How Chainlink Enables High-Integrity Tokenized Gold Markets

The future of finance is being built using blockchain technology by cutting-edge researchers, innovative startups, and leading financial institutions. Beyond offering greater access to financial products and services, it’s set to provide unparalleled transparency, deepen liquidity of previously illiquid assets, increase market resilience, and reduce operational costs.

Fundamental to this economic shift are tokenized assets; digital tokens stored on a distributed digital ledger representing real-world assets, such as currencies, bonds, or gold. Gold has been foundational to our monetary system since the earliest days of commerce and is often sought out by investors to protect their wealth during times of crisis.

At a time when both tokenization and gold are seen as viable ways to restore confidence in the global financial system, it’s no surprise that markets are seeing a growing demand for gold-backed, onchain tokens. Recently, the total value of tokenized gold surpassed $1B.

<div class="educational-divider sections-divider"></div>

What Is Tokenized Gold?

Gold tokenization involves minting digital tokens on a blockchain to represent ownership rights of physical gold bullion or coins, which are typically custodied in a vault by a third party. For example, one onchain token can represent one gram of physical gold stored offchain.

As the next-gen solution for gold ownership, tokenization provides:

• Greater accessibility—Fractionalized ownership through tokenization enables smaller-value purchases, such as a fraction of a gram, which makes gold-based financial products more accessible to billions of people across the globe.
• Enhanced transparency—Storing immutable ownership records on a blockchain ledger enable provenance tracking and auditable data trails to verify authenticity and eliminate the need to trust custodians with holding paper certificates.
• Increased efficiencies and reduced costs—Streamlining backend processes with programmable smart contracts speeds up verification and reduces settlement costs. For example, atomic settlement eliminates the need for T+2 settlement by syncing payment with asset delivery.
• Deeper liquidity—Interoperability across various blockchain-based markets and composability of tokenized financial products within a blockchain ecosystem make it easier for tokenized gold products to achieve far greater liquidity than is possible if they were siloed across fragmented markets.
• Unlock innovation—Combining a high-quality asset with the power of blockchain technology helps unlock exciting new financial products that better serve everyone, from underserved investors to leading institutions.

<div class="educational-divider sections-divider"></div>

How Does Gold Tokenization Work?

Gold tokenization follows the same general process as tokenizing any real-world asset, although the exact steps can differ slightly depending on the specific requirements, use case, and issuers. 

A typical step-by-step process for tokenizing gold consists of: 

1. Selecting the gold asset — This could be a 1 oz American Gold Eagle coin to a 1 kg gold bar.
2. Defining the token type — Determine the token type, such as ERC-20 or ERC-721, the minting mechanism, and number of tokens to initially mint. 
3. Selecting the blockchain  — This could be a public blockchain, private chain, layer 2, or other DLT-based network.
4. Enriching it with data — Tokenized gold can require proof of reserves, onchain market data, identity verifications, and more. 
5. Establishing blockchain interoperability — Increase liquidity for the tokenized gold access by making it accessible across the cross-chain ecosystem. 
6. Issuance — Deploy the token smart contract onchain and mint the tokenized gold tokens. 
7. Distribution — Provide an array of markets and users with access to the tokens.‍
8. Synchronization — Ensure the tokenized gold smart contracts remain updated, regardless of where they are transferred across the multichain ecosystem.

Examples of Tokenized Gold Projects

Various projects are tokenizing gold and making it available across the onchain finance ecosystem. As the industry-leading oracle network, Chainlink securely delivers data and computation onchain, enables seamless and secure cross-chain communications and token transfers, and provides a secure gateway onchain—critical for building secure, efficient, reliable, liquid, and transparent tokenized gold solutions.

CACHE Gold

CACHE Gold provides infrastructure to digitize physical gold and other real-world assets. Through CACHE Gold, users can access fully public, transparent, and redeemable gold-backed tokens.

Projects can achieve unparalleled levels of transparency and security by using Chainlink Proof of Reserve (PoR) to provide reliable and timely monitoring of off-chain gold reserves. For example, CACHE Gold is using PoR to help enable users to quickly verify onchain that their tokenized gold products are fully backed by gold reserves custodied in offchain vaults.

“Chainlink Proof of Reserve has enabled us to bring increased transparency to our platform.”—Brian Hankey, Co-Founder, CACHE Gold

Pax Gold

Pax Gold by Paxos offers a tokenized gold token, PAXG, redeemable for one fine troy ounce of gold stored in LBMA vaults in London. Owning PAXG provides holders with ownership rights of the underlying physical gold.

Hyper-reliable, accurate, and decentralized Chainlink Price Feeds are critical for creating secure onchain markets around tokenized assets, including tokenized gold products. Thanks to the PAXG Chainlink Price Feed for Pax Gold,projects are able to more safely incorporate PAXG into lending/borrowing platforms, DEXs, and more.

“Chainlink oracles will accelerate the adoption of Paxos’ USD and gold-backed tokens in DeFi.”—Walter Hessert, Head of Strategy at Paxos

Instruxi

Instruxi developed I-ON with the vision to create a secure, robust, and hyper-scalable infrastructure that could support asset digitization and tokenization so they could fractionalize the ownership of gold and other assets.

Along with PoR, Instruxi is using Chainlink Functions,a Web3 serverless developer platform that enables users to fetch any data from any API and run custom compute on the highly secure Chainlink Network. Making it easy to bring real-world data onchain opens the landscape for exciting new onchain financial products underpinned by tokenized gold.

“Smart contracts, Chainlink’s secure communication, and Space and Time’s decentralized data warehouses allowed us to deliver the advanced auditing capabilities, scalability, and robust security that I-ON required for our institutional-grade framework.”—Austin Przybysz, CTO, Instruxi

Golteum

Golteum is a platform for fractionalized NFTs backed by physical gold bars and other metals. They aim to provide greater accessibility, security, and transparency to the precious metals industry.

Cross-Chain Interoperability Protocol (CCIP) provides a universal, open standard for developers to build secure services and applications that can transfer tokens, send messages, and trigger actions across multiple networks. Golteum is planning to use CCIP for cross-chain communications, which will help future-proof their platform, avoid vendor lock-in, and increase liquidity for their tokens., a platform for fractionalized NFTs backed by physical gold bars and other metals, is planning to use CCIP for cross-chain communications, which will help future-proof their platform, avoid vendor lock-in, and increase liquidity for their tokens.

“Chainlink Price Feeds, Proof of Reserve, and other Chainlink services are all paramount for strengthening the security assurances of our fractionalized NFTs backed by precious metals and gaining rapid user adoption.”— Alex Bowman, Co-Founder, Golteum

<div class="educational-divider sections-divider"></div>

Future of Tokenized Gold

Blockchain technology is emerging as the next generation of financial infrastructure to underpin global markets. As one of the most foundational monetary assets, and with an increased current interest in gold given inflationary pressures, tokenized gold is set to play an important role in this transition to on-chain finance. Underpinning this economic shift is the Chainlink Network, which provides the secure, reliable, and performant Web3 services needed to unlock advanced tokenized gold solutions.

If you’re ready to explore a tokenized gold solution, talk to an expert today.