Gold-Backed Tokens - How do they Work?

If you have been around long enough to grow grey hair, you may remember the frenzy around E-gold, the first gold-backed digital currency, which came out in 1996. Back then, people didn’t know much about digital assets, cryptocurrencies, or anything like that. Still, the glittering appeal of a gold-backed asset was enough to help E-gold attract over 5 million users in 13 years. Notably, at its peak in 2006, the system built around it was processing more than $2 billion in transactions per year.

The E-gold story didn’t last long, and in 2009 it shut down due to legal issues. However, its demise came just before the most popular cryptocurrency of all time, Bitcoin, entered the stage. Therefore, digital asset investors didn’t waste too much time sitting on their money.

Bitcoin grew so popular in the past decade that its supporters call it "digital gold." In other words, this cryptocurrency provides a store of value similar to gold, which is unattainable in other financial markets, like stocks. Its opponents deny this claim, arguing that BTC does not have the physical backing of a stable asset. However, that's irrelevant to Bitcoin's value and potential. After all, the globally-leading fiat currencies haven't had one either since they abandoned the US gold standard in 1971.

While it has no correlation to actual gold, Bitcoin spurred a new frenzy around digital assets. This time, investors are focusing on cryptocurrencies, and assets backed by physical assets are making a comeback. This leads us to the present-day gold-backed tokens, which, similar to E-gold, use gold bullions to have value both on the blockchain and in the real world.

This article discusses the definition of gold-backed tokens and how they work. Read on to discover a few examples of these digital assets boasting physical value!

What Are Gold-Backed Tokens?

A gold-backed token is a cryptocurrency pegged to the value of gold. This means that every single token of said crypto running on the blockchain has a value correspondence in real-world gold. Holding that token gives you ownership over its equivalent in gold without you having to store the actual gold bullion under your bed.

To understand this concept better, we need to go back to the mother of all cryptocurrencies. Bitcoin, similar to many other cryptos, does not have tangible value. Instead, trade volume, popularity, and demand dictate its value. That’s why its price is highly volatile and subject to turbulent fluctuation.

Other cryptocurrencies peg their values to real-world assets to reduce volatility to a minimum. As a result, their price in the market is primarily steady for long periods, earning them the name of "stablecoins.”

Gold-backed tokens are stablecoins that use the real-world spot price of gold as a parameter for their digital values. When the cost of gold increases, the value of these tokens follows suit. Conversely, when the price of gold drops, the tokens’ value plummets too. However, unlike Bitcoin and other cryptocurrencies, these value oscillations are rarely tempestuous.

How Gold-Backed Tokens Work?

Issuing a gold-backed token is impossible without having its real-world counterpart in the precious metal. For example, one token equals one gram of gold, which a trusted custodian stores securely. This custodian is usually a third party enabling a reliable trade relationship between the gold-backed token holders.

The value of a gold-backed asset will never drop below the price of gold. However, it may rise higher than the precious metal price, depending on temporary market demand.

Gold is the leading precious metal investment worldwide. As a result, gold-backed tokens provide a lower risk and a higher sense of security for cautious investors. Furthermore, they can count on gold as a long-term store of value with a proven track record.

On the other hand, investing in gold-backed cryptocurrency is not entirely risk-free. Both investors and traders depend on the trustworthiness of the custodian holding the gold reserves. This third party gets the benefit of the doubt for storing the necessary amount of gold backing the tokens on the blockchain. In other words, you need to trust the custodian for every ounce of gold representing your stablecoin assets.

Investing in gold-backed tokens comes with both benefits and risks. So, make sure that the gold you invest in is accurate and stored in a secure facility.

Popular Gold-Backed Tokens

Unlike most cryptocurrencies, stablecoins allow for a different type of investment. Since they have tangible assets backing, these tokens can help move funds faster and more securely. This is one of the reasons why gold-backed tokens are increasingly popular. Below are three of these digital assets with growing communities of coin holders and supporters.

1.      The AABB Gold Token

AABB Gold Token (AABBG) is an ERC-20 gold-backed token that combines the benefits of cryptocurrencies with the stability of the gold market. This asset comes from Asia Broadband, Inc (OTC: AABB), a company focusing on the manufacture, supply, and sale of various metals, including gold.

With over $100 million in assets, Asia Broadband can back 100% of the AABBG tokens with real gold. On average, the company has already sold 485,932 AABBG tokens for $5.6 apiece in 2021. Moreover, it sold $1 million worth of tokens within the first two weeks following the launch, backed by $30 million in physical gold. Currently, AABBG has a circulating supply of $5.4 million.

AABBG aims to provide a stable asset in an increasingly complex economic environment struggling with rising inflation and currency devaluation. By linking the token to the current spot price of gold, Asia Broadband ensures investors can benefit from the surge in price and demand for the precious metal in the market.

Unlike other gold-backed tokens, Asia Broadband provides a high level of reliability for AABBG token investors. The company has a long experience in the metal industry, and it is actively mining in Mexico to sustain its development.

Asia Broadband’s foray into the crypto industry does not stop at its gold-backed token. In fact, the company recently launched a crypto AABB Wallet, the AABB Exchange, and the PayAABB Payment Gateway. These features confirm the company’s goal to become a standard of excellent quality, security, transparency, and trust in the gold-backed crypto community. Above all, they help users store and trade their assets safer and hassle-free.

2.      Tether Gold (XAUT)

XAUT allows investors with limited capital to enter the gold market and access unique investment opportunities. As the name reveals, XAUT is the product of Tether, one of the oldest stablecoin projects in the crypto industry. The company started with a fiat-backed token in 2014 and aims to diversify its physical asset-backed tokens through XAUT.

One XAUT token equals one troy ounce of gold from a London Good Delivery bar. The token owner has complete and undivided ownership over the amount of physical gold representing their XAUT assets on the blockchain.

One thing that separates XAUT from other gold-backed tokens is that it allows token holders to invest in ETFs and other financial assets. This way, they can enhance their portfolio with ventures beyond the constricting limits of blockchain.

XAUT runs on two blockchain networks. It is both an ERC-20 token on the Ethereum blockchain and a TRC-20 token on the TRON blockchain. This dual-chain feature enhances the base of potential holders, consisting of users from both networks. Moreover, XAUT tokens are transferrable between on-chain Tether wallets.

Every XAUT token is redeemable through physical gold that holders can obtain at any location in Switzerland. Alternatively, XAUT owners can request to sell the gold for cash before receiving the corresponding amount.

Upon purchasing XAUT, the holder receives a unique serial number, purity, and weight identifying a specific gold bar in storage. XAUT holders can then check online for their gold bars or see their own ounces in different bullions.

3.      Paxos Gold (PAXG)

Paxos Gold is a gold-backed token from Paxos, the company behind itBit, a Singapore-based crypto exchange. This asset stands out from the competition through its legal custodian, a trusted charter issued by the New York State Department of Financial Services.

Every PAXG token is backed by one fine troy ounce of gold at a ratio of 1:1. The token enables investors to access the gold market and venture into gold ETFs and Gold Futures (COMEX), among others. Meanwhile, they retain full ownership of the gold corresponding to their PAXG holdings, which they can redeem at any time.

Paxos Gold holders do not have to pay any custody fees and benefit from instant settlement. Moreover, they can trade their tokens on numerous crypto exchanges, such as Binance, Kraken, itBit, and Alpha Bullion. And, since it is an ERC-20 token, they can store their assets in any Ethereum-compatible crypto wallet.

Paxos launched PAXG in September 2019 and instantly opened the gates to the gold market for numerous investors. With this token, they can own, transfer, or store gold, even if they don’t have the necessary means to buy physical gold directly. Additionally, they can use their tokens to bet on gold price fluctuations and increase their assets.

Paxos has set a minimum purchase of $20 or 0.01 PAXG. If investors wish to bank on Major Gold ETF futures, they must buy at least 1 share. Lastly, the minimum purchase for LBMA 400 t oz gold bar is $800.

The value of gold-backed tokens is pegged to the spot price of gold. This kind of cryptocurrency provides more stability and fewer risks for casual crypto investors. Also, it allows many to enter the gold market without the limitations of purchasing or trading real gold, such as storage, transfer ownership, and subdivision.

All in all, gold-backed tokens provide an alternative to highly volatile cryptocurrencies. Like any investment, they come with their own benefits and risks. However, considering their reliability and demand, they are less likely to meet the same sudden death of E-gold.