Tokenized gold has seen a surge in demand this year as physical bullion reached record-high prices, but only a fraction of that value is actively deployed in decentralized finance (DeFi), according to a new report from oracle provider RedStone.

Spot trading volume for tokenized gold reached $90.7 billion in the first quarter, driven by a rally that pushed gold futures above $5,600 per troy ounce. Despite this momentum, only about $63 million worth of Tether Gold (XAUT) and PAX Gold (PAXG) — two ERC-20 tokens each backed by one troy ounce of investment-grade physical gold held in vaults — is currently serving as collateral across lending protocols Aave v3 and Morpho. That figure represents just 1.5% of the two tokens' combined $4.2 billion market capitalization.

The gap underscores a broader pattern in DeFi lending, where stablecoins such as USDC and DAI dominate as collateral because their price stability lets borrowers avoid liquidation risk. Gold-backed tokens, by contrast, fluctuate with bullion prices, exposing borrowers to margin calls during metal sell-offs — a deterrent to wider use despite the tokens' growing market presence.

Although DeFi adoption remains thin, tokenized gold has already passed a significant stress test. On March 23, Aave processed its largest cluster of XAUT liquidations without disruption during an abrupt gold sell-off, demonstrating that tokenized bullion can function reliably as DeFi collateral under adverse market conditions. The event also validated the reliability of the oracle price feeds that lending protocols depend on to trigger and execute liquidations.

The liquidations followed a 10% weekly decline in gold prices — the metal's worst weekly performance in more than four decades. JPMorgan precious metals strategist Greg Shearer characterized the downturn as an "extremely brutal flush." (Yahoo Finance)

Since its January peak, gold futures have fallen more than 26%, weighed down by expectations of sustained high US interest rates, which dampened appetite for non-yielding assets such as precious metals.

DeFi Adoption as the Next Challenge

RedStone's findings indicate that while tokenized gold has demonstrated durability as DeFi collateral, broader integration into lending protocols remains a key infrastructure hurdle as the tokenized real-world asset (RWA) market continues to expand.

Gold is part of a rapidly growing tokenized RWA ecosystem that also encompasses private credit, US Treasurys, and an increasingly prominent equities segment. In June, Token Terminal reported that the sector had surpassed $43 billion in total value.

Centralized cryptocurrency exchanges are also accelerating their embrace of tokenized assets in an effort to bridge traditional finance and digital markets. According to a recent CoinGecko report, the emerging "crypto TradFi" sector had grown to $6.6 billion as of June.