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Tokenized Gold: Potential for Use as the Next-Generation Collateral

Updated Dec 11 2023
7 Min
mr slava
Nick Patel
CEO & Founder at Clinq.Gold, Bank of Bullion | Keynote Speaker

The 2020s are an epoch of asset digitization. Traditional investment assets, such as gold, silver, or USD, are increasingly digitized to enjoy expanding circulation. J.P. Morgan, Citi, and Franklin Templeton are among the institutional pioneers working with digital analogs of precious metals. 

So, is the global financial community ready for change? What are the prospects of tokenized assets in the increasingly digitized world? One of the potential use cases for tokens is collateral. Here, we examine how gold-backed tokens are accepted as collateral in lending operations and dwell on the prospects of this financial application. 

Gold as Collateral 

Probably every investor remembers the 2008 crisis and the crash of Lehman Brothers. This once solid and reliable bank was the first to collapse under the pressure of the mortgage catastrophe. Those events made finance experts think of more solid and reliable collateral, a role that can be confidently allocated to gold as a safe, non-volatile precious metal. 

Gold doesn’t promise mind-wrecking profits that high-risk investors seek; neither does it hide crazy losses that may turn one’s capital into ashes in one day. That’s why gold is the present cautious investor generation’s favorite collateral, and gold-backed tokens also follow this tradition in the DeFi sphere. Here is a brief guide and overview of current practices in using digitized gold as collateral. 

Tokenized Gold Collateral 

There’s increasing acceptance of tokenized gold as collateral for credit lines across the globe. Similar to gold’s status as a premium collateral in the traditional financial market, gold-backed tokens perform the same function in the crypto space. Here are the recent advancements of tokenized gold acceptance in lending operations: 

  • Nexo, one of the leaders in the crypto lending industry, has recently added the NYDFS-regulated PAX Gold token as a variant of collateral for receiving an instant crypto credit line. PAX Gold is an Ethereum-based gold-backed token pegged to physical gold kept in a London-based Brink vault. 
  • PAX Gold was also accepted by the SALT lending platform as collateral. Users can apply this form of gold to get crypto loans on SALT starting in 2019. 
  • The Digix Gold Token (DGX) can be used as collateral on the decentralized lending platform ETHLend from 2020. 
  • PAX Gold was the first digital gold token launched by Aave in 2019, following the company’s mission to make physical gold ownership cheaper, more convenient, and safer. It has been circulating on all major crypto exchanges since its advent, giving people access to gold investment and yield generation. Since that moment, many other gold-backed tokens have entered the DeFi space, with the most reliable of them accepted as loan collateral of high reliability. 

    Benefits of Gold Collateral 

    Crypto lending is a sphere with many hidden risks and volatility concerns. People coming for a loan and using their crypto assets as collateral are always exposed to increased risks of unfavorable price changes resulting from high volatility. This way, a loan can quickly become too pricy if crypto assets lose their value. 

    Gold solves this problem by offering crypto collateral with a conventionally stable price and asset value. While gold is also susceptible to price fluctuations in the commodity market and stock exchange, it’s much more stable than most crypto tokens. That’s why even rapid moves in the crypto market don’t cause gold-backed tokens’ price movements, as these tokens are pegged to gold, not BTC. Ultimately, borrowers and lenders in the DeFi sphere are much better protected with gold collateral compared to regular crypto assets. 

    Gold Tokens Represent the Commodity Tokenization Trend 

    According to crypto experts, gold tokenization was one of the first steps in the process of traditional commodity tokenization. This move started a new era in which gold-pegged tokens could be used as loan collateral while simultaneously maintaining their exposure to fluctuating gold prices. This way, the crypto market witnessed an expansion of token use cases beyond infrastructure, security, and utility tokens. With gold-backed tokens entering the DeFi space, users have received a unique opportunity to exchange their crypto assets for tangible materials of predictable value. 

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