Commodity-Backed Stablecoins

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Cryptal global

7 min readJul 14, 2023

Stablecoins are increasingly attracting the eyes of authorities thanks to their explosive development, extensive worldwide application scenarios, and possible risks associated with contagion paths.

In order to stabilize the crypto market, stablecoins were developed. Still, as with anything else in the cryptocurrency realm, they are always being upgraded and stabilized through innovation.

Stablecoins come in a few distinct varieties, each having advantages and disadvantages of its own. One of the most common kinds of stablecoins available today is the one backed by a commodity. Join us as we explore the many varieties of stablecoins and everything you need to know about them.

What coins are stablecoins?

Together with those that are frequently considered unbacked crypto-assets, stablecoins are a part of the larger crypto-asset ecosystem. They are digital currency units that depend on stabilization technologies to keep their value stable in relation to one or more fiat currencies or other types of assets (such as crypto-assets).

Stablecoins were created to cope with the considerable fluctuating prices of unbacked crypto-assets like bitcoin and ether, so much so that their relatively low volatility in prices makes them ideal for a variety of uses when this attribute is required.

Yet, armed with what happened in 2022 for Terra stablecoin, they are not entirely deemed to be as stable as once thought. So authorities should watch them closely since they have an undeniable relationship with the conventional monetary system through their reserve assets (if they are collateralized).

Applicability of stablecoins

In the framework of crypto-assets, stablecoin applications have grown recently. Stablecoins started out to be primarily utilized as a “parking space” for fluctuations in cryptocurrency prices and as a medium to trade digital assets.

However, stablecoins now have more uses thanks to the growth of decentralized finance (DeFi) systems. Even though stablecoins make up a very small portion of the entire crypto-asset market, the biggest ones are currently serving as an indispensable part of the crypto-assets ecosystem.

They are flourishingly considered an essential component of the crypto-asset ecosystem when they are frequently used in crypto-asset trading and as liquidity providers in DeFi.

This is true in particular for those that currently rule the market. Approximately ninety percent of the stablecoin market is made up of the collateralized stablecoins of Tether, USD Coin, and Binance USD.

The remaining market share of stablecoins is associated with the algorithmic stablecoins of DAI and TerraUSD, of course, up until its collapse on May 9, 2022, which virtually erased its entire market capitalization.

The value of a stablecoin is based on the owner’s confidence in the reserve asset of collateral. To keep the value of the crypto stable, the platform must certify that it is solvent. Stablecoin holders can use their investments to pay for expenses like food, transportation, and bills. If you have been searching for a lucrative option to invest in, stablecoins are excellent for yielding passive income.

Aside from their financial value, stablecoins are also useful for lending and staking crypto on various platforms. Fiat-backed stablecoins require the issuer to keep a reserve of gold in a value corresponding to that fiat backing.

The same goes with both stablecoins backed by fiat and commodity. Your stablecoins will retain their worth and remain redeemable even if you keep them for an extended period.

What are stablecoins backed by?

There are various different kinds of stablecoins. However, the 3 most common kinds are those that are backed by fiat, cryptocurrencies, and commodities. Stablecoins backed by fiat are more widely used and transacted on exchanges.

The widely known collateralized stablecoins use reserve assets upon which stablecoin holdings can be exchanged. In contrast, those that are known as algorithmic stablecoins use algorithms that balance supply and demand to keep their value stable.

That currency backs a stablecoin with a reserve of another cryptocurrency. The majority of stablecoins employ Bitcoin or Ethereum as collateral. However, they are constantly overcollateralized to decrease volatility in the markets. If you are wondering whether or not the cryptocurrency you are considering investing in is sufficiently stable, examine whether the reserve amount is greater than the supply in circulation or not.

A commodity-backed stablecoin is one whose value is guaranteed by a physical item, like gold. By linking themselves to tangible assets, including gold, silver, copper, and platinum, they fulfill their goal of stability. For instance, An example of a gold-backed stablecoin is Tether Gold (XAUt).

What has made commodity-backed stablecoins so distinguishable?

Stablecoins supported by commodities are less prone to inflation than their fiat counterparts. Such currencies are convertible when necessary and have the same value as the collateral. They are also an excellent option for investors who do not have access to valuable assets since they are more stable than fiat currency.

The reasoning behind investing in a commodity-backed token as a component of a portfolio with a variety of assets is largely similar as it is for the actual commodity itself. The tokenization of certain commodities does have certain distinct benefits, though. Commodities that have been tokenized don’t need to be physically stored, and the owner shouldn’t take responsibility for any loss or harm to the underpinning reserves. This makes it potentially a more secure and economical option to invest in assets like gold and copper.

Additionally, compared to numerous gold-linked derivatives offered on conventional markets, tokenized equivalents, especially for precious commodities like gold and copper, might serve as a more trustworthy price estimate. As an example, several gold tracking indices incorporate investments with an increased amount of passive exposition, like equities of mining companies, which factors beyond the value of gold may influence.

When thinking about high-value assets or the commodification of assets like diamonds, it can be helpful for commodities to be tokenized because it makes it simpler to possess portions of assets. Besides, commodity-backed tokens may be more liquid than their actual equivalents. The only disadvantage of commodity-backed stablecoins is that they have less liquidity compared to other cryptocurrencies or fiat currencies.

Yet, although their liquidation process is challenging, they are still considerably more secure than the other two types of stablecoins, notably algorithmic ones. Having lost its peg to the dollar in May 2022, TerraUSD went down in history as a tangible indicator of how dangerous algorithmic stablecoins might be. With its value plummeting, the value of its native currency, LUNA, dropped down too.

Instead, commodity-backed stablecoins can be frequently utilized as payment mechanisms while they are also more stable. They have fewer fluctuations in comparison to typical cryptocurrencies since they are backed by real assets like gold and copper.

Not to mention that in periods of economic inflation, such assets typically retain their value a lot better than others. Additionally, such coins let investors buy difficult-to-find goods. For instance, actual gold is generally valuable and challenging to obtain. Commodity-backed crypto, nonetheless, enables investors to enjoy the advantages of actual gold regardless of their expenses and challenges related to actual gold.

Risks associated with regulations and compliance

The impending EU “Markets in Crypto Assets” regulation (MiCA), which incorporates a provision for asset-referenced tokens, will probably be applied to commodity-backed tokens. So it’s probable that commodity-backed stablecoins will be banned or subject to strict regulation in the years to come.

Yet, considering their market share in comparison to fiat-backed stablecoins, regulators are not expected to focus their attention on them first,

Additionally, commodity-backed assets that aim to bring market players together to fulfill shared objectives, like lowering the release of greenhouse gases, may act as a brake on overly restrictive regulations.

Since many of such products are still somewhat new and frequently experimental, thorough investigation to accurately identify money laundering, reserves, and the risk associated with counterparty would be crucial.

What the future holds

The emergence of stablecoins has been a significant step towards the wider use of cryptocurrencies. They facilitate investing in difficult-to-acquire assets like gold bars and properties.

For many individuals in nearly every region of the globe, holding physical assets is not viable due to the high cost and difficulty of purchasing gold, silver, platinum, copper, and other valuable metals. With decent stability, commodity-backed stablecoins make it simpler to obtain actual ownership of the tokenized assets.

Although a few of their possible applications were indicated here, their use case is by no means restricted. It is crystal clear that you would ultimately end up purchasing real estate, luxurious automobiles, aircraft, and many other assets you can not even imagine owning through tokenizations of such assets, thanks to developing blockchain technology and the growing popularity of cryptocurrencies worldwide.

A case in point is Cryptal.global platform that allows you to invest in copper, bentonite as well as Camelina beans through tokenization of their own mines and fields in such a way that all the intermediaries are eliminated, yielding you guaranteed profits.

All the obstacles to effective commerce and possession of assets on a global scale would be removed in this way. A person located in New York would boast of possessing an antique bookstore in Japan, while an individual situated in South Korea might be the owner of a football field in Spain. The opportunities are limitless.