Stablecoins were invented to bring stability to the cryptocurrency market. However, like everything else in the crypto world, they are constantly undergoing innovation and improvements.
There are several types of stablecoins, each with their own advantages and disadvantages. Commodity-backed stablecoins are one of the most important stablecoin types on the market today.
How does a commodity-backed stablecoin work?
Commodity-backed stablecoins achieve stability by being pegged to a real-world asset such as precious metals, oil, or real estate. They are designed to offer better access to investors who want to invest in cryptocurrencies more securely. They can, therefore, invest in commodity-backed stablecoins that are tied to the value of an underlying asset.
For example, the PAX Gold token ($PAXG) is a stablecoin backed by physical gold. Each PAXG token is worth one troy ounce of gold. The underlying asset consists of 400-ounce London Good Delivery gold bullions held in Brink's vaults. The parent company Paxos is regulated by the New York State Department of Financial Services and the physical gold reserves are audited monthly.
What makes these stablecoins unique?
In addition to holding the same value or, for example, being used as collateral, these currencies are liquid. Because they are less volatile than fiat currencies, they are a great choice for investors without access to precious commodities.
Although achieving their liquidity is more difficult, commodity-backed stablecoins are still much safer than other stablecoin forms, especially algorithmic ones. The best example of how risky algorithmic stablecoins can be is the TerraUSD token ($UST), which lost its peg in May 2022.
Because commodity-backed stablecoins are backed by tangible assets such as gold, they are less volatile than traditional cryptocurrencies. In addition, they are often used as payment methods because they tend to hold their value better when there is high inflation.
Future of commodity-backed stablecoins
The development of stablecoins is an important step towards the wider adoption of cryptocurrencies. They make it easy to invest in hard-to-find assets like gold bars and real estate. Buying gold, silver or platinum and other precious metals is expensive and difficult, so owning tangible assets is not practical for most people in many parts of the world.
Commodity-backed stablecoins facilitate the acquisition of physical ownership of tokenized assets while maintaining some level of price stability. With blockchain technology improving and cryptocurrency adoption increasing around the world, eventually we will be able to buy real estate, vintage cars, boats, and any other asset in token form on the blockchain.
Obtaining a gold bar and storing it safely is difficult and expensive in many areas. As a result, owning tangible assets such as gold and silver is far from simple. This is where tokenized assets come in, which are much easier to buy and store.