Up until relatively recently, the vast majority of price-stable cryptocurrencies were pegged to the US dollar (USD) and were hence designed to maintain their value at close to 1 USD at all times.
But in recent times, a new wave of asset-backed cryptocurrencies has emerged, pegged to a wider range of traditional assets, including other fiat currencies, basket funds, and even commodities. Among these, gold-backed cryptocurrencies have seen perhaps the most dramatic uptick in interest — fueled in large part by the recent surge in decentralized finance (DeFi) applications.
Backed by physical gold, these gold-pegged cryptocurrencies maintain their value at roughly the market price of gold, which can change over time. As a result, they don’t quite meet the definition of a “stablecoin”, but their unique properties have seen them applied several unique DeFi use-cases.
Here’s why gold-backed stablecoins are now being added to the biggest DeFi projects.
Gold Is an Appreciating Asset
Right now, the vast majority of DeFi applications feature some sort of yield generating mechanism for users.
This can include liquidity provider rewards on platforms like Uniswap, Curve, and Balancer; liquidity mining on apps like Kava or Sushi Swap; or decentralized lending rewards on platforms like Aave and Compound. As a result, it is clear that yield-generation is among the most sought after properties for DeFi applications right now.
As these platforms look for new, ever more innovative ways to improve yields for their users, many have begun adding support for gold-backed cryptocurrencies like CACHE Gold (CGT) and Tether Gold (XAUT). As their name suggests, these assets are backed by real gold stored in a physical vault — as such, trading these tokens is the equivalent to trading gold, since CGT and XAUT can be redeemed for physical gold at any time.
Because gold has largely appreciated in value in recent years, they represent an ideal way to escape the volatility of regular crypocurrencies while still offering a low-risk yield. Combining this with the yields offered by DeFi platforms, gold-backed tokens can be used to generate substantial returns.
This use-case has resulted in rampant interest for gold-backed cryptocurrencies on DeFi platforms. For example, CACHE Gold (CGT) has seen its market capitalization climb by more than 500% in the last three months, as an increasing number people look to use it for DeFi applications.
Bridging the Gap With Gold
But gold-backed cryptocurrencies are more than just yield-generating assets, they also represent a tangible link between the traditional economy and the blossoming world of DeFi.
Since these tokens can be minted by simply depositing gold with the issuer, anybody can quickly move their gold assets onto the blockchain, allowing it to be traded and sold with ease. This also opens up the DeFi industry to the hundreds of millions of gold owners and traders worldwide, who can now access these new platforms without needing to cash out their gold portfolio.
Naturally, DeFi platforms and protocols have been quick to capitalize on this potentially massive market, as they look to maximize the number of users that can benefit from their platform. As a result, gold-backed cryptocurrencies are now available to use on several major DeFi platforms, including Celsius Network, Uniswap, Kyber Network, and more.
The rampant interest in asset-backed DeFi solutions has spawned the development of a variety of synthetics issuance platforms, like Synthetix, which allows users to tokenize a variety of traditional assets to form derivate assets called “synths”. These synths can represent practically anything, including commodities like gold, stocks, and more, but haven’t yet become widely used.
This development has also attracted the interest of world governments, including the government-owned Perth Mint of Western Australia, which now supports a gold-backed token known as Universal Gold (UPXAU).
With gold-backed tokens becoming increasingly recognized as an ideal bridge between centralized and decentralized financial markets, it is likely just a matter of time before they become as commonly used as fiat-backed stablecoins as a means to escape volatility while still remaining in the crypto ecosystem.