold reserves, but again, there are fees and requirements. Plus, when you redeem tokens, they get burned on the blockchain to keep that 1:1 gold backing intact.
The Benefits
Gold tokenization makes it easier for everyday investors to get into the gold market. Some perks of tokenized gold are:
- Accessibility and Fractionalization
- Improved Liquidity and Efficiency
- Transparency
- DeFi Integration
- Cost Efficiency and Storage
Conclusion
Since the start of 2024, tokenized gold has been on the rise, merging the safety of gold with the clarity and efficiency of blockchain. Thanks to blockchain tech, tokens can be split into tiny fractions, making it super easy for investors to get involved. Plus, with DeFi, investors can actually make their gold work for them by earning yields through liquidity and other DeFi options, when available. But, it’s important for potential investors to research the issuer’s regulatory status and audit transparency, and to be aware of risks like impermanent loss in DeFi and the market ups and downs in the crypto world.