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Gold-backed vs USD-backed stablecoins: Key differences

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 of USD-backed stablecoins USD-backed stablecoins offer several advantages, making them a critical part of the crypto ecosystem. By combining the reliability of fiat currency with the efficiency of blockchain, USD-backed stablecoins play a vital role in digital finance. Here are a few advantages of USD-backed stablecoins:Steady value: Unlike traditional cryptocurrencies, which experience high volatility, stablecoins maintain a steady value, making them an ideal unit for payments, particularly in exchange for goods and services.Liquidity and accessibility: USD-backed stablecoins are widely accepted across crypto exchanges, payment platforms and DeFi applications. This allows traders to move funds quickly between assets without converting crypto back to fiat currency, reducing transaction costs and delays.Transparency: Issuers generally provide regular audits and reports on their reserves, which enables users to verify that actual USD holdings back each token. This transparency builds trust among users, issuers and regulators.Fast, low-cost international payments: Operating on blockchain networks, USD-backed blockchain networks facilitate fast, low-cost international payments without relying on traditional banking systems. This makes them a preferred option for remittances and cross-border trade.Safe haven during market downturns: USD-backed stablecoins offer stability during periods of market volatility. Investors and traders often convert volatile crypto holdings into stablecoins to protect their value without exiting the crypto market entirely.Still, please note that stablecoins may depeg occasionally because of several macro and microeconomic factors. Macro factors include changes in economic conditions, such as inflation or an increase in interest rates. Micro variables involve differences in market conditions, such as changes in the underlying collateral and problems with liquidity. When Silicon Valley Bank failed in March of 2023, the USDC stablecoin deviated from its peg because $3.3 billion of its reserves were held there.Did you know? Stablecoins are of four types: fiat-collateralized, crypto-collateralized, algorithmic and commodity-collateralized. Algorithmic stablecoins have gradually gone out of favor. Key differences between gold-backed and USD-backed stablecoins Gold-backed and USD-backed tokens are stablecoins, yet they differ in several ways. This comparison explores the fundamental differences, focusing on their backing assets, price stability, liquidity, adoption and primary use cases:Backing asset: Physical gold vs fiat reservesGold-backed and USD-backed stablecoins differ primarily regarding the collateral that supports their value. Gold-backed stablecoins are tied to physical gold, usually at a fixed ratio, while some USD-backed stablecoins are backed by a reserve of US dollars, short-dated and cash deposits.Price stability: Long-term vs short-termThe value of gold-backed stablecoins fluctuates depending on the market price of gold, which can experience short-term volatility but tends to appreciate over the long run. USD-backed stablecoins maintain a 1:1 peg to the dollar, ensuring more predictable short-term stability. Their value remains steady unless external factors, such as regulatory changes or mismanagement of reserves, impact the peg. Liquidity and adoption: Use of USD-backed in DeFi applicationsUSD-backed stablecoins are more liquid and widely accepted in the crypto ecosystem, including exchanges, payment systems and DeFi applications. They are frequently used for trading and lending. Moreover, many countries in Latin America, such as Bolivia, have adopted USDC for payments. Gold-backed stablecoins, while useful for preserving value, are less commonly integrated into DeFi protocols due to low liquidity concerns.  Use cases: Value storage Gold-backed stablecoins serve as a hedge against inflation, appealing to investors seeking growth. USD-backed stablecoins are preferred by investors seeking stability and value storage. USD-backed stablecoins are used for everyday transactions, trading and financial services, thanks to instant liquidity and ease of use.Regulatory considerations: ComplianceGold-backed stablecoins and fiat-backed stablecoins differ in regulation due to their underlying assets. For instance, specific regulations such as the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) and the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act have emerged in the US for USD-backed stablecoins. However, no specific regulations exist for gold-backed stablecoins as of March 31, 2025, though they are expected to adhere to the usual banking and financial regulations. Can gold-backed stablecoins surpass USD-backed coins in adoption? Two factors favoring gold-backed stablecoins are their inflation-resistant properties and long-term stability. As Bitcoin advocate Max Keiser points out, gold enjoys greater global trust than the US dollar, particularly among nations with strained relations with the US. But is this enough for gold-backed stablecoins to get ahead of its more celebrated competitor?USD-backed stablecoins, often under scrutiny in the days of the Biden administration, are now enjoying the support of the US government headed by President Donald Trump. The current dispensation views USD-backed stablecoins as a potent tool to maintain the status of the US dollar as the world’s reserve currency. While the Trump administration has been crypto-friendly since it took over, its support of the GENIUS Act and the STABLE Act, which await Congressional approval, is further testimony of this approach.Treasury Secretary Scott Bessent has emphasized stablecoins as a strategic tool for sustaining the dollar’s reserve currency status. Federal Reserve Governor Christopher Waller has echoed this sentiment, supporting stablecoins as a means to uphold US dollar hegemony.Still, countries including Russia, China and Iran, arch-rivals of the US, might prefer gold-backed stablecoins over USD-backed stablecoins because the bullion-powered coins may help them limit the influence of the US dollar. According to Keiser, China and Russia collectively hold around 50,000 tons of gold, more than officially reported. If true, this gold could be used to roll out gold-backed stablecoins.If gold-backed stablecoins gain wider adoption, they could challenge the US government’s efforts to maintain dollar dominance through stablecoins. To that end, stablecoin issuer Tether introduced Alloy (aUSDT) in June 2024, a gold-backed digital asset tied to Tether Gold (XAUT), a token representing claims on physical gold. Gold-backed stablecoins resemble the gold-backed US dollar before 1971. That was the year when President Richard Nixon abolished the convertibility of the US dollar to gold. XAUT has enjoyed a 15.7% price increase year-to-date, suggesting the growth potential of the bullion-backed stablecoins.While gold-backed stablecoins present a compelling alternative, the battle for dominance between gold and USD-pegged stablecoins remains ongoing, influenced by geopolitical factors, financial policies, and market demand.